2e:["$","$L2f",null,{"category":"$30","relatedArticles":[{"id":"cG9zdDoyNzAxNTg=","databaseId":270158,"postId":270158,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/3b02fac7ed4b968df109a1571de56eef337973ae16dead35422edea7ab805eb9?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1673,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUyMQ==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19521,"categoryId":19521,"link":"https://smartasset.com/other-checking-account/articles","name":"Other","postCount":{"pageInfo":{"offsetPagination":{"total":2,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"other-checking-account","ancestors":{"nodes":[{"name":"Checking Account","slug":"checking-account","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Checking Account","id":"dGVybTo0NzIx","slug":"checking-account","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$31","date":"2024-12-03T21:19:48","excerpt":"

Reserve requirements are set by central banks and dictate the minimum amount of reserves that a financial institution must hold against its deposit liabilities. Essentially, they help ensure that banks have enough liquidity to meet customer withdrawals and other obligations. By controlling the amount of money that banks can lend, reserve requirements influence interest rates […]

\n","featuredImage":{"id":"cG9zdDoyNzAxNjE=","databaseId":270161,"altText":"A woman looking up reserve requirements.","date":"2024-12-03T21:13:16","fileSize":206352,"mimeType":"image/jpeg","modified":"2024-12-03T21:14:09","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/12/iStock-2160367971.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-3","readable":"December 3, 2024","readableExtended":"December 3, 2024, 9:19pm ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/ec94ef289aaaff921cceaadb51aba5e4ac1e9d0ca6d0ca8350c24e727726c750?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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A financial advisor can help you create a financial plan to cover emergencies and reach other objectives.

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How Reserve Requirements Work

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Typically set by central banks like the Federal Reserve in the United States, reserve requirements are designed to ensure that banks maintain a buffer of cash or equivalent assets. This buffer helps banks meet withdrawal demands and maintain liquidity, which reduces the risk of bank runs.

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Central banks can use reserve requirements as a tool to influence monetary policy. By adjusting these requirements, they can control the amount of money circulating in the economy. For example, lowering reserve requirements allows banks to lend to more businesses and consumers, which could potentially stimulate economic growth. Increasing requirements, on the other hand, could help curb inflation by restricting the amount of money available for lending.

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For consumers, reserve requirements can indirectly affect the availability and cost of credit. When banks have more reserves, they may offer more competitive interest rates on loans and mortgages, making borrowing more affordable. But when reserve requirements are tightened, consumers might face higher interest rates and stricter lending criteria.

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Benefits of Lower Reserve Requirements

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Lower reserve requirements can offer several benefits for banks. Here are four common ones to keep in mind:

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Increased lending capacity: With fewer funds held in reserve, banks can extend more loans, potentially boosting profitability and stimulating economic growth.
Enhanced investment opportunities: Freed-up capital allows banks to invest in diverse assets, aiming for higher returns and improved financial performance.
Improved liquidity management: Lower reserves provide banks with greater flexibility in managing liquidity, enabling them to respond more effectively to market conditions and customer needs.
Competitive advantage: The ability to offer more loans or better interest rates can enhance a bank’s competitiveness in the financial market.

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And, here are four general ways lower reserve requirements can benefit you as a bank client:

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Increased access to credit: With banks required to hold less cash in reserve, more funds become available for lending, making it easier for clients to obtain loans for personal or business needs.
Potentially lower interest rates: The increased supply of loanable funds can lead to more competitive interest rates, reducing borrowing costs for clients.
Enhanced economic activity: Easier access to credit can stimulate consumer spending and business investments, contributing to overall economic growth, which can positively impact clients’ financial well-being.
Improved banking services: Higher profitability from increased lending may enable banks to invest in better services and products, enhancing the overall banking experience for clients.

","

While lower reserve requirements can allow banks to lend more, which can boost economic activity, this can also lead to increased risk-taking and reduced liquidity. And it could make banks more vulnerable during financial downturns. For clients, while easier access to credit may seem beneficial, it can result in higher debt levels and potential financial instability if economic conditions worsen.

","

Benefits of Higher Reserve Requirements

","

","

Higher reserve requirements can also offer several benefits for banks:

","$3e","

And, here are four general benefits for bank clients:

","$3f","

You should also note that higher reserve requirements can compel banks to hold a larger portion of deposits as non-lending reserves, which can limit their ability to extend credit and invest in profitable ventures. For bank clients, this constraint may also lead to decreased loan availability and higher interest rates, which can make borrowing more challenging and expensive. Additionally, banks might offer lower interest rates on deposit accounts to offset the costs associated with maintaining higher reserves, affecting clients’ returns on savings.

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Bottom Line

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Reserve requirements are essential for the stability of individual banks and the broader economy. Policymakers consider them important in balancing economic growth with financial stability. Understanding how reserve requirements work can help you understand how monetary policy affects daily financial decisions and investment portfolio.

