Why I Prefer High-Yield Savings Accounts Over CDs

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If you’ve paid attention to your credit card statements lately, you’ve probably noticed that interest rates have been trending upward for a while. Like most of us, I'm not particularly pleased about this, but there is an area where higher interest rates have impacted my financial life in a positive way: my cash savings.

When the Federal Reserve raises the federal funds rate, banks and credit unions tend to respond by increasing the interest rates they offer their customers as well. This means that the annual percentage yields (APYs) on savings accounts, high-yield savings accounts (HYSAs), money market accounts, and certificates of deposit (CDs) could increase at many financial institutions.

In the current environment, I’m faced with a choice that many of us have to make: Do I put my cash savings in CDs, or do I opt for high-yield savings accounts instead?

In my situation, I choose to keep my liquid cash savings in HYSAs. Below, I’ll break down the top reasons for my choice. But keep in mind that personal finance decisions are just that — personal. You should always take the time to examine your own situation before you decide the best place to store your savings. And when in doubt, it never hurts to talk to a trusted financial advisor for recommendations.

1. High-Yield Savings Accounts Offer Flexibility

One of the biggest reasons I opt for high-yield savings accounts over CDs is the flexibility that HYSAs offer. With most CDs, I would need to agree to lock away my cash savings for a specified period of time (AKA the CD’s term). If I decided to withdraw money before the maturity date on my CD arrived, I would owe an early withdrawal penalty that could reduce or possibly even negate the interest earned on my savings.

The only exception to this rule would be if I decided to open a no-penalty CD. Those types of CDs, however, usually feature lower interest rates than traditional certificates of deposit. So, they’re not my favorite solution.

Early withdrawal penalties, CD terms, and maturity dates aren’t details that I need to worry about with high-yield savings accounts. Knowing that I have the flexibility to access my cash if I need it is a benefit that I value.

2. Rates on HYSAs May Be Higher Than CDs

In general, you can find slightly better interest rates if you keep your cash in CDs over HYSAs. You might think that detail would persuade me to choose CDs over HYSAs. But comparing CDs and HYSAs can be tricky.

The best CDs rates aren’t always higher than the rates on the best high-yield savings accounts. In some cases, the APY on a HYSA might be higher than the rate a CD offers. The difference usually comes down to the financial institution and the CD term you choose.

At the time of writing, short-term CDs (6 months to 24 months) tend to offer the best interest rates. Long-term CDs often feature lower interest rates by comparison.

Below are examples of some of the top interest rates available for CDs and high-yield savings accounts as of October 16, 2023.

By comparison, here are the national average interest rates on both CDs and savings accounts according to the FDIC as of October 16, 2023.

• Savings: 0.46%
• 6-Month CD: 1.39%
• 12-Month CD: 1.79%
• 24-Month CD: 1.50%
• 48-Month CD: 1.30%

Of course, it is important to point out that interest rates change. There’s no way to predict how long interest rates will continue to rise. If I locked in an interest rate on a CD and rates continue to rise in the future, I could miss out on potentially higher rates.

It’s true that I could use a CD ladder to take advantage of potentially rising interest rates. But at least for now, there’s not a huge difference between the top interest rates on HYSAs and short-term CDs. So, at least for now, it’s my preference to monitor the variable interest rates on my HYSAs and adjust my savings strategy later if needed.

The risk I face, however, is the fact that the interest rates on HYSAs are variable. That means the higher rates I’m earning today aren’t guaranteed to last forever. At some point, the Federal Reserve will likely begin to lower interest rates again. When that happens, banks are likely to lower the interest rates they offer on savings accounts in response.

3. HYSA Bonuses and Rewards

Another perk that attracts me to high-yield savings accounts is the opportunity to earn attractive bank account bonus promotions and rewards. While this benefit isn’t available with every new HYSA, certain financial institutions do offer bank bonuses for eligible new customers. Some banks and credit unions may offer a chance to earn rewards on your savings as well. But you likely won't find these types of perks on certificates of deposit.

Bottom Line: High-Yield Savings Accounts vs. CDs

For now, I’m parking my personal savings in high-yield savings accounts. But that may not be the perfect choice for every financial situation. It might not even be the best option for my own cash savings forever.

The interest rates on my HYSAs are variable. As a result, the banks that manage those savings accounts could adjust those APYs if rates decrease. So, there could come a time in the future when I want to adjust my savings strategy.

It’s also important to understand that while both FDIC-insured HYSAs and CDs are safe in terms of protecting your cash from losses, they also tend to offer historically lower returns. These types of accounts can be a good place to store and grow emergency savings or cash for short-term goals. But for long-term goals, like retirement, HYSAs and CDs aren’t typically ideal. Instead, consider speaking with a trustworthy financial advisor about other investment options that might make sense for you.