In today’s rate environment, individuals looking to maximize their savings have two options: CDs and high-yield savings accounts. With interest rates on the rise, both options offer attractive returns compared to traditional savings accounts. High-yield savings accounts provide significantly higher interest rates than standard savings accounts, making them ideal for short-term goals and emergencies. On the other hand, CDs offer higher interest rates than both traditional and high-yield savings accounts, but come with the caveat of locking your money away for a specific term. The choice between the two ultimately depends on individual financial needs and goals.
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CDs vs. high-yield savings accounts: Which is better in today’s rate environment?
Trying to determine which account is better for you now depends on a series of factors. Here’s what to take into consideration:
Why a high-yield savings account may be better in today’s rate environment
Higher interest rates than standard savings accounts
A high-yield savings account offers significantly higher interest rates than standard savings accounts found at traditional brick-and-mortar banks. According to recent data from the Federal Deposit Insurance Corporation (FDIC), savings accounts currently offer average yields of 0.45%, but this paltry figure doesn’t include high-yield savings accounts. You can find high-yield savings accounts from credit unions and online banks with rates ranging from 4.30% to 5.05%.
Yields ranging from 4.30% to 5.05%
High-yield savings accounts, which are typically online savings accounts, are especially useful in an elevated rate environment, like today, since their yields are so much higher than yields of traditional savings accounts. These accounts offer yields ranging from 4.30% to 5.05%, providing the opportunity to earn more on your savings.
Useful for emergency funds and short-term goals
All savers should have a high-yield savings account for emergency funds and short-term goals and expenses. High-yield savings accounts are popular savings options for short-term savings goals like a vacation, a wedding, or a down payment on a car. You’ll earn a better return than a standard savings account but without the risks that come with the stock market or other investments.
Less risk compared to stock market or other investments
High-yield savings accounts provide a safe and low-risk way to grow your savings. With the uncertainties of the stock market and other investments, a high-yield savings account offers stability and peace of mind. Your money is protected and insured, making it a reliable option for growing your savings without taking on unnecessary risks.
Why a CD may be better in today’s rate environment
Higher interest rates than traditional and high-yield savings accounts
Certificates of Deposit (CDs) usually pay higher interest rates than traditional and high-yield savings accounts, with one caveat. You must agree to lock your money in the CD account for a specific term, typically between three months and five years. If you withdraw funds before your CD’s maturity date, you’ll likely incur an early withdrawal fee, usually a portion of the account’s earned interest.
Lock your money in for a specific term
CDs are a great option when interest rates are high since they offer fixed interest rates that typically increase with rising interest rates. By locking your money in a CD for a specific term, you can take advantage of the higher rates and secure a consistent return on your investment.
Early withdrawal fees
While CDs offer higher interest rates, it’s important to note that withdrawing funds from a CD before its maturity date usually comes with a penalty. Early withdrawal fees can vary depending on the terms of the CD, but they typically involve forfeiting a portion of the earned interest. Consider your financial needs and goals before committing to a CD to ensure you won’t need to access the funds before the CD term ends.
Good option when interest rates are high
Currently, the best CD rates exceed 5% APY for CDs up to three years. Longer-term four- and five-year CD rates tend to range between 4% and 5%. Investing in a CD when interest rates are high allows you to take advantage of these higher rates and earn a solid return on your investment.
Fixed interest rates paid on CDs typically increase with rising interest rates
One of the advantages of CDs is that their fixed interest rates typically increase with rising interest rates. This means that as interest rates go up, the return on your CD investment also increases. By aligning your CD term with rising interest rates, you can maximize your earnings and grow your savings more effectively.
Align your CD term with specific savings goals
A smart savings strategy is to align your CD term with specific savings goals. By choosing a CD term that matches your savings timeline, you can ensure that your funds will be available when you need them. For example, if you’re saving for a down payment on a home and expect to make the purchase in three years, a three-year CD can provide a guaranteed return on your investment when you’re ready to make the purchase.
Funds in CD are protected with federal deposit insurance
Like high-yield savings accounts, the funds in your CD are protected with federal deposit insurance. This insurance provides an added layer of security for your savings, giving you peace of mind knowing that your funds are safeguarded, even in uncertain economic times.
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Other savings options
While CDs and high-yield savings accounts provide a safe place to stash your money while earning higher rates, they’re not your only option. Before deciding which account is best for you, it’s wise to explore all possibilities. Some other savings options to consider include:
Money market accounts
Money market accounts (MMAs) typically offer higher interest rates than regular savings accounts. Many money market accounts also provide the ability to write checks and use a debit card, giving you more flexibility in accessing your funds when needed.
Money market funds
Money market funds are mutual funds that invest in short-term, low-risk securities. These funds can offer yields over 5%, but it’s important to note that they are not FDIC or NCUA insured. While they can provide higher returns, money market funds come with some level of risk, so it’s essential to carefully consider your investment goals and risk tolerance.
Treasury securities
Treasury securities are generally regarded as safe investments since they are backed by the full faith and credit of the U.S. government. These securities range from short-term Treasury bills to longer-term Treasury bonds, providing various options for investing your savings.
IRAs or 401(k) retirement accounts
Individual Retirement Accounts (IRAs) and 401(k) retirement accounts offer tax-advantaged ways to save for your future. With IRAs, you can contribute pre-tax income, which can reduce your taxable income for the year. Additionally, many employers offer 401(k) plans that allow you to contribute a portion of your salary, often with the benefit of employer matching funds.
The bottom line
In the current high-interest rate environment, both CDs and high-yield savings accounts can benefit you with higher yields. Deciding which option is best is a personal decision that should account for your financial needs and goals. If you don’t need immediate access to your funds, a CD may be an excellent way to lock in a high rate for a longer term, especially if you anticipate interest rates declining. On the other hand, if you want the flexibility to access your cash if needed, a high-yield savings account also provides high APYs without locking up your funds. Consider consulting with your financial advisor or tax accountant before making a final decision to ensure you make the best choice for your financial situation.
Disclaimer: The information provided in this article is for informational purposes only and should not be taken as financial advice. Please consult with a professional financial advisor or tax accountant before making any financial decisions.
CDs vs. high-yield savings accounts: Which is better in today’s rate environment?
