3 Reasons a High-Yield Savings Account May Be a Better Place for Your Money Than CDs

If you're searching for a safe investment, you may be deciding between a certificate of deposit (CD) and a high-yield savings account. Both are FDIC-insured and each rewards you with interest for keeping your money in the account. Most checking accounts don't do this.

There are some important differences between CDs and savings accounts, though. And understanding these differences can help you to decide which account is best.

Right now, for many people, that may be a high-yield savings account. Here are three reasons why that's the case.

1. You have more access to your funds

With a savings account, you're pretty much free to take out your money whenever you want. Some accounts limit you to six convenient withdrawals a month, but that's not a big challenge to work around. You may even receive an ATM card so you can withdraw your money whenever you want, although not all savings accounts offer one.

With a CD, though, you aren't supposed to just take out your money when you need it. Instead, when you buy a CD, you decide on a term like three, six, or 12 months -- or even as long as five years. If you withdraw your money before the term is up, you're penalized. The penalties vary, but can add up to several months of interest charges.

Since you can't just access your money whenever you want with a CD, you have to be careful about what funds you use to buy one. You shouldn't ever open a CD if you don't know for sure you can remain invested until it matures.

2. Savings account rates could stay high for a while

Savings accounts have variable rates. This means the interest rate your account pays can change over time, usually moving in concert with benchmark interest rates. If interest rates rise, then your bank is likely to increase the rate it's paying you. On the flip side, a decline in interest rates means your yields will likely fall.

CD rates are different because you're locked in for the term of the CD. This can be a good thing if, say, you buy a CD right now with rates above 5.00% and rates fall before your CD matures. You'll be guaranteed to keep earning your current high rate. But if rates go up, then you're still locked in and won't benefit.

The ability to keep your guaranteed rate is normally a reason to choose a CD over a savings account; it gives you more certainty. But since inflation is above the Federal Reserve's target (2%) right now, all evidence points to the fact that the Fed isn't likely to lower the federal funds rate for a while. This means your savings account is probably going to keep paying impressive yields for the foreseeable future.

If you feel confident your savings account rate isn't going to decline soon, it makes a lot more sense to just keep your funds in savings where you can earn that high rate and still have your cash accessible. It's not worth buying a CD just to get the guaranteed rate.

3. You may actually be able to get a better rate on a savings account than on a CD

Finally, it can make sense to keep your money in savings rather than a CD right now because savings account yields are actually higher than those offered by CDs in many cases.

This is usually not the case. CDs usually pay higher rates in exchange for locking up your money. But in this unusual economic environment, banks are more willing to offer high rates on variable rate accounts than to commit to keeping your rate high for the full duration of a CD term.

That's why on The Ascent's list of the best savings accounts, you can find accounts offering yields as high as 5.36% as of April 2024. By contrast, the best CD rates come in at 5.15%. Since you don't need to lock up your money in a CD to get the best rates, there's less reason to do it.

Putting your money in savings just makes sense

So, to sum it up:

• Savings accounts are paying higher rates than CDs right now.
• You're likely to keep those rates for a while.
• Savings accounts keep your money more accessible.

If you can get a better rate, keep it for a while, and have reliable access to your money, choosing a savings account over a CD is an easy call. You can even find savings accounts offering new customer sign-up bonuses right now to make the deal even sweeter.

Check them out, open an account today, and keep your money in savings where you'll earn a great rate and can use your money when you need it.