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Financial Planning Tips

","$40","

Photo credit: ©iStock.com/Aksonsat Uanthoeng, ©iStock.com/EmirMemedovski, ©iStock.com/Yaroslav Olieinikov

"],"experts":null,"link":"/checking-account/reserve-requirements","modifiedIso":"2024-12-03T21:19:48.000Z","published":{"datetime":"2024-12-3","readable":"December 3, 2024","readableExtended":"December 3, 2024, 9:19pm ET"},"publishedIso":"2024-12-03T21:19:48.000Z","shareInfo":{"title":"What Are Reserve Requirements and Why Do They Matter?","origin":"/checking-account/reserve-requirements"},"isNewsArticle":true},{"id":"cG9zdDoxOTU2NjA=","databaseId":195660,"postId":195660,"author":{"node":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/7c731dd1727acb7246e8305663a0f7b141e21e77a35763773a94c0b236d369f5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":959,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQyMg==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19422,"categoryId":19422,"link":"https://smartasset.com/banking-basics/articles","name":"Banking Basics","postCount":{"pageInfo":{"offsetPagination":{"total":95,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"banking-basics","ancestors":{"nodes":[{"name":"Checking Account","slug":"checking-account","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Checking Account","id":"dGVybTo0NzIx","slug":"checking-account","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$41","date":"2023-05-02T15:17:33","excerpt":"

\n","featuredImage":{"id":"cG9zdDoxOTU2NjE=","databaseId":195661,"altText":"is my money safe in the bank","date":"2023-05-02T22:00:47","fileSize":60183,"mimeType":"image/jpeg","modified":"2023-05-02T22:00:47","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2023/05/bank-1-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2023-8-24","readable":"August 24, 2023","readableExtended":"August 24, 2023, 8:42am ET"},"multipleBylinesByRole":{"editedBy":null,"reviewedBy":null,"writtenBy":null,"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/checking-account/is-my-money-safe-in-the-bank","metaDesc":"Both banks and credit unions are insure up to $250,000 per customer. Banks are insured by the FDIC and credit unions are insured by the NCUA.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":7,"title":"Is My Money Safe in the Bank?","__typename":"PostTypeSEO"},"slug":"is-my-money-safe-in-the-bank","status":"publish","title":"Is My Money Safe in the Bank?","postType":"post","subtitle":null,"uri":"/checking-account/is-my-money-safe-in-the-bank","tags":{"nodes":[],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":"$42","description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":"$43","email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":"$44","slug":"eric-reed","__typename":"User"},"editedBy":null,"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQyMg==","children":"$47","databaseId":19422,"categoryId":19422,"link":"https://smartasset.com/banking-basics/articles","name":"Banking Basics","postCount":95,"slug":"banking-basics","ancestors":"$49","parent":"$4c","__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

In recent months the FDIC has managed two of the largest bank failures in U.S. history. The collapse of Silicon Valley Bank (SVB) and Signature Bank happened shockingly fast. And First Republic wasn’t far behind. Consumers have plenty of questions, as the banking sector looks shakier than at any point since the 2008 recession. But perhaps the biggest is also the most basic: is my money safe? The good news is, yes. The federal government acts to protect bank deposits in a number of ways. The two most important, and effective, are insurance and liquidity. For help managing your money and preparing for potential future bank failures, consider working with a financial advisor.

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The Federal Government Insures Deposits

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The most direct way that the government acts is through depository insurance. For banks, this is managed by the FDIC (Federal Deposit Insurance Corporation). For credit unions, which operate similarly to banks, deposit insurance is managed by the NCUA (the “National Credit Union Administration”).

","

In both cases, the government insures each depositor at each institution for up to $250,000. This means that if the bank fails and its assets are wiped out, the government will reimburse you for any and all lost money up to $250,000. It periodically updates that amount for inflation.

","

This rule applies to each depositor, so the government won’t protect multiple accounts at the same bank. However it applies to each institution as well. So if you have three accounts with a single bank, you are only protected up to $250,000. However if you have accounts at three separate banks, your money at each institution is protected up to the limit. There are some instances in which you could have multiple accounts protected at one institution, if they are different types of accounts.

","

This also applies only to depository institutions, places which offer products like checking and savings accounts. It does not apply to investment banks. The government will reimburse you if your checking account is wiped out, but it won’t make you whole for stock market losses.

","

The Federal Reserve also has shown willingness to expand its footprint of protection. When Silicon Valley Bank collapsed, the government lifted this $250,000 cap. It guaranteed that it would reimburse all of the money that businesses and individuals had on deposit, including about $18 billion in uninsured cash. It did the same with Signature bank, guaranteeing about $1.6 billion in uninsured assets.

