With interest rates rising, many people are wondering about CDs vs high yield savings accounts and which is better for their financial goals. Both are great options when it comes to saving and earning money, but it's important to understand the differences between the two so you can choose the right financial strategy for your needs.
Before we get into the pros and cons of CDs vs high yield savings accounts and what they are, I want you to congratulate yourself for even considering this question. The fact that you are wondering which is better means that you have prioritized saving money.
Ultimately, the act of putting money in savings at all is far more important than which savings account you use.
Many people spend way too much time trying to find the perfect option, comparing interest rates, and even jumping from one account to another to get the highest rate. Or, they become overwhelmed with figuring out which option to choose and end up doing nothing.
It’s important not to overthink this decision. CDs and high yield savings accounts are both great options. Both keep your money safe and help it grow more than a traditional savings account.
Keep reading to learn what the difference is and what to consider when making your decision.
High Yield Savings Accounts
High Yield Savings Account: How does it work?
High yield savings accounts (HYSAs) are simply savings accounts that pay you more in interest than a traditional savings account. When you signed up for a checking account at your bank, you probably got a savings account as well. These “traditional” savings accounts pay you next to nothing when you keep money in your account.
For example, basic Wells Fargo savings accounts currently pay .15% in interest (as of Feb 2023). That’s nothing. What’s worse is that Wells Fargo charges you a $5/month service fee unless you jump through the appropriate hoops. That means you’re paying money for the privilege of earning a few pennies.
For a long time, these traditional savings accounts were your only option. But the rise of internet banking has created a plethora of options (in the form of HYSAs) and has put more pressure on traditional banks to do better (though clearly not enough to improve offerings at Wells Fargo and some of the other big banks).
Are high yield savings accounts safe?
HYSAs are typically offered by smaller, online-only banks and credit unions, but that doesn’t mean these accounts are riskier.
As long as you make sure the bank is FDIC insured (or insured by the NCUA if it’s a credit union), your money is protected up to $250,000. Both of these organizations indicate that the federal government protects your money against bank failure. Always check that any bank or credit union you’re considering is covered by the FDIC or NCUA.
HYSAs work just like a regular savings account, where you can withdraw your money any time you need it. This makes it an excellent choice for emergency funds and other shorter-term savings goals. You can easily link HYSAs to your checking account, even if it is at a different bank, to facilitate easy access.
How much do high yield savings accounts pay?
Interest rates fluctuate depending on market conditions and the federal funds rate set by the Federal Reserve. For most of the 2000s, interest rates have been extremely low and close to zero for many of those years. In 2021, for example, you were lucky to be earning .5% even in high yield savings accounts. But in early 2023, it’s not hard to find banks offering 3-4%.
So if you want to know how much high yield savings accounts pay, the best thing to do is Google it. Sites like Bankrate.com and Nerdwallet.com regularly update lists of banks with the highest interest rates. And remember, these rates fluctuate, so your rate may go up and down as the economy changes.
Who should use a high yield savings account?
Anyone! The biggest downside to a high yield savings account is the minimal amount of time it takes to pick one and open the account. In other words, as long as you choose a bank or credit union backed by the FDIC or NCUA, there is very little downside.
High yield savings accounts are a great option for storing money that you need for your emergency fund or any other near-future purchase, such as an upcoming vacation, a new car, or home upgrades.
Note: there is a point at which you might be saving too much money in an HYSA. If the money is for the distant future, you may want to consider investing it. Consult with an investment professional for advice.
CDs (Certificates of Deposit)
CDs: How do they work?
A CD is a financial product where you agree to leave your money with the bank for a certain period of time in exchange for some interest to be paid at the end of the term. For example, you could purchase a 1-year CD with an interest rate of 4%. If you put $1000 in this CD and leave your money there the entire time, you will end up with $1040 (by earning $40 in interest). You can use this CD interest calculator to calculate the amount you’ll earn.
Typically, CDs are purchased within a bank account or brokerage account. For example, if you have a Wells Fargo Savings Account, you can use the money in your savings account to purchase a CD. At the end of the term, the money goes back into your savings account unless you choose to purchase another CD.
