Since the beginning of 2022, the highest interest rates on High Yield Savings Accounts (HYSAs) and Certificates of Deposit (CDs) have risen from nearly 1% to nearly 5%, making them a much more attractive place to put your money.
compared to the average interest rate 0.6% you get for checking accountsMoving money from your debit account into one of these savings accounts can be a smart move. But which one should you choose? The answer depends on what you plan to do with the money, and when you will spend it.
HYSAs have higher interest rates than regular savings accounts, and the best rates are usually offered by credit unions or small online banks. The interest rate is not fixed, which means that it rises or falls based on factors such as inflation, competition between banks, and changes in the Federal Reserve’s benchmark interest rate.
Many online banks currently offer interest rates of around 4.5%, which works out to $450 in annual interest for a $10,000 balance. That’s about $400 more than you could have had before interest rates started rising last year.
While you’ll want to look for a premium price when shopping for a HYSA, there are other considerations as well. Some accounts may come with maintenance fees, limits on withdrawals and minimum balance requirements.
CDs differ from savings accounts in that they have a fixed interest rate that is guaranteed over a set period, such as six months, one year, or five years. Long term CDs usually have slightly higher interest rates than short term CDs.
CDs also tend to offer higher interest rates than HYSAs. Currently, you can find interest rates for one-year CDs that’s about 5%. For a $10,000 credit, that works out to $50 more in annual interest than HYSA.
But the trade-off for higher interest rates on CDs is that you can expect to lock in that money for the duration. It is possible to withdraw the money earlier than that, but you will incur a fee that can be worth several months of interest on the balance.
HYSA and CDs are safe, low-risk accounts, as they are both insured by the FDIC for up to $250,000 per depositor. And unlike stocks or bonds, there is no risk that your money will go down in value.
For cash that you may need to access immediately, such as for emergency expenses, certified financial planners usually recommend HYSAs.
“If you don’t know exactly when you need the money, and are comfortable with the fact that interest rates can fluctuate up or down, a high-yield savings account is where you want to go,” says Stephen Magard, CFP of South Carolina. “It’s a great place to park your emergency fund for three to six months.”
On the other hand, if you know the exact timeline for when you might need some cash — such as money for a future house or car — a CD may be a better option for you.
Ideally, the savings goal set should match the duration of the CD, maximizing interest yield. For example, a 5-year CD with an expected rate of return might be an attractive option if you have a child who plans to go to college in five years.
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