Americans looking for a place to keep savings often consider high-yield savings accounts and certificates of deposit, commonly called CDs.
Both can provide an opportunity to earn interest, but they work differently.
A high-yield savings account generally provides easier access to your money, while a CD typically requires you to leave your money deposited for a specified period to receive the agreed-upon interest rate.
Understanding the differences can help you decide which option may fit a particular savings goal.
What Is a High-Yield Savings Account?
A high-yield savings account is a savings account that generally offers a higher interest rate than many traditional savings accounts.
The interest rate is commonly expressed as an annual percentage yield, or APY.
The rate can change over time, depending on the financial institution and market conditions.
The main advantage is flexibility.
You can generally access your money more easily than you can with a CD, although account-specific withdrawal rules may apply.
What Is a Certificate of Deposit?
A certificate of deposit is a deposit account where you typically agree to keep your money deposited for a specific period.
CD terms can range from short periods to several years.
In exchange for leaving the money deposited for the agreed term, the bank may provide a fixed interest rate.
If you withdraw the money before maturity, an early withdrawal penalty may apply depending on the CD’s terms.
When a High-Yield Savings Account May Make Sense
A high-yield savings account can be useful for money that you may need relatively soon.
For example, an emergency fund generally benefits from easy access.
You may also prefer a savings account for a home fund or other goal where the exact timing of the expense is uncertain.
The flexibility can be valuable.
When a CD May Make Sense
A CD can be useful when you know you will not need the money for a specific period.
For example, if you have $10,000 that you do not expect to use for a year, you may consider a one-year CD.
The interest rate may be fixed for the term, depending on the product.
That can provide greater certainty compared with a savings account whose rate can change.
Compare APY
APY is an important number when comparing savings products.
However, do not compare APY alone.
Check the minimum deposit, account fees, early withdrawal rules, term length, and other conditions.
A slightly higher APY may not be worth it if the account has restrictions that do not fit your needs.
Consider Liquidity
Liquidity refers to how easily you can access your money.
This is one of the biggest differences between savings accounts and CDs.
If you might need the money unexpectedly, locking it into a CD could create inconvenience or penalties.
If you are confident you will not need the money during the CD term, the reduced flexibility may be acceptable.
Consider Building a CD Ladder
Some savers use a strategy called a CD ladder.
Instead of putting all their money into one long-term CD, they divide their savings among several CDs with different maturity dates.
For example, a saver might divide money among CDs that mature at different intervals.
This can provide periodic access to funds while potentially allowing some savings to earn longer-term rates.
The exact strategy depends on your goals and available products.
Check Deposit Insurance
Before placing a large amount of money into a bank deposit product, confirm that the financial institution is covered by the appropriate federal deposit insurance program and understand the applicable limits.
Do not assume every financial product has identical protection.
Avoid Putting Emergency Savings Into Long-Term CDs
Emergency savings should generally be accessible.
If you place your entire emergency reserve into a long-term CD, you may face penalties or delays when an unexpected expense occurs.
A combination of accessible savings and longer-term deposits may be more appropriate for some households.
Final Thoughts
High-yield savings accounts and CDs can both be useful financial tools.
Savings accounts generally provide greater flexibility, while CDs may provide a fixed rate for a defined period.
The best choice depends on when you need the money, how much access you require, and how comfortable you are with locking funds away.
Compare the APY, fees, terms, withdrawal restrictions, and deposit insurance before opening an account.