CD Rates Over 5%? Don't Open One -- Do This Instead

If you're like me, you probably love the idea of getting to earn free money by simply having money. That's the beauty of keeping your money in the bank, as opposed to your bedroom sock drawer.

It's also worth noting that now's an extremely good time to have money in the bank. Interest rates are sitting at a decades-long high. And with many CDs paying 5% or even a little bit more, it's hard to pass up the opportunity to score some free cash. 

A 12-month, $5,000 CD with a 5.05% APY, for example, puts $252.50 in your pocket after a year -- without you having to make any sort of effort beyond opening the CD in the first place.

But while it's easy to see why today's CD rates might appeal to you, I'm here to talk up the benefits of keeping your money in a regular savings account instead. 

Our Picks for the Best High-Yield Savings Accounts of 2024

Capital One 360 Performance Savings APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening. Min. to earn $0 Open Account for Capital One 360 Performance Savings Member FDIC.	APY 4.25% Rate info See Capital One website for most up-to-date rates. Advertised Annual Percentage Yield (APY) is variable and accurate as of April 11, 2024. Rates are subject to change at any time before or after account opening.	Min. to earn $0
American Express® High Yield Savings APY 4.25% Rate info 4.25% annual percentage yield as of July 1, 2024 Min. to earn $1 Open Account for American Express® High Yield Savings Member FDIC.	APY 4.25% Rate info 4.25% annual percentage yield as of July 1, 2024	Min. to earn $1
Citizens Access® Savings APY 4.50% Min. to earn $0.01 Open Account for Citizens Access® Savings Member FDIC.	APY 4.50%	Min. to earn $0.01

It's all about the flexibility

CDs are great and all, since they guarantee you a certain interest rate on your money and typically pay a bit more than high-yield savings accounts. But in exchange for all of that good stuff, CDs force you to make a commitment.

Now, I'm a commitment type of person, as evidenced by my 17-year marriage. But I'm not necessarily the biggest fan of locking my money up in the bank.

What if I open a 12-month CD, only a few months later, some great investment opportunity arises? Nope, sorry -- my money's in a CD, so I can't get in on it. 

I mean, to be clear, you can access money in a CD early. You just risk a pretty whopping penalty as a result, the exact amount of which varies from bank to bank. 

That's why I'd encourage you to forget the fact that CDs are paying over 5% today and keep your money in a high-yield savings account instead. You may find that you're able to earn a comparable amount of interest, only without the stress. 

Let's say that instead of putting $5,000 into a 12-month CD with a 5.05% APY, you stick to a savings account with a 4.5% APY. If that APY holds steady for the next year, you're looking at $225 instead of $252.50. So OK, yes, you're losing out on $27.50, but you're gaining flexibility. And it's hard to put a price on that.

But what if interest rates start to fall?

That's the big question, right? There's still a good chance the Federal Reserve will cut rates at least once before 2024 ends. That means the APY on your high-yield savings account could fall, whereas with a CD, your rate is locked in.

But even if the Fed cuts rates later this year, that initial cut is unlikely to be drastic. So maybe you'll only earn a 4.25% APY on your savings instead of 4.5%. It's really not such a big deal.

What is a big deal is losing money by getting slapped with an early withdrawal penalty. If you don't like the sound of that, resist the urge to open a CD and stick with a high-yield savings account instead.