What is the difference between a CD and a high-yield savings account?

Though both are deposit accounts that generally offer better rates than a standard savings account there are some differences. A CD account locks in a fixed rate for a specific term length and you cannot access those funds until the account reaches maturity. High-yield savings accounts have more flexibility but the variable rates can change.

Is it better to put money in a CD or savings?

CD accounts often have better rates and are great for short-term savings goals, but you can't access those funds until an account reaches maturity. If you are okay with not touching that money for months or years this could be the way to go, however, if you need more flexibility a high-yield savings account may be the better option.

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CD vs. High-Yield Savings Account: Which Should I Open in 2024?

February 21, 2024

7 min Read

Written by Caitlyn Moorhead

Edited by Melanie Grafil

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In today’s environment of favorable interest rates, you may be considering different options to make the most of your savings. Two popular choices for earning higher returns are certificates of deposit and high-yield savings accounts. Both offer competitive interest rates compared to the national average of traditional savings accounts, but they have distinct features that may align differently with your financial goals.

These are the differences between CDs and high-yield savings accounts to help you decide which option is right for you.

What Are the Main Benefits of CDs?

A CD is a deposit account with a fixed-term period that often offers higher rates than that of a standard savings account. Here are some items to note:

Term lengths for CDs typically vary between three months to five years.
The interest you earn is only paid once the account has reached maturity as taking funds out before it has matured when the term ends could result in early withdrawal penalties.
It’s a low-risk investment with a guaranteed return, making it a safe and FDIC-insured savings option.
CDs are a great option for long-term savings goals. Your money will be tied up for a set duration and won’t have access to it right away.
If you have a specific goal in mind, such as saving for a down payment on a house in five years or funding a child’s education in a decade, a CD can offer a stable return and help you stay disciplined with your savings.

Should You Open a High-Yield Savings Account?

Compared to a standard savings account, you can earn much higher APYs with a high-yield savings account. Banks offer varying rates for this type of account so make sure you research how a specific financial institution is going to help your money grow. Here are some features of high-yield savings accounts to consider:

A good APY for a high-yield savings account could be around 5%.
In order to earn the best rates you often have to maintain the minimum balance requirements.
This flexibility of high-yield savings makes it an ideal choice for quick access to savings. This access can be used for emergencies or short-term goals.
Online banking can be beneficial for this type of account as online banks have less overhead and can offer better rates.
There may be an initial deposit minimum to meet in order to reap the benefits of a higher APY.

CDs vs High-Yield Savings Accounts: Accessibility

When choosing a deposit account, whether it is a money market account, CD, checking or savings you need one that fits your daily banking needs. If you are someone who needs consistent access to an account, CDs may not be for you. However, if you have more flexibility and want to grow your money steadily it could be time to focus on higher yields.

Key Takeaways

High-yield savings accounts: High-yield savings accounts provide a high interest rate while offering flexibility and easy access to your funds. You can deposit and withdraw money from the account as needed, usually through electronic transfers, checks or ATM withdrawals.
CDs: CDs, on the other hand, require you to deposit a fixed amount of money for a specific term, which can range from a few months to several years. During this period, your funds are locked, and accessing them before the CD matures may result in early withdrawal penalties.

CDs vs High-Yield Savings Accounts: Rates and Returns

The interest is usually calculated daily and credited to your account on a monthly or quarterly basis, allowing your money to grow over time. This stability can be advantageous in a low-interest-rate environment since you can secure a higher rate for a specific period. However, if interest rates rise during your CD term, you may miss out on potentially better returns available in the market.

Key Takeaways

High-yield savings accounts: High-yield savings accounts offer competitive interest rates that are typically higher than those of traditional savings accounts. While the rates may vary among financial institutions, they often provide a relatively stable return on your savings.
CDs: CDs offer fixed interest rates that are generally higher than those of regular savings accounts. With CDs, you know the exact interest rate you will earn for the entire term.

CDs vs. High-Yield Savings Accounts: Your Risk Tolerance

FDIC insurance protects your deposits in case the institution fails, providing a level of security for your savings. While there is still some risk associated with the overall financial stability of the institution, the FDIC coverage adds an extra layer of protection. On the other hand, investing in CDs provides a level of security, particularly if you prioritize the preservation of your capital.

Key Takeaways

High-yield savings accounts: High-yield savings accounts are typically offered by banks and credit unions and are FDIC-insured up to the maximum limit allowed by law.
CDs: Similarly, CDs offered by banks and credit unions are also FDIC-insured up to the maximum limit. This insurance safeguards your principal and interest in the event of a bank failure.

CDs vs. High-Yield Savings Accounts: Financial Goals

If you anticipate needing access to your funds within a shorter time frame or prefer the flexibility to deposit and withdraw funds as required, a high-yield savings account can be a better fit. CD accounts have to reach maturity before you can access them otherwise you could get an early withdrawal penalty.

Key Takeaways

High-yield savings accounts: High-yield savings accounts are suitable for short- to medium-term savings goals or as an emergency fund.
CDs: CDs are more suitable for longer-term savings goals where you can afford to lock in your funds for a specific duration.

Final Take To GO: Opening a CD or High-Yield Savings Account

The bottom line is that choosing between a CD and a high-yield savings account depends on your financial goals, time horizon, and liquidity needs. If you prioritize flexibility and accessibility while earning interest rates, a high-yield savings account may be the better option. On the other hand, if you have a specific savings goal and can afford to lock in your funds for a predetermined term, a CD can provide a stable return and potentially higher interest rates.

Consider your short- and long-term financial objectives, the need for immediate access to your savings, and your risk tolerance when deciding between the pros and cons of a CD or a high-yield savings account. It’s also a good idea to compare rates and terms offered by different financial institutions to find the best fit for your specific needs.

FAQ

Here are some answers to frequently asked questions about a CD vs. high-yield savings account.

What is the difference between a CD and a high-yield savings account?
- Though both are deposit accounts that generally offer better rates than a standard savings account there are some differences. A CD account locks in a fixed rate for a specific term length and you cannot access those funds until the account reaches maturity. High-yield savings accounts have more flexibility but the variable rates can change.
Is it better to put money in a CD or savings?
- CD accounts often have better rates and are great for short-term savings goals, but you can't access those funds until an account reaches maturity. If you are okay with not touching that money for months or years this could be the way to go, however, if you need more flexibility a high-yield savings account may be the better option.

The article above was refined via automated technology and then fine-tuned and verified for accuracy by a member of our editorial team.