High-yield savings accounts and certificates of deposit are deposit accounts that can earn significantly more interest than many traditional savings accounts.
With a certificate of deposit, you agree to leave your money in the account for a set period. In return, you earn a fixed interest rate for the entire term. Taking money out before the account matures results in a penalty.
High-yield savings accounts allow withdrawals as needed, but the interest rate can drop at any time.
High-yield savings accounts currently offer as much as 4% APY. The best rates are often found at online banks, which may not offer in-person banking. Many online banks provide fee-free ATM networks, mobile check deposit, and the ability to link outside accounts for transfers. Credit unions also offer high-yield savings accounts if you prefer in-person banking.
Like traditional savings accounts, high-yield savings accounts offer a variable rate of return, expressed as an annual percentage yield. Banks and credit unions may raise or lower this rate as market conditions change.
Certificates of deposit have term lengths ranging from a few months to several years. When you open one, you agree to leave your money in the account for the entire term. In exchange, you earn a guaranteed interest rate, often comparable to high-yield savings accounts.
Certificates of deposit can be beneficial if interest rates are expected to drop, since you keep earning the same rate locked in at account opening. Tying up money in a certificate of deposit is not ideal if interest rates increase significantly before maturity.
Withdrawing money before the term ends incurs an early withdrawal penalty, typically equal to a portion of the interest earned. Some banks offer no-penalty certificates of deposit, but these usually come with much lower rates.
When a certificate of deposit reaches maturity, you have a grace period of about 10 days to decide what to do with the money. You can withdraw it, transfer it to another certificate of deposit, or take other actions. If you do not act, the bank often automatically renews the certificate of deposit for a similar term at the current interest rate.
Choosing between a certificate of deposit and a high-yield savings account depends on how soon you need the money and how much flexibility you want.
A high-yield savings account is likely better for short-term savings, such as an emergency fund, because you can add and withdraw money regularly. With most certificates of deposit, you cannot add money after initial funding, except with add-on certificates of deposit, and you must wait until maturity to withdraw.
A certificate of deposit is a good option for saving for specific goals with a defined timeline. For example, if you plan to start shopping for a new house one year from now, you could put down payment money in a one-year certificate of deposit to earn interest until needed.
Many savers use both, keeping emergency savings in a high-yield savings account and putting extra cash into certificates of deposit with staggered maturity dates to balance flexibility and higher returns.