CDs vs. High-Yield Savings Accounts: Which Should I Get?

Certificates of deposit (CDs) and high-yield savings accounts are two popular options for savers looking to earn more interest on their money. Both offer higher returns compared to traditional savings accounts, but they come with different features and benefits. Understanding the distinctions between CDs vs. high-yield savings accounts can help you decide which one fits your savings goals and financial situation.

Need help deciding which one is a better fit for your investment portfolio? Consider reaching out to a financial advisor.

What Is a Certificate of Deposit (CDs)?

Certificates of deposit are time deposits offered by banks and credit unions that pay a fixed interest rate for a specified term. The term can range from a few months to several years. However, CD rates are typically higher than savings account rates. This is because when you deposit your cash, you agree to leave your money untouched until the term ends and the CD matures. In most cases, early withdrawals incur a penalty, typically a portion of your interest earnings.

Given the higher interest rates and early withdrawal penalties, CDs are a good choice for those who can commit to locking away their funds for a set period.

What Is a High-Yield Savings Account?

High-yield savings accounts function similarly to traditional savings accounts but come with significantly higher interest rates. They are common among online banks because, without the cost of maintaining physical branches, these banks can afford to offer higher interest rates to their customers.

High-yield savings accounts provide more flexibility than CDs, as you can access your funds at any time without penalty. They’re an excellent option for those who want to earn competitive interest rates while maintaining access to your money as needed.

Differences Between CDs vs. High-Yield Savings Accounts

Certificates of deposit (CDs) and savings accounts are both useful tools for saving money, but they work differently, each with their own specific features, benefits and limitations.

Interest Rates

CDs typically offer higher interest rates compared to high-yield savings accounts. This is because CDs require you to commit your money for a fixed period, ranging from a few months to several years. In return for this commitment, banks reward you with a higher interest rate.

Savings accounts, on the other hand, offer lower, variable interest rates that can change over time based on market conditions and the bank’s policies.

Access to Funds

One of the main differences between CDs and high-yield savings accounts is the access you have to your money.

Savings accounts are designed for flexibility, allowing you to deposit and withdraw funds at any time without penalties (although some banks may limit your number of monthly transactions). This access makes savings accounts ideal for emergency funds or savings goals that require regular access to cash.

In contrast, CDs lock up your money for a predetermined term. Withdrawing funds from a CD before maturity usually incurs a penalty, which cuts into your interest earnings.

Minimum Deposit Requirements

CDs often come with higher minimum deposit requirements than savings accounts.

To open a CD, banks usually require a minimum deposit that can range from $500 to several thousand dollars. Savings accounts, on the other hand, typically have lower minimum deposit requirements, making them more accessible to a broader range of savers.

Risk and security

Both CDs and savings accounts are considered low-risk investments since they are usually insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA), up to $250,000 per depositor, per institution.

This insurance protects your money in the unlikely event that the bank fails.

Purpose

The choice between a CD and a savings account often comes down to your financial goals and timeline. CDs are suitable for long-term savings goals where you can afford to lock away your money and earn a higher return. Savings accounts are better for short-term goals or for maintaining an emergency fund, where you need to maintain immediate access to your money.

Pros and Cons of CDs vs. High-Yield Savings Accounts

A couple compare CDs vs. high-yield savings accounts.

When choosing between certificates of deposit (CDs) and savings accounts, take the time to weigh the pros and cons of each option. Both financial products serve the purpose of saving money, but their features and benefits differ.

Pros of CDs

Higher interest rates: CD rates are typically higher compared to savings account rates. This is because banks want to entice customers to leave their deposits untouched for a period of time, whether it’s for a few months or a few years.
Fixed returns: CDs provide a fixed interest rate, providing guaranteed returns. This predictability helps you calculate CD earnings and plan for long-term goals.
Incentive to save: The penalty for early withdrawal acts as a deterrent, encouraging savers to keep their money in the CD until maturity. This can help savers achieve their financial goals and minimize the temptation to dip into their funds.

Cons of CDs

Lack of liquidity: Compared to other types of savings accounts, CDs lack liquidity. Once you deposit your money, you can’t access it without incurring a penalty. This can be a disadvantage if you need funds for an emergency.
Minimum deposit requirements: CDs often have higher minimum deposit requirements compared to savings accounts, which may not be feasible for all savers.
Inflation risk: If the interest rate on the CD is lower than the rate of inflation, the real value of your savings could diminish over time.

Pros of Savings Accounts

Flexibility and accessibility: Savings accounts offer flexibility, generally allowing you to deposit and withdraw funds at any time without penalty. This makes them ideal for emergency funds and short-term savings goals.
Low minimum deposits: Savings accounts usually have low or no minimum deposit requirements, making them accessible to a wider range of savers.
Interest compounding: Interest in savings accounts typically compounds daily, monthly or quarterly, allowing your money to grow more efficiently over time.

Cons of Savings Accounts

Lower interest rates: The interest rates for savings accounts are generally lower compared to CDs, which can result in lower returns over time.
Variable rates: Savings account interest rates are variable and can fluctuate with market conditions. This means your returns are somewhat unpredictable.
The temptation to spend: Easy access to funds in a savings account can be a disadvantage if it tempts you to withdraw and spend money before you can reach your savings goals.

When to Use a CD vs. a High-Yield Savings Account

Certificates of deposit (CDs) work well for savers with specific, time-bound goals who do not need immediate access to their money. For example, if you are saving for a down payment in two years or setting aside money for a future expense with a known timeline, a CD can provide a higher fixed interest rate in exchange for locking in your funds. Since CDs impose penalties for early withdrawal, they help discourage spending and encourage long-term saving discipline.

High-yield savings accounts are more appropriate for situations where you may need to access your money at any time. They’re well suited for emergency funds, irregular expenses or short-term goals without a fixed deadline. The flexibility to make deposits and withdrawals without penalties makes these accounts practical for managing cash flow while still earning more interest than a standard savings account.

In some cases, a combination of both can be useful. You might keep a portion of your money in a high-yield savings account for flexibility and emergencies while placing other funds in CD ladders with staggered maturity dates. This approach provides a balance of liquidity and higher earnings.

Matching the account type to your financial goals and access needs can help optimize how your money grows.

Bottom Line

A couple decide between CDs vs. high-yield savings accounts.

Both CDs and high-yield savings accounts can help you reach your financial goals, but they each have limitations and serve a unique purpose. CDs are ideal for those looking for higher, fixed returns and who can commit their funds for a set term without touching them. High-yield savings accounts provide more flexibility and access to funds but have lower and variable interest rates. Understanding these differences can help you choose the right financial product for your goals, but you don’t have to limit yourself to either one. In fact, you might find a purpose for both CDs and high-yield savings within your financial strategy.

Work with a financial advisor to determine the best strategy for your accounts based on your short-term and long-term financial goals.

Tips for Saving

Savings play a role in any sound financial strategy. To make sure you’re saving enough for emergencies, short-term goals and retirement, consult a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use a savings calculator to estimate how much you can earn with current rates. If you’re saving for a particular goal, play around with different interest rates, monthly contributions and timelines to see how long it could take you to save up under these different circumstances.