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Interest rates for high-yield savings and CD accounts are rising — here are their main differences

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High-yield savings accounts have become a popular vehicle for depositing and growing savings since they allow account holders to earn significant interest on their balances. But when it comes to stashing away your cash, there’s another option some individuals may want to consider.

Certificate of deposit accounts (CD accounts) operate similarly to high-yield savings accounts in some ways, but the two have some very important differences.

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What is a high-yield savings account and how does it work?

High-yield savings accounts let you earn a higher interest rate (compared to traditional savings accounts), which allows your money to grow even faster as it sits in your account. To put this into perspective, right now, some high-yield savings accounts are offering over 3% interest, whereas the national average APY on traditional savings accounts is just 0.17%.

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The interest rate that these accounts offer is noted as APY, which stands for annual percentage yield. The higher your APY on a particular savings account, the more interest you’ll earn and the faster your money will grow. You can also continue to make contributions to the account regularly to grow your balance and amount of interest earned even faster.

It’s important to note, however, that the APY that savings accounts offer when you sign up can change at any time. These rates go up or down in accordance with the Federal Reserve changing its benchmark interest rate. In other words, there will be times when you earn less money on your balance but also times when you earn more money on your balance. Regardless, though, it’s still more than you’d earn if you were to keep your money in a traditional savings account. And, you still have access to your cash when you need it as you would in a normal savings account. 

What is a CD and how does it work?

CDs are another type of account that institutions offer. Similar to a high-yield savings account, CDs allow you to deposit money to earn interest on your balance. Sometimes, the interest you earn on a CD can even be higher than what you earn on a high-yield savings account.

However, though, the difference is you need to keep your money locked into the account for a specified amount of time. This is known as the term length. Term lengths range between three months and five years, and usually the longer the term, the more interest you’ll earn. Typically, you should avoid trying to access your money before your term ends or you’ll get hit with an early withdrawal penalty.

The penalty fees can vary depending on your bank or credit union. Usually, though, the penalty amounts to the interest earned, or the interest that you would have earned, over a certain number of days or months.

Also, the interest rate offered by high-yield savings accounts can change while your money is in the account but with CDs, the rate you lock in when you make a deposit stays the same throughout the entire term. This can be a good thing if you open an account before the rate drops. You also cannot make additional contributions to the CD after opening the account and making an upfront deposit.

How to choose between a high-yield savings account and a CD?

Opening a CD can be a good idea if you’re saving up for a large purchase — like a home or a car — that you hope to make within the next six months to two years and you want your money to grow faster without having to worry about stock market volatility. However, you still have to make sure that you are depositing money you definitely won’t need for that time period, since you can be penalized for withdrawing money before your term is over.

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Because of this, CD accounts are not the best account for creating an emergency fund. Emergencies can pop up when you least expect them. Because of this unpredictability, you never know when you’ll need to make an account withdrawal. In this case, a high-yield savings account would be a much better fit for growing your emergency fund.

Best high-yield savings accounts

Select ranked the Marcus by Goldman Sachs High Yield Online Savings as the best high-yield savings account for no fees. And if you want the opportunity to earn even more extra cash, the SoFi Checking and Savings account offers a welcome bonus of up to $300, depending on how much you deposit upon account opening. For more information, check out our full list of the best high-yield savings accounts.

Marcus by Goldman Sachs High Yield Online Savings

Goldman Sachs Bank USA is a Member FDIC.

  • Annual Percentage Yield (APY)

  • Minimum balance

    None to open; $1 to earn interest

  • Monthly fee

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

  • Overdraft fees

  • Offer checking account?

  • Offer ATM card?

Pros

  • No minimum balance (just $1 to earn interest)
  • No monthly fees
  • Up to 6 free withdrawals or transfers per statement cycle*
  • Easy-to-use mobile banking app
  • Offers no-fee personal loans

Cons

  • No option to add a checking account
  • No ATM access
  • You can’t deposit a check via the mobile app

SoFi Checking and Savings

Information about Sofi Checking and Savings has been collected independently by Select and has not been reviewed or provided by the issuer prior to publication.

  • Monthly maintenance fee

  • Minimum deposit to open

  • Minimum balance

  • Annual Percentage Yield (APY)

    Members with direct deposit earn 2.50% APY. Members without direct deposit will earn 1.20% APY.

  • Free ATM network

    55,000+ fee-free ATMs within the Allpoint® Network

  • ATM fee reimbursement

  • Overdraft fee

    No-Fee Overdraft Coverage is available; however, SoFi requires $1,000 of monthly direct deposit inflows to unlock it

  • Mobile check deposit

Pros

  • No minimum deposit to open an account
  • 1.80% APY with direct deposit
  • 2-day-early-paycheck automatically when you set up direct deposit
  • Save your change automatically with Roundups and set savings goals with Vaults
  • Get up to 15% cash back at local establishments
  • No foreign transaction fees

Cons

  • No reimbursement for out-of-network ATM fees
  • Not a standalone checking or savings account

Best CD accounts

When it comes to CD accounts, Select ranked the Synchrony Bank CD as the best option for locking up your money for three to six months. If you’re comfortable locking up your money for a longer period of time, the Ally Bank High Yield CD lets you do that for up to five years. See our full list of the best CD accounts for more.

As you can see, currently, their APYs are slightly lower than the high-yield savings accounts, but on the flip side, you would be locking in the rate for a longer period of time.

Synchrony Bank CD

Information about the Synchrony Bank CD has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

  • Annual Percentage Yield (APY)

  • Minimum balance

  • Monthly fee

  • Early withdrawal penalty fee

    For 3-month CD: 90 days interest, whether or not earned

Pros

  • Higher-than-average APY
  • Compounds interest daily
  • No minimum balance
  • No monthly fees
  • Website is easy to navigate

Cons

  • You can’t access your money before your CD term ends
  • Early withdrawal penalty fee

*Annual Percentage Yield (APY) is effective as of 10/3/2022. A penalty may be imposed for early withdrawals. Fees may reduce earnings. After maturity, if you choose to roll over your CD, you will earn the base rate of interest in effect at that time. Offer applies to personal accounts only. Individual Retirement Accounts (IRAs) are not eligible for this offer.

Ally Bank High Yield CD

Information about the Ally Bank High Yield CD has been collected independently by Select and has not been reviewed or provided by the bank prior to publication. Ally Bank is a Member FDIC.

  • Annual Percentage Yield (APY)

    APY varies based on length of term. Click “Learn More” for details.

  • Minimum balance

  • Monthly fee

  • Early withdrawal penalty fee

    For 5-year CD (or any CD that is 49 months or longer): Equal to 150 days of interest

Pros

  • Higher-than-average APY
  • Interest is compounded daily
  • No minimum balance on all CDs
  • No monthly fees
  • Offers a variety of CD options to raise your APY or withdraw with no penalty
  • 0.05% Loyalty Reward automatically added to CD account renewals
  • Easy-to-use website, mobile app and has high-rated customer service

Cons

  • You can’t access your money before your CD term ends
  • Early withdrawal penalty fee (unless you open Ally’s No Penalty CD)

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

Source: CNBC

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