Need help deciding whether to open a CD or a high yield savings account? The accounts earn interest and are safe, but they are fundamentally different. The following factors should be considered when choosing between CD vs. high yield savings account. If you are aiming to supercharge your savings today with a high yield savings account, check out Beem.
Which One to Choose: CD or High-Yield Savings?
Your financial circumstances, objectives, and risk tolerance will help you determine your best choice. The best way for you can be identified by looking at some scenarios. Here are some examples:
Emergency Fund
Having a High-Yield Savings Account is the best option for building an emergency fund you can access quickly. In case of an unexpected expense, you can access your funds easily through it because of its liquidity and competitive interest rates.
Short-Term Savings
A HYSA can be used for short-term savings for a vacation or holiday shopping. As well as earning decent interest, you can also withdraw funds whenever necessary.
Long-Term Savings
CDs may be a good option for those looking to gain wealth over the long term and lock away their money for a fixed period. The rates on high-yield savings accounts decline as maturity nears, but CD rates tend to be higher in the short term.
Risk Tolerance
Consider how much risk you can take. Risk-averse or guaranteed interest rate seekers may prefer the security of a fixed-rate CD. A high-yield savings account might appeal more if you are comfortable with variable interest rates.
Also know about: Money Without a Savings
What Are the Key Differences?
It’s crucial to understand the fundamental differences between CDs and High-Yield Savings Accounts to make an informed decision:
1. Liquidity:
CD
An investment in a CD is a time-bound investment with a fixed term ranging from several months to several years. A CD usually has a maturity date, and you cannot access your funds before that date.
High-Yield Savings Account
You can withdraw funds from a HYSA whenever you want without incurring penalties. A traditional savings account works similarly to a savings account.
2. Interest Rates:
CD
CDs often offer higher interest rates than regular savings accounts but lower rates than High-Yield Savings Accounts. Interest rates are typically higher for CDs with longer terms.
High-Yield Savings Account
Compared to long-term CDs, these accounts typically offer higher interest rates than regular savings accounts.
3. Fixed vs. Variable Rates:
CD
CD interest rates are fixed for the term. You lock in a specific rate when you open the CD, which remains unchanged until maturity.
High-Yield Savings Account
High-Yield Savings Account interest rates are affected by market conditions and bank policies.
4. Accessibility:
CD
CDs mature and can be rolled over into new ones, at which point interest and principal can be withdrawn.
High-Yield Savings Account
Withdrawals, transfers, and ATM transactions are all possible ways to access your funds.
How Does CD Work?
In addition to CDs, institutions offer other types of accounts. A CD works similarly to high-yield savings accounts by allowing you to deposit money and earn interest. You can sometimes earn more interest on a CD than you would from a high-yield savings account.
One significant difference between this account and a savings account is that you must lock up your money for a certain period. Term length is known as this. Your interest rate will be increased if you prolong your term beyond three months but lower if you prolong it beyond five years. If you opt out before the end of your contract, you’ll usually be charged an early withdrawal charge.
Banks and credit unions charge different penalty fees. Penalties typically equal the interest earned, or the interest you would have earned, over a designated period.
In addition, when you deposit a CD, you’re more likely to lock in a rate than with a high-yield savings account, where rates may change throughout the term. If interest rates drop, opening an account before they do can be beneficial. CD accounts cannot be added to after an upfront deposit has been made and the account has been opened.
How Does High-Yield Savings Account Work?
High-yield savings accounts share several similarities with other varieties of savings accounts. Regular deposits and withdrawals are convenient, although withdrawal limitations may apply. Transferring funds between accounts within the same financial institution is possible.
Banks and credit unions that only offer online savings accounts usually offer high-yield accounts. Compared to conventional banks, these financial organizations can provide higher interest rates to their consumers because they have lower operational overheads.
High-yield savings accounts can require a minimum deposit of $100 or more. You can, however, discover financial institutions that offer high yields and refrain from imposing account maintenance, low balance, or inter-account transfer fees by diligently researching and comparing different banking services. It enhances your financial strategy’s overall value by maximizing your savings’ growth and minimizing associated costs.
See also about: What to do when your Certificate of Deposit matures
CD vs. High-Yield Savings Account: Which Is Better?
In choosing between a CD and a High-Yield Savings Account, consider your financial goals, risk tolerance, and current financial situation. This guide will help you choose the best option for your needs:
Also Read: Bonds Vs. High Yield Savings
When to Choose a CD:
The certificate of deposit (CD) is a type of savings account whose purpose is to hold money for a specified period, typically between three months and five years.
In contrast to high-yield savings accounts, you cannot withdraw cash before the CD matures. You will lose any interest earned due to fees unless you have a CD with no penalties. There is no guarantee that CD rates will always be higher than savings account rates, but they can sometimes earn more than 4%. Additionally, CD accounts lock in interest rates, so you won’t lose money if rates decline.
If you plan to purchase a house in five years or fund your child’s education in ten years, a CD may offer higher interest rates.
Guaranteed Returns: CDs provide predictable returns because the interest rate is fixed for the entire term. A CD may be suitable if you prefer a low-risk, stable investment.
Conclusion
High-yield savings accounts and CDs can help you increase your savings interest. Make sure to understand the differences between CDs and IRAs before making early withdrawals. In the meantime, high-yield savings accounts offer easy access to emergency fund savings and are an excellent place for storing them. Beem will help strengthen your savings with the best high-yield savings accounts that align with your savings goals and priorities.
Whether you choose a CD or high-interest savings account, you can earn interest on your cash. The advantage of high-yield savings accounts is that you can easily manage your cash. Maturity dates must withdraw CDs, while savings accounts allow you to add funds whenever possible.
In contrast, you cannot lock in rates when you open a high-yield savings account. APY remains constant from when the CD is opened to when it matures. The interest rate decrease doesn’t affect high-yield savings accounts, but the funds you store there are affected.
You must pay attention to the variable interest rates of high-yield savings accounts. As the Fed’s benchmark interest rate changes, they can change over time. Consider moving your money to an alternative savings option or a different account if the interest rate on your current account drops.
FAQs
Q. Is a high-yield savings account the same as a CD?
No, a high-yield savings account offers liquidity with variable interest rates, while a CD locks in funds for a fixed term with a guaranteed interest rate.
Q. Why CD instead of high-yield savings?
CDs may offer higher interest rates for longer-term savings goals and suit risk-averse individuals willing to commit to a set term.
Q. Is a CD safer than a savings account?
Both are generally safe, but CDs have fixed rates, while savings account rates can fluctuate. The choice depends on your risk tolerance.
Q. Are high-yield CDs a good idea?
High-yield CDs can be a good option for savers seeking higher interest rates while preserving principal, especially for longer terms.
Q. Can you sell a T-bill or a CD before it matures?
Yes, you can sell T-bills on the secondary market, but it’s less common for CDs. Early withdrawal from CDs usually incurs penalties.
Q. What is a Treasury securities auction, and how do I find the results?
A Treasury securities auction is where the U.S. government sells debt securities like T-bills. Auction results are available on the U.S. Treasury website or financial news sources.