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The FDIC and the Federal Reserve Backstop Liquidity

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Depository insurance is the guarantee of last resort, and the government uses it very rarely. Before reimbursing consumers the FDIC and the Federal Reserve try to prop up a bank’s liquidity and keep it from failing. They do this in two main ways.

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Lender of Last Resort

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First, the Federal Reserve acts as a lender of last resort when banks need cash. This is the government’s preferred method of protecting deposits at healthy banks.

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One of the major ways that a bank can fail is if too many depositors try to take their money out all at once. The bank might not have enough cash on hand to cover all of these demands, which can force it to sell off assets at a loss or even might bankrupt the institution altogether.

","

To prevent this, the Federal Reserve extends emergency loans to banks in need of cash. Banks can borrow money from the government to cover their immediate needs and make depositors whole. This is useful to solve cash flow crises, when an otherwise stable institution might be forced into insolvency by a short-term demand for money. The bank takes out a loan to meet its short-term demands and repays that loan with the returns on its long-term investments.

","

To cover particularly large liquidity issues, the Federal Reserve has recently created the Bank Term Funding Program. This was instituted in the wake of the SVB and Signature collapses, and it will act as a lender of last resort for large institutions.

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Broker of Last Resort

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As noted above, lending to banks can work well for a healthy institution that has cash flow issues. Any bank, no matter how well-managed, is vulnerable to a bank run and emergency loans can cover that short-term crisis.

","

Loans will not work for banks that are failing though. While the government will, typically, extend loans to try and shore up an immediate crisis (such as it did in the case of SVB and Signature), that is only a stopgap solution when the bank is going out of business. And that happens more often than most consumers realize. Banks may fail because they made bad investments, because they have lost too many customers or because their underlying business model has gone wrong in some way.

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In this case, the Federal Reserve and the FDIC act as a broker of last resort to try and sell the bank to another, healthier institution. Their goal is to find a solvent bank that will take over the failing bank’s deposits and assets, effectively folding one institution into another.

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When successful, the FDIC doesn’t need to reimburse depositors at all. Often, from the outside, this looks like a simple merger and individual consumers notice no change except for the name on the door. The new institution takes over the deposits and loans of the old one. This is particularly important because large depositors frequently have more than $250,000 on account with their banks. One estimate by the FDIC suggests that about 43% of all bank deposits are uninsured, so mergers are a critical tool for making sure that depositors are protected against bank failures.

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Depositors Are Historically Well-Protected

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Banking protections are an incredibly complicated issue, and the government has a wide range of regulatory and financial tools that it uses to protect depositors. For example, the Federal Reserve conducts regular oversight of banks to look for bad investments and risky assets that might cause a failure (although, as the case of SVB made clear, this system is far from foolproof).

","

The takeaway is this, though: As a depositor, your money is about as safe as it can be. Making sure that depositors feel like their money is secure is a huge priority for the government, and several different agencies and entities work to make sure of that. Banks are monitored to try and prevent failures, and the Federal Reserve acts to give them liquidity quickly and at need. When a bank does fail, the government moves quickly to find a buyer for those assets and deposits. And if all that doesn’t work, it simply cuts a check to reimburse depositors for cash that they’ve lost.

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It’s not a perfect system, but depositors haven’t lost money to a bank failure in the United States since the 1930s.

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The Bottom Line

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Your money is as safe as it can be in the bank. Between depositor insurance, emergency loans and bank sales, the government works hard to protect what you have.

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Banking Tips

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Photo credit: ©iStock.com/Henrik5000, ©iStock.com/mphillips007, ©iStock.com/mapodile

","

"],"experts":null,"link":"/checking-account/is-my-money-safe-in-the-bank","modifiedIso":"2023-08-24T08:42:20.000Z","published":{"datetime":"2023-5-2","readable":"May 2, 2023","readableExtended":"May 2, 2023, 3:17pm ET"},"publishedIso":"2023-05-02T15:17:33.000Z","shareInfo":{"title":"Is My Money Safe in the Bank?","origin":"/checking-account/is-my-money-safe-in-the-bank"},"isNewsArticle":false},{"id":"cG9zdDoyNTY4MTg=","databaseId":256818,"postId":256818,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/3b02fac7ed4b968df109a1571de56eef337973ae16dead35422edea7ab805eb9?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1673,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUxOA==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19518,"categoryId":19518,"link":"https://smartasset.com/savings-accounts/articles","name":"Savings Accounts","postCount":{"pageInfo":{"offsetPagination":{"total":54,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"savings-accounts","ancestors":{"nodes":[{"name":"Checking Account","slug":"checking-account","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Checking Account","id":"dGVybTo0NzIx","slug":"checking-account","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$4f","date":"2024-07-26T17:09:08","excerpt":"

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 these two financial products can help you decide which one fits your […]

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

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What Is a Certificate of Deposit (CDs)?

