After the Fed's Rate Hike: Is a CD or High-Yield Savings Account Better for Your Cash?
Deciding between a CD and a high-yield savings account? Here's how to choose based on your savings goals.
If you're looking for a place to store and grow your savings, you have multiple options. Two popular choices are certificates of depositand high-yield savings accounts.
Both offer higher APYs to help shelter your cash from inflation. However, they have distinct differences that appeal to different savings needs.
We'll look at the features of each and what to consider before signing up. That way, you can find the right one to grow your savings.
When to choose a CD
A certificate of deposit (CD) is a savings account that holds a set amount of money for a fixed period, ranging from 3 months to 5 years. Unlike high-yield savings accounts, you can't 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).
Furthermore, CD rates are higher than those on traditional savings accounts at brick-and-mortar banks, and in many cases, some of the best CD rates on the market offer an APY of 4% or higher.
Another notable aspect of CDs is that interest rates are locked in when opening a CD account, meaning if the Federal Reserve decides to raise interest rates later this year, you won't receive any rate bump.
Use this Bankrate tool to find a CD term that works for you:
Because your money is locked away for a fixed period, CD accounts aren't a good option for cash you may need quick access to, like in an emergency fund. Meanwhile, CD accounts are good for 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 and resist the temptation to spend your cash.
CDs offer a fixed, predictable rate of return. Our savings calculator can help you determine how much you’ll earn in compound interest once your CD reaches maturity.
Another benefit of CDs is that you can create CD ladders with staggered maturity dates. Say you have $50,000 to deposit; you could do the following:
- $10,000 in a six-month CD
- $10,000 in a one-year CD
- $10,000 in a three-year CD
- $10,000 in a five-year CD
- $10,000 in a no-penalty CD
I like this approach because the staggered maturity windows open up your cash flow. The no-penalty CD gives you a free way to break open a CD if it isn't working, without worrying about an early termination fee. Just know that these CDs have vesting periods from seven days to one month.
Of course, there's another option that offers unrivaled flexibility.
When to choose a high-yield savings account
A high-yield savings account works like 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, high-yield savings accounts have variable rates, meaning if the Fed raises rates again, your savings rate could rise too.
As with CDs, review any fees or balance requirements before opening an account.
You can shop around and find the right account quickly, using this Bankrate tool:
There’s no term length associated with a high-yield savings account, as cash is readily accessible. Unlike CDs, you won’t be charged a fee for withdrawing your cash unless you use an out-of-network ATM.
Because of this, high-yield savings accounts are better suited to savers who want quick access to their money, should an emergency arise.
They are also convenient for savers looking to add regular deposits. You can set up automatic transfers from your checking account to your savings to meet future goals.
How Federal Reserve policy impacts each account
When the Federal Reserve raises interest rates, as it did at its September meeting, savings rates often trend higher as banks respond to changes in the broader interest rate environment. That can lead to higher APYs on savings accounts, high-yield savings accounts and CDs, although rates do not rise automatically or by the same amount. The impact can also vary depending on the type of account.
Since high-yield savings accounts have variable rates, banks can increase APYs at any time. This means if you need cash flow yet want to maximize growth, it is a smart solution since you won't miss out on rate hikes.
Meanwhile, CD rates also increase. However, if you already have a CD, the rate you locked in won't change even if the Fed hikes rates again.
This is why, if you're looking to maximize growth, I recommend a short-term CD in the interim. That way, you can earn a high rate of return now, and if the Fed hikes rates again, you'll be in a great position to capitalize on them.
Bottom line on CDs vs. high-yield savings accounts
Both options help you grow your money and outpace inflation. CDs work best if you can put aside a portion of your money and don't touch it. They're also wise choices for savers looking to lock in high rates regardless of future Fed policy.
Meanwhile, high-yield savings accounts are better for people who want to earn a high rate of return, but who also need quick access to their cash. In either case, shop around to find the best rates, and pay close attention to any account fees.
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