High-yield savings account vs. CD: Which one is better?

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With today's high interest rates, it's never been a better time to save. But where should you put your money?

High-yield savings accounts and certificates of deposit (CDs) are two popular savings options that offer some of the best rates. But what’s the best option for you?

Here are the key differences between these two accounts and how to decide which one is right for you.

What is a high-yield savings account and how does it work?

High-yield savings accounts function similarly to regular ones, with one significant difference. These accounts allow you to earn a higher amount of money.

As the name suggests, these accounts earn a higher interest rate. The best high-yield savings accounts have rates as high as 5%. That’s over eight times the national average savings rate.

The main advantage of a high-yield savings account is flexibility. You can deposit and withdraw funds when you need them without penalties or restrictions. High-yield accounts are a good option for an emergency fund or short-term financial goal.

Pros of high-yield savings accounts

• Accessibility: Unlike other savings options, high-yield savings accounts offer easy access to your funds. You can deposit and withdraw money without penalties or restrictions.
• Low or no fees: Most high-yield accounts have low minimum balance requirements and no monthly maintenance fees.
• High interest rates: High-yield savings accounts offer higher interest rates than regular savings accounts. This allows your money to grow faster.
• No risk: Like regular savings accounts, high-yield accounts are FDIC insured, safeguarding your money up to $250,000 per person per bank.
• Flexibility: You can use the funds in your high-yield savings account for any purpose, be it emergencies, short-term goals, or building your savings.

Cons of high-yield savings accounts

• Variable interest rates: The rate you see now may not be the same in the future. Banks and credit unions can adjust rates on high-yield savings accounts anytime.
• Higher earning potential elsewhere: While these accounts are considered "high-yield," there may be even greater potential for returns in other options, such as CDs.

What is a CD and how does it work?

CDs involve depositing a fixed amount of money for a set amount of time, ranging from a few months to several years. CDs often offer higher rates than regular savings accounts or even high-yield savings accounts.

The main advantage of CDs is the guaranteed fixed interest rate throughout the term. But the downside is that your money is inaccessible for the entire time. Early withdrawal usually leads to penalties.

Pros of CDs

• Fixed interest rate: When you open a CD, you lock in a set interest rate for the entire term, providing stability.
• Higher interest rates: CDs generally offer higher rates than regular and high-yield savings accounts.
• Discourages impulsive spending: Locking your money in a CD prevents impulsive spending and helps you stay committed to your savings goals.
• Secure: Like high-yield savings accounts, CDs are often FDIC insured.
• Variety of options: Some banks and credit unions offer no-penalty CDs, allowing early access to funds without charges, and bump-up CDs, enabling rate increase requests before maturity if higher rates are available.

Cons of CDs

• Limited access to funds: With a CD, your money is tied up for the entire term. You may face penalties if you need to access your funds before the CD matures.
• Inflation risk: CD interest may not keep up with inflation, diminishing purchasing power.

“CDs do not provide explicit inflation protection,” says Elliot J. Pepper, certified financial planner at Northbrook Financial. “If inflation picks up [before maturity], the CD holder will be worse off.”

What to consider when choosing between a high-yield savings account and a CD

If you’re unsure which account fits your finances better, ask yourself these three key questions.

How much interest can you earn?

While both options provide better rates than regular savings accounts, CDs often come with higher yields. Consider whether the difference in rates justifies locking in your funds for extended periods.

For example, if you want to put $10,000 in a 12-month CD that pays a 5.5% APY, you’ll earn $550 at maturity. If you put $10,000 in a high-yield savings account that pays 5%, you can earn $500 within a year – as long as rates don’t drop in the interim.

When do you need the money?

Assess how necessary liquidity is to you. High-yield accounts offer flexibility, allowing you to deposit and withdraw funds without penalties. CDs, on the other hand, charge penalties for early withdrawals. If you need easy access to your funds, a high-yield savings account is the more flexible option.

A CD can be a great match if you’re planning a specific date, like a wedding in 15 months. You’ll know exactly how much you will earn, and those early withdrawal penalties can reduce spending temptation.

What is your risk tolerance?

High-yield savings accounts are low-risk, as they are FDIC insured. CDs also carry low risk but involve tying up your money for a fixed term. Both are a solid choice if you're comfortable with a low-risk option and want stability. You might explore other investment options if you're willing to take on more risk for potentially higher returns.

Bottom line

Most banks and credit unions offer both high-yield savings accounts and CDs. These accounts can be appealing to savers in different ways.

Deciding between a high-yield savings account and a CD depends on your financial needs and goals.

If you prioritize accessibility and flexibility, picking a high-yield savings account might be the right choice. It allows you to easily deposit and withdraw funds without penalties. If you have extra cash that you don't need immediate access to and you're looking for a higher interest rate, a CD can be a good option.

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.