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CDs 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. CD rates are typically higher than savings account rates. That’s because 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. Higher interest rates and early withdrawal penalties make CDs a good choice for those who can commit to locking away their funds for a set period.

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What Is a High-Yield Savings Account?

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High-yield savings accounts function similarly to traditional savings accounts but come with significantly higher interest rates. They’re 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 the ability to deposit and withdraw money as needed.

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Differences Between CDs vs. High-Yield Savings Accounts

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Certificates of deposit (CDs) and savings accounts are both useful tools for saving money, but they work differently, each with specific features, benefits and limitations. Understanding these differences is key before choosing one or the other.

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

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Access to funds: One of the main differences between CDs and high-yield savings accounts is access to your money. Savings accounts are designed for flexibility, allowing you to deposit and withdraw funds at any time without penalties. (Some banks, however, 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.

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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.

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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.

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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.

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

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

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Pros of CDs

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Higher interest rates: CD rates are typically higher compared to savings account rates. That’s because banks want to entice customers to leave their deposits untouched for a period of time, whether that’s 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 long-term goals, minimizing the temptation to dip into their funds.

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Cons of CDs

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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, which 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.

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Pros of Savings Accounts

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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.

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Cons of Savings Accounts

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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: The easy access to funds in a savings account can be a disadvantage if it tempts you to withdraw money and spend it before you can reach your savings goals.

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Bottom Line

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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.

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Tips for Saving

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There are many types of savings accounts. Money market accounts can earn higher interest rates than traditional savings accounts. But CDs can often earn even higher rates. However, there are pros and cons to each type of account that goes …

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If you have questions about how your savings account fits into your overall financial plan, consider working with a financial advisor.

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High-Yield Savings Accounts

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High-yield savings accounts are similar in many ways to traditional savings accounts and have many of the same advantages, including FDIC insurance on balances up to $250,000.

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As their name suggests, high-yield savings accounts pay interest rates higher than traditional savings accounts. Interest rates change frequently, but generally, that equates to 10-20 times higher interest rates.

","

Other than interest rates, the biggest difference between high-yield savings accounts and traditional savings accounts is the presence of bank branches. Those that offer traditional savings accounts typically have them, while those with high-yield savings accounts don’t.

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The latter is generally offered by online-only banks, and their lack of branches allows them to cut costs and offer better rates to their customers. However, the two are otherwise similar in most ways.

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High-yield savings accounts, which at time of writing offered annual percentage yields above 4%, usually have a monthly transaction limit (typically six per month), and they often don’t have ATM access or check-writing privileges. Still, customers can access their money whenever they need it by transferring money electronically.

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Money Market Accounts

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Money market accounts are another type of saving product that offers higher interest rates than checking accounts and traditional savings accounts. The FDIC also insures balances up to $250,000.

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In addition, these accounts sometimes have features like mobile check deposits and ATM withdrawals. Like high-yield savings accounts, there may be limits on the number of monthly transactions.

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The best money market accounts generally have interest rates 10-20 times higher than traditional savings accounts. While some require a minimum deposit, several allow you to open an account with $0 to start.

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However, some money market accounts may charge fees for maintaining a low balance or making too many withdrawals. Check the fine print and make sure you understand the terms before opening an account.

","

Certificates of Deposit (CDs)

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Certificates of deposit (CDs) are another type of savings product that offers higher interest rates than traditional savings accounts. CDs, which are FDIC-insured, lock up your money for a certain period in exchange for a higher interest rate.

","

You will usually incur penalties if you want to withdraw your money before the end of the CD’s term. This makes CDs better for medium-term savings goals and for money you won’t need in the immediate future.

","

However, the best CD rates can be higher than rates on money market accounts or high-yield savings accounts, so keeping your money locked up could be worthwhile if you want the best rate. Plus, some CDs have no minimum to get started, so you can deposit as much as you want.

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But unlike savings accounts, you often can’t make additional deposits to the account. Thus, they may not be the best choice if you don’t have a lump sum to deposit. Still, the interest rates CDs offer make them a good choice for those with funds to spare.

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Comparing and Contrasting Savings Accounts

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There are several things to keep in mind when deciding which type of savings account is right for you. Here are something things to keep in mind:

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Each type of savings account has its own set of pros and cons. The best choice will depend on your savings goals.

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Bottom Line

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High-yield savings accounts, money market accounts and CDs can all have competitive interest rates that allow your money to grow. The best CDs offer some of the highest interest rates, but they require you to keep your money locked away to earn the best rate. Thus, it’s important to consider not only the interest rate but also factors like fees, minimum balance requirements and liquidity before deciding which type of savings account is best for you.

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Tips for Opening a Savings Account

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