High Yield Saving Account or CD: Which is Best?

Many people are looking to get better returns for their savings without incurring too much risk. In this scenario, there are two valid options; high yield saving accounts and Certificates of Deposit (CDs). But, which is the better option for your savings? Let’s take a closer look at both and compare them to help you make a more informed decision. 

What is a High Yield Saving Account?

These types of savings accounts are designed to offer a higher return or yield on the savings balance. They offer better returns than a standard savings account which may seem similar, but there are certain restrictions to take into account. To get access to the higher rate, there is typically a restriction on the number of withdrawals each month. This may seem draconian, but the limited number of transactions will reduce the processing costs for the bank. This makes it more viable for the bank to offer these types of accounts and it’s just something that savers need to accept. Certain banks may have a minimum balance requirement to set up and use a high yield savings account. These restrictions are worth it, a high yield saving account can offer some of the highest rates in the banking sector. This could be as much as 10x the national savings account rates and the money is still secure and accessible! These types of savings accounts have FDIC insurance with $250,000 of coverage if the bank has financial problems.

What is a Certificate of Deposit (CD)?

A certificate of deposit is a fixed term and fixed rate savings account. The term is selected when the CD is set up and it could range from a single month up to several years. Most financial institutions set the APYs on CDs that are weighted towards longer terms. This will improve the rate, but the money will be locked in for the duration of the pre-agreed period. This is excellent for savers, the interest base rate can change, but the same return is guaranteed on the CD until it reaches maturity and you access your money. There is a drawback, if some or all of the funds are withdrawn before the CD matures, there may be an early withdrawal penalty. This is usually a percentage amount that’s calculated on the original CD term. In certain cases, a saver could lose all the interest that they’ve accrued on their account if they choose early access. 

Comparing CDs to High Yield Saving Accounts

Both of these financial products are designed to give savers access to improved rates. But, there are key differences which may affect your choices to meet your saving needs. Here are five key factors that should be considered carefully.

1.Accessibility

A high yield savings account is more accessible than a CD, there may be a maximum number of monthly withdrawals before a penalty is applied. But, there is no limit on the amount that can be withdrawn and it’s easy to access funds if they’re needed. Some banks offer an ATM card for high yield saving accounts or the funds are simply transferred to a different account of your choosing. A CD is much harder to access, there are early withdrawal penalties before maturation. This isn’t an issue with a short-term CD or a no penalty CD which charges an early withdrawal fee (if you can find one).

2.Risk

High yield saving accounts and CDs are offered by banks, credit unions and other types of financial institutions. Choose an institution that offers federal insurance protection for extra peace of mind. Both financial products are considered to be low risk and there is no chance that the savings will be lost. 

3.Account Requirements

Certain financial institutions will impose a minimum balance amount on high yield savings accounts and CDs. Others may have a tiered minimum balance for CDs which is determined by the initial deposit amount. This makes it difficult to make a direct comparison between these two financial products. Savers should check the account requirements of the financial institutions for both products to get the best rates.

4.Fixed or Variable Rate

Many high yield savings accounts have variable rates which are influenced by any changes that affect the base rate. So, a base rate increase will bump the APY and vice versa. This introduces a little risk into an otherwise low-risk saving product. For those seeking more stability, a CD may make better sense. A CD will allow the saver to lock their savings into a fixed rate for the entire duration until the CD matures. There are certain exceptions, some banks have “bump up” CD products. These CDs give the saver the benefit of any base rate increases until maturation. The rate could be bumped up one or twice throughout the term depending on the specific CD product. 

5.Ongoing Savings Potential

These two products are very different when it comes to ongoing savings potential. A high yield savings account works like a basic savings account. The funds can be transferred into the account later as required. This is not the case with a CD. Funds are required for the initial deposit, but extra funds cannot be added later. This isn’t much of a drawback because the saver could simply open a second CD as needed. But, the additional CD may not have the same rate or terms, so it’s important to understand the differences. 

Which is the Best Product?

This comes down to the personal preference and requirements of the saver. Comparison shopping to find the best product is essential to find the best rates. A bank may be offering a high yield savings account that is comparable to a CD. This type of deal is typically available with online banks that have lower overheads and reduced fees. For savers that may require early access, a high yield savings account is the best option. But, a CD is an excellent product for those who have spare funds that they don’t need access to for the entire term duration.