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When you’re saving money, every dollar counts — including interest — so keeping your money in a safe, high-yield account is a good way to start working toward your savings goals.
High-yield savings accounts (HYSAs) and certificates of deposit (CDs) are two good examples. Both are deposit accounts that can earn 10 times or more interest than traditional savings accounts offered by many banks. However, they differ in important ways.
With most CDs, you agree to leave your money in the account untouched for a set period of time. In return, you earn a fixed interest rate for the entire term. However, you’ll be penalized if you take money out before the account matures.
On the other hand, a high-yield savings account allows you to withdraw your money as needed. But the rate can also drop at any time.
So which one is a better place to park your cash? That depends on current interest rates, when you need the money, and your savings goals. Read on to decide whether a high-yield savings account or CD is better for you.
A high-yield savings account, also called a high-interest savings account, offers an interest rate significantly higher than what traditional savings accounts typically offer.
In fact, high-yield savings accounts currently offer as much as 4% APY. And the best rates are usually found at online banks, meaning in-person banking likely won’t be an option. However, many online banks offer large fee-free ATM networks, mobile check deposit, and the ability to link an outside checking or savings account for transfers.
That said, if you prefer banking in person, many credit unions also offer HYSAs.
Like traditional savings accounts, high-yield savings accounts offer a variable rate of return, typically expressed as an annual percentage yield (APY). Banks and credit unions may raise or lower this rate at any time as market conditions and interest rates change.
Read more: How do banks set their savings account interest rates?
CDs are deposit accounts with term lengths ranging from a few months to several years. When you open a CD, you agree to leave your money in the account for the entire term. In exchange, you earn a guaranteed interest rate — often comparable to what you can earn with an HYSA.
CDs can be especially beneficial if interest rates are expected to drop, since you keep earning the same rate you locked in when you opened the account. Of course, tying your money up in a CD isn’t great if interest rates increase significantly before the account matures.
It’s important to note that if you withdraw your money before the term is up, you’ll be charged an early withdrawal penalty, which is typically equal to a portion of the interest earned. Some banks do offer no-penalty CDs, but these accounts usually come with much lower rates.
When your CD reaches maturity, you’ll have a grace period of about 10 days to decide what to do with the money in the account. For example, you can withdraw the money and use it for another purpose, or transfer the funds to another CD. If you don’t act, the bank will often automatically renew your CD for the same or a similar term length and at the current interest rate offered.
To understand your options when your CD matures, be sure to read the terms of the account when you open it.
Choosing between a CD and a high-yield savings account comes down to how soon you’ll need the money and how much flexibility you want.
A high-yield savings account is likely a better choice for short-term savings (such as an emergency fund) because you can add and withdraw money regularly. With most CDs, you can’t add money to the account after the initial funding (with the exception of add-on CDs), and you must wait until it matures to make a withdrawal.
A CD is a good option when saving for specific goals with a defined timeline. For example, say you plan to start shopping for a new house one year from now. You could put your down payment money in a CD with a one-year term and let it earn interest until you need the funds.
That said, many savers use both — keeping emergency savings in an HYSA and putting extra cash into CDs with staggered maturity dates (a CD ladder) to balance flexibility and higher returns.