Pros and Cons of a CD vs. High-Yield Savings Account
If you’re ready to start saving, you might wonder what is the best way to get started? There are various savings vehicles to choose from including certificates of deposit (CDs) and high-yield savings accounts. Which one should you choose though? Read on to learn more about the pros and cons of CDs vs. high-yield savings accounts.
What is a certificate of deposit (CD)?
You might wonder “What is a CD?” A CD is a type of savings vehicle that has a specific term length and withdrawal date.
For example, you might have a one-year CD that you deposit money into. Once the account reaches its maturity date, after one year, you can access your money, plus any earned interest. Unlike a savings account, with a CD you don’t have easy access to your money. Any withdrawals before the maturity date are subject to penalties.
CDs offer higher Annual Percentage Yield (APY) than savings accounts in most cases and have fixed rates. The longer your term length, the higher the APY. You can open a CD at most banks, but beware some may have a minimum deposit.
What is a high-yield savings account?
A high-yield savings account is a type of savings vehicle that has more flexibility than a CD. It offers a higher APY than a standard savings account. It’s also a good place to set money aside and earn interest while still having access to funds in an emergency.
A high-yield savings account allows you to make deposits from your checking account at any time.
Pros and cons: CDs vs. high-yield savings accounts
Both certificates of deposit and high-yield savings accounts are used for the same goal — saving money. But there are pros and cons with each and situations where one savings vehicle is better than the other.
Certificates of deposit
Safe way to save
Various terms to choose from
May have penalties if you need to access cash
High-yield savings accounts
Higher APY compared to a traditional savings account
Safe way to save
May have transfer delay between checking and savings
Rates can change
When to choose a CD vs. high-yield savings account
The main difference between CDs and high-yield savings account is about access. Saving with a CD, your cash will go untouched until the maturity date. On the other hand, a high-yield savings account offers more accessibility.
A CD is good for medium to long-term savings goals. Let’s say you know you have a vacation coming up and don’t want to touch that money. A CD could be a good option. For emergency funds, a high-yield savings account is a better option as you can access the funds and withdraw as needed without any penalties.
So a good rule of thumb is to use a CD for money that you don’t need right away. You can use CDs to reach specific goals, while your high-yield savings accounts can be good for emergency funds or rainy day funds.
When choosing a CD, consider the term length. The longer the term, the higher the APY, but consider the amount of cash and time that your money will be inaccessible. When choosing a high-yield savings account, compare rates among online banks and choose the best rate.
You can use both
You might think that when saving it’s either through a CD or a high-yield savings account. But there’s nothing that says that you can’t use both. You can choose both types of accounts as part of your financial portfolio. Using each saving vehicle can diversify your savings strategy and help you reach your financial goals.