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High-Yield Savings Account vs. a CD—Differences, Similarities & Alternatives


High-Yield Savings Account vs. a CD—Differences, Similarities & Alternatives


If you’re looking for a safe way to save money and earn substantial interest in the process, investing in high-yield savings accounts or certificates of deposit (CDs) may be your safest bet. While keeping funds in either of these accounts will make it worth your while, one option may suit you more than the other depending on your financial goals and plans. 

In this guide, we’ll cover everything you should know when deciding between a high-yield savings account vs. a CD, revealing the pros, cons, and differences between the two accounts. We’ll also offer some alternatives if you can’t make up your mind.

A CD or a High-Yield Savings Account—What To Choose

Both CDs and high-yield savings accounts are popular money-saving vehicles because they offer higher interest rates than traditional savings accounts. Plus, they’re both backed by the government since they’re insured by the Federal Deposit Insurance Corporation (FDIC), meaning you’ll be reimbursed if your bank fails.

So, what is the difference between a high-yield savings account and a CD, and which account should you choose? To help you make this important decision more easily, we’ll first answer the following questions:

  1. What is a CD?
  2. What is a high-yield savings account?
  3. What is the difference between the two?

What Is a CD?

A certificate of deposit is a type of savings account offered by banks, credit unions, and investment firms. This account requires you to invest funds and keep them in the account for an agreed-upon period, ranging from 30 days to multiple years. Here’s how the account works once you place your initial deposit:

  • You earn a fixed interest rate on your deposit
  • Once the term ends, there’s a grace period of seven to ten days
  • You use the grace period to decide whether you want to withdraw your initial deposit and the accrued interest or invest the money into a new CD

Unlike traditional savings accounts, CDs allow you to earn high interest because your investments typically remain untouched for a long period. The interest rate you’ll get depends on your financial institution, but for example, America First Credit Union offers an annual percentage yield (APY) as high as 5.25%.

If you decide to make a withdrawal before your CD matures, you’ll receive a penalty and lose some of the interest you earned. While no-penalty CDs also exist, they offer lower interest rates compared to regular CDs.

Another factor to keep in mind is that CDs usually require a minimum deposit of $500 to $1,000, and they don’t allow you to make additional contributions. You can only do this if you choose an add-on CD, but this option is rarely offered and includes lower interest rates. 

What Is a High-Yield Savings Account?

High-yield savings accounts (HYSAs) are similar to traditional savings accounts, but they offer higher interest rates so your money can grow faster. While the national average APY on savings is 0.46% as per the FDIC, many HYSAs include an APY of 4% to 5% or more.

Unlike CDs, which include a fixed interest rate, a HYSA pays variable interest rates. This means your earnings can go up or down depending on the Federal Reserve benchmark interest rate changes. Regardless, the interest you earn will still exceed what you’d earn in a traditional savings account.

You can also ensure you earn higher interest by opening your account at an online bank instead of a traditional one. Online banks have lower overhead costs, so they’re typically able to offer higher interest rates.

On top of this, high-yield savings accounts let you access your funds whenever you need to without paying fees, although some financial institutions may limit the number of monthly withdrawals. Plus, you can make additional contributions to the account anytime.

Certificate of Deposit vs. a High-Yield Savings Account—What Is the Difference?

While CDs and high-yield savings accounts share some similarities, such as higher interest rates and FDIC insurance, they differ in many aspects as well. Here’s a table showing the main difference between a CD and a high-yield savings account across multiple categories:

FeatureCD AccountsHYSAs
Interest rateFixed interest rateVariable interest rate
Deposit limitsNo contributions beyond the initial deposit are allowedContributions to the account are possible anytime
FlexibilityPenalties are included for early withdrawalsWithdrawals are available at any time but may include monthly withdrawal limits
Debit cardNo debit cards are availableUsually, no debit cards are available, but you may get an ATM card

Why Do CDs Pay Higher Interest Rates Than Savings Accounts?

CDs typically pay higher interest rates compared to both traditional savings accounts and HYSAs. This is because your funds have time to grow since you’re required to keep your money in a CD account for a certain period.

