Unsure whether a CD or high-yield savings account is right for you? Both accounts keep your savings safe while accruing interest, but apart from that, they have significant differences. Understanding the differences between the two accounts can help you decide which is appropriate for your particular savings goals. Keep the following aspects in mind when deciding whether a CD or a high-yield savings account is the right choice for you.
When to choose a CD
A certificate of deposit (CD) is a type of savings account that holds a set amount of money for a fixed period, ranging anywhere from 3 months to 5 years. Unlike high-yield savings accounts, you won’t be able to withdraw cash from a CD before its maturity date. Doing so will result in fees that can offset any interest earned (unless you have a no-penalty CD account).
Usually, CD rates are much higher than rates on traditional savings accounts, and in many cases, some of the best CD rates on the market feature an APY of over 4%. Another notable aspect of CDs is that interest rates are locked in when opening a CD account, meaning if rates go down (which they have been), your earnings won't be affected.
Not only should you compare interest rates before opening a CD, but you should also consider any early withdrawal penalties, fees and minimum balance requirements associated with the account, along with the amount of time you’re comfortable locking your cash away.
You can compare current CD rates by using our tool below, powered by Bankrate.
Because your money is locked away for a fixed time, CD accounts aren't good options for cash you may need quick access to, like money in an emergency fund. What CD accounts are good for is saving for a particular goal, such as a future purchase, like a new car, or an event, like a wedding.
For example, if you know you’re going to buy a car in three years, opening a three-year CD can help build your savings with minimal effort, thanks to compound interest, and also help you resist the temptation to spend your cash.
CDs offer a fixed, predictable rate of return on your savings. Our savings calculator tool can help you determine just how much you’ll earn in compound interest once your CD reaches maturity.
When to choose a high-yield savings account
A high-yield savings account functions in the same way as a traditional savings account, but with one main difference: high-yield savings accounts pay a higher than average APY on deposits. In fact, many of the best high-yield savings accounts offer well over 4%. However, unlike CDs, rates on high-yield savings accounts are not fixed, meaning they can fluctuate with the market.
Below, you can compare current rates for high-yield savings accounts, thanks to our tool in partnership with Bankrate. As with CDs, before opening a high-yield savings account, be sure to review any fees or balance requirements associated with the account.
There’s no term length with a high-yield savings account, as funds in the account are readily accessible. Unlike CDs, you won’t be charged a fee for withdrawing your cash. Because of this, high-yield savings accounts are better suited towards short-term savings goals or to save cash you may need to spend at some point in the near future, like an emergency fund.
Since you won’t be making a singular up-front payment when opening the account, like with a CD, these accounts are useful for individuals looking to gradually save by making regular deposits.
Bottom line on CD vs. high-yield savings accounts
With both CDs and high-yield savings accounts, your cash remains secure while also earning interest. High-yield savings accounts offer more flexibility when it comes to managing your cash. You won't have to wait until the maturity date on the account before withdrawing funds, and you can add to the account whenever you like, unlike with a CD.
However, the downside is that you can't lock in rates when opening a high-yield savings account. With a CD, the APY on the account stays the same from when it's opened until it matures. If rates go down, your earning potential won't be decreased, but it will, however, if your funds are in a high-yield savings account.
And while savings rates are still notably high, they won't remain that way for long. Saving rates initially began rising in March 2022, when the Federal Reserve started hiking interest rates in an attempt to combat high inflation.
But as inflation began to slow, the central bank paused its rate-hiking campaign, and savings rates began to creep downward. Rates fell recently after the Fed announced a quarter of a percentage point rate cut.
Related Content
-
Don’t Make These Five Mistakes on Your Tax ReturnTax Filing The IRS warns taxpayers to watch out for these common errors as they prepare to file.
-
Cooling February CPI Lifts Rate Cut Hopes: What the Experts Are SayingWhile the Fed is likely to keep interest rates unchanged next week, an encouraging February CPI report raises the odds for more easing later this year.
-
Is a Long-Term CD the Best Option for Saving?CDs offer good rates and guaranteed returns. However, are they the best option for longer range savings goals?
-
Is a Joint Bank Account Romantic or Risky?Considering a joint bank account with your partner? Discover the advantages and potential pitfalls to determine if it's the right choice for your relationship.
-
Why a 5-Year CD is Your Best Bet After the Fed MeetingWith no rate cut at the Fed meeting in January, you still have time to lock in historically high interest rates with a 5-year CD.
-
How to Shelter Your Tax Refund From Rising InflationAre you expecting a tax refund? Here are some ways to grow it so it outpaces inflation.
-
After the Fed Meeting, Seven High-Yield Savings Accounts Worth Your WhileThe Fed didn't cut interest rates during their meeting this week. These high-yield savings accounts offer attractive rates to beat continuing inflation.
-
Are You Really Prepared for a Financial Emergency?High inflation and interest rates have impeded the ability of many people to save more. How do you save more with less? We'll show you a few options.
-
Where to Store Your Cash in 2025Take a fresh look at budgeting and savings opportunities for where to store your cash this year, to ensure you leave no stone unturned.
-
Callable CDs: Was Your High-Yield CD Called Back Before It Matured?Here's what you need to know about callable CDs, which let banks redeem your CD before its official maturity date.