Or, you can purchase CDs as part of your investment portfolio either in your retirement accounts or brokerage accounts. (This is not to say that you should do this. Always work with an investment advisor or financial planner who is a fiduciary to develop an appropriate investment plan for you.)
How much do CDs pay?
CD rates fluctuate too. The rates are often higher than a high yield savings account to make up for your money being less accessible.
CDs also have different rates depending on the length of the term (from as short as one month up to ten years). Usually, the longer term CDs offer a higher rate than shorter term CDs, but that’s not always true.
To find current rates, check with your current banking institution to see what they offer. Otherwise, check with Bankrate.com or NerdWallet to find the best rates currently available.
Are CDs safe?
Most CDs, like high yield savings accounts, are insured by the FDIC or NCUA, meaning that your money is protected up to $250,000. Again, it’s always worth it to check the institution that offers the CD to make sure.
The biggest risk when it comes to CDs is related to tying up your money. When you purchase a CD, you face penalties if you try to remove the money before the term is up. This means that you shouldn’t buy a CD unless you are reasonably certain that you will not need the money during that time period. Penalties vary, so read the fine print before committing if you’re unsure.
Another potential problem (or benefit!) when buying a CD is that you are locking in a particular interest rate. If interest rates keep rising, you could be missing out on earning even more in interest (which would be the downside). On the other hand, if interest rates go down after you purchase the CD, you’re locking in a higher rate than you otherwise could get.
For example, let’s say that I purchase a 1-year CD at 4%. If interest rates go up to 6%, I might be missing out on the opportunity to buy a CD at 6%. If the interest rates for new CDs go down to 2%, I’d feel pretty good about having my money locked in at 4%. (This is also one of the potential benefits of CDs over HYSAs—if interest rates go down, a CD might give you a higher rate for longer.)
To hedge against this risk, some people use a strategy called a CD ladder. Some institutions have technology that can set this up for you and walk you through the process. Otherwise, a financial advisor can help you determine if that’s a good strategy and help you get started.
Who should purchase CDs?
CDs are a great option for anyone looking to earn more in interest on money they need soon, but not right away. Do not buy CDs if you think you will need to access this money before the end of the term.
High yield savings account vs CDs: How to decide
When trying to decide between HYSAs and CDs, there are three factors to consider
1. Your Timeline
The most important thing to consider is time. If there’s any chance you might need the money, an HYSA is the way to go. On the other hand, if you’re saving for a home that you know you won’t buy for 5+ years, a CD might be a good option. A CD locks up your money for a period of time, so never buy a CD when you think you might need the money before the term expires.
2. Interest Rates
If time is not an issue, look at how much you’ll earn in interest. Bankrate.com is a great place to research and compare current rates on HYSAs and CDs at various banks. We are currently in a very low interest rate environment and there might not be much of a difference. It is likely not worth it to get a CD over an HYSA if it only offers a few tenths of a percent more.
3. Convenience
Convenience is another factor to consider. You might not want to go to the work of researching options and changing banks, particularly when there’s a risk interest rates will keep changing. Instead, you might want to take a look at what your current banking institution has available. If you can find something that meets your time requirements and offers a decent interest rate, it might not be worth it to switch.
Only you can decide if chasing interest rates is worth the time and effort it takes to open and close accounts. Remember, your time has value too.
Next Steps
Think about your goal for your money. Is it something you might need to access in the near future?
Consider how much work you’re willing to put into switching. Going from a bank that offers you 4.3% to one that offers you 4.5% may not be worth it. Going from .15% to 4.5%, on the other hand, would be significantly more worth it. You get to decide what is worth it to you.
Do some research on what your current bank offers and then search the internet for what other banks are offering. (Don’t forget to verify that the institution is backed by the FDIC or NCUA.)
Just make a decision and get started. Don’t let indecision keep you from putting your money to work for you.
Ultimately the choice of a high yield savings account vs CDs isn’t as important as the act of saving money. Figuring out how to save (and invest) more money is a much better use of your time than agonizing over which account you’ll use.
In the end, the best HYSA or CD is the one you actually put money in.
Next: Automate your finances so you don’t have to think about it.