Most types of CDs also offer fixed interest rates. Once you make your deposit, the interest rate will remain the same until your CD matures. This doesn’t apply to step-up and bump-up CDs, which allow you to increase the interest rate before the term ends.

Meanwhile, traditional and high-yield savings accounts are affected by the benchmark interest rate changes—if the interest rates decrease, so do your earnings.

How Is a Savings Account More Liquid Than a CD?

Liquidity refers to the degree of ease of converting your securities or financial assets into cash without losing money on fees or penalties. In that sense, savings accounts are considered more liquid than CDs because they let you withdraw your funds whenever you need them. What’s more, they usually don’t include any fees unless you exceed the monthly withdrawal limit some financial institutions may impose.

CDs, however, have strict withdrawal rules and come with early withdrawal penalties. While penalties vary depending on your bank or credit union, taking money early from the CD you invested in 24 months ago can cost you a year’s worth of interest on the withdrawn amount. This makes CDs not as flexible or liquid as other savings accounts. 

Should I Open a CD or a Savings Account?

Deciding whether you should open a high-yield savings account or a CD depends on your financial needs and plans. 

CDs are a good choice if you can afford to let your money rest for a while. For example, if you’re planning to save for a future purchase like a car or a house, opening a CD will allow your money to accumulate and grow until it’s time to make a withdrawal.

Meanwhile, high-yield savings accounts are more suitable for:

  1. Short-term financial goals—If you have savings goals that are a few years away, such as a vacation or a home improvement project, you may choose a HYSA because you won’t have to wait long to withdraw the funds
  2. An emergency fund—HYSAs are a good option for creating an emergency fund since they let you earn high interest but also let you withdraw money whenever you need it like in the case of an emergency

If you still can’t make a choice, exploring the benefits and drawbacks of both types of accounts should help steer you in the right direction. Let’s take a look at the:

  1. Pros and cons of CDs
  2. Pros and cons of high-yield savings accounts

Pros and Cons of CDs

Here are the main advantages and disadvantages of opening a CD:

Pros of CDsCons of CDs
FDIC- or NCUA-insured
Fixed interest rates
Usually pay a higher interest rate than a HYSA
Guaranteed APY earnings for the duration of the CD term
Low-risk investments
Early withdrawals result in penalties
Lack of flexibility compared to HYSAs
No additional contributions allowed
Fixed interest rates may not keep up with market trends

Pros and Cons of High-Yield Savings Accounts

High-yield savings accounts come with the following benefits and drawbacks:

Pros of HYSAsCons of HYSAs
FDIC- or NCUA-insured
Higher interest rates than traditional savings accounts
Withdrawals available at any time
Additional contributions allowed at any time
Variable interest rates mean your rate can potentially increase
Interest rates typically a little lower than those offered by CDs
Variable interest rates mean your rate can decrease
The availability of funds may tempt you to spend more

Best Alternative to CDs and High-Yield Savings Accounts

If the drawbacks of CDs and high-yield savings accounts are making you reconsider your options, there are always alternatives you can explore. Other popular savings account options include:

  • Traditional savings accounts—These are the savings accounts you’ll find at traditional banks/credit unions. They include lower interest rates than CDs and HYSAs, but they also include lower minimum deposit limits
  • Money market accounts (MMAs)—MMAs are a combination of regular savings accounts and checking accounts. They offer similar interest rates to high-yield savings accounts and often allow you to write checks and use an ATM card
  • Individual retirement accounts (IRAs)—These typically include Roth IRAs and traditional IRAs and are used to help you save for retirement. While you contribute to a traditional IRA with pre-tax dollars, a Roth IRA allows you to contribute with after-tax dollars and makes any withdrawals after the age of 59½ tax-free

While these alternatives have their strengths, they all lack an important feature—high account security. Financial scams are extremely common these days—in 2023, American consumers lost $10 billion to fraud. This means account security should be one of the most important considerations when choosing a savings account. After all, high interest rates and no withdrawal limitations don’t mean much if there’s a risk that your savings will be stolen. 

That’s where FortKnox by Austin Capital Bank comes in. It’s a high-yield savings account with a strong focus on account security, which allows you to grow your savings in a safe environment.

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