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High-Yield Savings Accounts vs Certificates of Deposit (CDs)

High-Yield Savings Accounts vs Certificates of Deposit (CDs)
Rebecca Safier
Rebecca SafierUpdated April 23, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’re looking to earn a better return on your savings, you may be thinking about opening a high-yield savings account or a certificate of deposit (CD). Both of these accounts typically pay a higher interest rate than checking accounts or traditional savings accounts. But they also have some key differences that are important to understand before you decide where to deposit your money. Read on for a closer look at CDs vs high-yield savings accounts so you know which type of account would better help you meet your savings goals. 

Understanding High-Yield Savings Accounts and How They Work

High-yield savings accounts work in a similar way to regular savings accounts. They pay interest on your deposits, which is typically expressed as an annual percentage yield (APY), and are federally insured up to $250,000 per depositor. Also like other types of savings accounts, high-yield savings accounts typically come with limits on the number of transactions you can make per month. While the Federal Reserve lifted the six-withdrawal limit on savings accounts in April 2020, many banks still impose transaction limits (which may be six or nine per month) and will charge a fee if you exceed the limit.What makes high-yield savings accounts different from regular savings accounts is that they are typically offered by online-only banks. And, true to their name, they allow you to earn a higher APY compared to a traditional savings account. In fact, the APY on a high-yield savings account can be as much as 25 times the national average for savings accounts. As a result, your savings could grow at a much faster rate in a high-yield account than a traditional one. However, it’s worth noting that the APY on a savings account is variable, which means it could go up and down after you open the account depending on benchmark interest rates. 

Understanding Certificates of Deposit and How They Work 

Many banks (online and traditional) and credit unions offer CDs. Like a high-yield savings account, CDs typically pay a higher APY than regular savings accounts. In some cases, a CD might even pay a higher APY than a high-yield savings account. Unlike a high-yield savings account, however, CDs come with term lengths. This means you need to leave your money untouched for the entire term of the CD, which may span anywhere from three months to five years. During this time, your savings will grow at a fixed interest rate — meaning your APY will stay the same no matter what happens to benchmark rates. That can be a positive if rates drop after you open your account. However, it can be negative if rates go up after you open the CD. The longer the CD term, generally the higher the APY. However, if you need to access your money before the end of the CD’s term, you’ll typically have to pay an early withdrawal penalty. Once you open a CD, you usually can’t make additional contributions. And, once your CD matures (or reaches the end of its term length), you’ll need to withdraw your savings and deposit it into another account or a new CD. Like other savings accounts, CDs are federally insured up to $250,000 per depositor.Recommended: Guide to APY vs APR

High-Yield Savings Accounts vs Certificate of Deposit

Both high-yield savings accounts and CDs can help your savings grow faster than it could in a regular savings account. But these accounts also have some key differences. Here’s a side-by-side comparison.
High-Yield Savings AccountsCDs
APYVariable (based on market rates) Fixed for length of CD term
Deposit minimumCommonly $0 to $100 Typically $500 to $1,000 (though some have no minimums)
Rules around depositsUnlimitedOne initial deposit 
Rules around withdrawals Typically limited to six per monthPenalty for early withdrawals
SafetyFederally insuredFederally insured
Best for Emergency funds and short-term savingsShort- to mid-term savings

Tips for Choosing Between a High-Yield Savings Account and a CD

When it comes to choosing between a high-yield savings account and a CD, one isn’t necessarily better than the other. The choice boils down to your particular savings goals.If you know you won’t need to tap your savings in the next few months or years, you might consider putting it in a CD. For example, if you’re saving up for a big purchase (like a vacation or a car) that’s at least six months off, a CD could be a good choice. You’ll be able to earn a competitive APY and also be discouraged from withdrawing the cash until your term comes to an end. If, on the other hand, you think you’ll need to access the money in the near future, a high-yield savings account may be a better choice. A high-yield savings account also tends to be a better choice for building an emergency fund. You can’t predict when emergencies will happen, and you’ll want to be able to withdraw your money whenever the need arises. If your primary goal is to get the best possible return on your savings, and you think rates might rise further than they are now, you might be better off with a high-yield savings account. Unlike CDs, these accounts are responsive to the rate environment. Recommended: Certificate of Deposit (CD) vs Savings Account

Tips for Finding High-Yield Savings Accounts and CDs

To find the best high-yield savings accounts and CDs, it typically pays to shop around and compare rates and terms being offered by traditional banks, online banks, and credit unions.When comparing savings products, the first thing you generally want to look at is the APY. This tells you how much you stand to earn on your money in one year and takes compounding (when the interest added to your account also earns interest) into account. Since different banks compound (i.e., add interest to your account) at different intervals, APY allows you to compare high-yield savings accounts and CDs offered by different institutions apples to apples.When comparing accounts, you’ll also want to look at features and associated fees, including:
  • Monthly maintenance fees
  • Initial deposit requirement
  • Minimum balance requirements 
  • Transaction limits and penalties
  • Automated savings features
  • Options for transferring money in and out of the account

Combining CDs and High-Yield Savings Accounts

When it comes to CDs vs. high-yield savings accounts, you don’t have to choose one over the other. For many people, it makes sense to have both. You might, for example, want to open a high-yield savings account for your emergency fund and any savings you may want to tap in the next few months. If you have extra money in your checking or savings account that you won’t need for six months to a year or so, you might also shop around for a good rate on a 6-month, 12-month or 18-month CD. When the CD matures, you can transfer the money into your high-yield savings account, or into your checking account if you plan to spend it right away.Some banks and credit unions offer both high-yield savings accounts and CDs but you don't necessarily have to open both accounts at the same institution.Recommended: What Is a CD Ladder and How Do They Work?

The Takeaway

If you have extra cash sitting in a checking or a traditional savings account earning little to no interest, it may be worth looking into a high-yield savings account or CD. Both of these savings vehicles pay relatively high APYs. If you’re looking for flexibility, you might prefer a high-yield savings account. If, on the other hand, you don't need to touch the funds for a while — and like the idea of set-it-and-forget-it savings — you might like a CD. For many people, it makes sense to have both a CD and high-yield savings account, since each one serves a slightly different purposeIf you’re not sure where to start your search for a savings account with a competitive APY, Lantern by SoFi can help. With our online banking marketplace, it’s fast and easy to compare high-yield savings accounts based on APY, fees, and balance minimums. Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

Should a high-yield savings account be chosen ahead of a CD?
Which offers higher rates, high-yield savings accounts or CDs?
Is a high-yield savings account perfect for a salary earner?
What is the benefit of using a CD over a high-yield savings account?
Is a high-yield savings account safer than a CD?
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About the Author

Rebecca Safier

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
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