Since early 2022, High Yield Savings Accounts (HYSAs) and Certificates of Deposits (CDs) have skyrocketed from nearly 1% to nearly 5%, making them even more attractive places to deposit cash.
Compared to the average interest rate of 0.6% on checking accounts, moving money from a debit account to one of these savings accounts is a smart move. But which one should you choose? The answer depends on what you plan to do with that money and when you use it.
HYSA offers a higher interest rate compared to a regular savings account and usually the highest interest rates are offered by credit unions or small online banks. Interest rates are not fixed. That means rates go up and down based on factors like inflation, competition among banks, and changes in the Federal Reserve’s benchmark interest rate.
Some online banks currently offer interest rates of around 4.5%. This equates to an annual interest rate of $450 on a balance of $10,000. That’s about $400 more than it got last year before interest rates started rising.
While you’ll want to look for high rates when buying HYSA, there are other things to consider. Some accounts may have maintenance fees, withdrawal limits and minimum balance requirements.
CDs differ from savings accounts in that they are guaranteed a fixed interest rate for a fixed period such as 6 months, 1 year or 5 years. Interest rates for long-term CDs are generally slightly higher than for short-term CDs.
Also, CDs tend to offer higher interest rates than HYSAs. Currently, the interest rate for a 1-year CD is around 5%. For a balance of $10,000, this translates to $50 more annual interest compared to HYSA.
However, the trade-off of higher interest rates for CDs is that they are expected to lock in those funds for the entire term. You can withdraw your money before then, but you will be charged a fee equivalent to several months’ interest on your balance.
Both HYSA and CD are insured by the FDIC up to $250,000 per depositor and are therefore considered safe and low risk accounts. Unlike stocks and bonds, there is no risk of the value of your money depreciating.
For cash that you may need immediate access to, such as an emergency expense, certified financial planners generally recommend HYSA.
“If you don’t know exactly when you’ll need the money, and you’re comfortable with the fact that interest rates can fluctuate up and down, a high-yield savings account is where you want to go,” says Stephen McGard. says CFP in South Carolina. “From 3 months he is a great place to store emergency funds for 6 months.”
On the other hand, if you know the exact timeline for when you’ll need the cash, such as to fund your future home or car purchase, a CD might be a better fit.
Ideally, your specific savings goal should match the duration of your CD. This maximizes your return on interest. For example, if you have kids who are going to college in the next five years, her five-year CD with a predictable rate of return might be an attractive option.
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