Analysis

Savings Accounts Are Paying Up to 5%. So Why Bother With CDs?

Many people keep their savings in a bank account that earns interest. Doing this allows them to be prepared for future expenses and earn extra money while their money sits in the bank. You may wonder where the best place to keep your savings is.

With savings accounts paying up to 5%, is there any benefit to keeping your extra money in a CD instead of a savings account? There’s one significant benefit you should consider. I’ll explain what you need to know when deciding where to keep your extra cash. 

Savings account rates can change 

I keep my emergency fund in a high-yield savings account to earn more interest. Traditional savings accounts tend to have much lower interest rates, so I benefit from the higher rates high-yield savings accounts offer. Every extra dollar I earn is a win for my wallet. 

I also use a high-yield savings account so I can easily access my money when needed. I can withdraw my money without penalties if I need to use it for an unplanned expense. I can access my money within a few business days, even with an online bank. 

However, one important thing to know is that savings account interest rates can change anytime. That means my bank’s current rate may not be the same a few weeks or months from now. So I could earn less from interest if the rate declines in the future. 

Many banks are offering rates of up to 5% for their high-yield savings accounts, but that could change at any time. So, if you want to benefit from a guaranteed rate, a high-yield savings account may not be the best place to keep all your extra cash. 

CD rates are guaranteed for a fixed period 

Some savers use certificates of deposits (CDs) to lock in rates. If you’re concerned about the rate for your high-yield savings account dropping, this may be an option to explore. 

Here’s how a CD works: You earn interest at a set rate for a fixed period, depending on the terms of the CD. It’s common to see CDs with terms of six months, one year, two years, or longer. But you’ll pay penalties if you withdraw your money before the term ends. 

No-penalty CDs exist, but they typically don’t offer as attractive interest rates as regular CDs. Any extra money you pay in fees adds up and impacts your personal finances. It’s essential to understand the terms before opening a CD. 

Consider your plans for your money

Before deciding whether to move your extra savings into a CD, consider your plans for the money. Do you plan to access the funds later this year? If you think you might need to use the money for an emergency, you may want to keep it in a high-yield savings account. But if it’s money that you don’t intend to touch for a few years, a CD may be a great option. 

Some savers move a portion of their extra money to a CD to benefit from the rate lock, and then they keep the rest of their savings in a high-yield savings account so they can access it quickly without worrying about penalty fees. This could be a good strategy if you have a sizable amount of savings. 

No matter what you decide, it’s wise to carefully research banks and bank account options to choose the right product for your needs. If you’re considering a CD, review our list of the best CD rates to learn more. 

These savings accounts are FDIC insured and could earn you 11x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.

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