High-yield savings accounts vs. CDs: What’s the difference?

If you're serious about growing your savings, you've probably heard of high-yield savings accounts (HYSA) and certificates of deposit (CDs). However, choosing between a HYSA or CD can seem daunting. While both offer a safer way to earn interest on your money compared to riskier investments, they serve different purposes and have distinct benefits and drawbacks.

By understanding the difference between CDs and high-yield savings accounts, you can make a more informed decision based on your financial goals. Let's dive into the details including CD vs. savings account, potential downsides, and how to include both in your savings plan.

A high-yield savings account is a type of savings account that generally offers a higher interest rate than traditional ones. These accounts are typically available through online banks, which can offer better rates due to their lower overhead costs.

The biggest advantage of a HYSA is its liquidity. You can deposit and withdraw money easily, which makes it a flexible option for those who need access to their savings. While the rates are higher than standard savings accounts, they can fluctuate with market conditions, meaning the interest rate may rise or fall over time.

• Flexibility: Easy access to funds with no lock-in period.
• No penalties: You can typically withdraw your money whenever you need it without penalties.

• Variable interest rates: Rates can change over time, potentially reducing your returns.
• Lower returns: Interest rates may not be as high as those offered by CDs.

A certificate of deposit (CD) is a savings product banks offer that provides a fixed interest rate for a specified period. When you invest in a CD, you agree to leave your money in the account for a set term, ranging from a few months to several years. In return, the bank offers a higher, fixed interest rate than a regular or even a high-yield savings account.

However, the trade-off for these higher rates is liquidity. If you withdraw your money before the term ends, you'll usually face an early withdrawal penalty. CDs are ideal for people who don't need immediate access to their funds and want to lock in a guaranteed rate for a set period.

• Fixed interest rates: Your interest rate won't fluctuate, offering predictable returns.
• Higher returns: CDs often offer better rates than high-yield savings accounts.

• Lack of liquidity: Funds are locked in until the CD matures, and withdrawing early can lead to penalties.
• Inflation risk: The fixed rate may not keep up with inflation over time, potentially eroding the real value of your savings.

When comparing CD vs. HYSA, one of the most common questions is which is the best option.

However, that all depends on your financial goals and needs:

• If you need easy access to your money and want a flexible account with no withdrawal penalties, a HYSA is better suited for you.
• If you want to lock in a higher interest rate and don't need access to your funds for a while, a CD is a better choice.

Since there's no clear winner between a high-yield savings account and CD, it's important to evaluate both your short-term and long-term financial goals before making a decision. If you're saving for an emergency fund or a big purchase in the near future, a high-yield savings account may be the better option. But if you're saving for a specific future goal, like a down payment on a house in two years, locking your money into a CD could give you better returns.

Both can serve distinct purposes in a diversified savings portfolio.

Choosing between a CD vs. high-yield savings account comes down to what you value more: access to your money or higher returns.

• If you anticipate needing quick access to your funds or want the ability to withdraw your savings without facing penalties, then a high-yield savings account will likely be your best bet.
• If you can set aside money for a specific term and won't need to touch it, a CD will offer higher interest rates and guaranteed returns.

This is why, for many savers, a blended approach might work best. You could place part of your savings in a high-yield savings account for emergencies or short-term goals and the rest in a CD to take advantage of higher rates.

While high-yield savings accounts are attractive for their flexibility, they have drawbacks. The biggest downside is their variable interest rates. Unlike CDs, where the rate is locked in for the term, HYSAs have rates that can change depending on market conditions. If interest rates drop, so will your returns.

Another downside is that the interest rates on HYSAs are typically lower than those on long-term CDs. So, while you get the benefit of liquidity, you may be sacrificing some potential earnings.

CDs are typically considered less liquid than high-yield savings accounts and, if you need to access funds in a CD prior to maturity, you may be subject to early withdrawal penalties. Fortunately, no-penalty CDs offer a balance between the fixed rates and liquidity, typically allowing for early withdrawal without penalty.

The question of HYSA vs. CD again boils down to your personal financial situation:

• For short-term savings or emergency funds, a high-yield savings account can be a better option because of the liquidity and lack of withdrawal penalties.
• For long-term savings goals, a CD might be better because of the higher fixed interest rates.

In most cases, comparing savings accounts vs. CDs won't result in a clear-cut winner. Instead, a combination of both may be the best strategy, allowing you to take advantage of both liquidity and higher returns. Using a savings platform like Raisin allows you to easily find, fund, and manage both high-yield savings accounts and CDs from a network of banks and credit unions all from a single account.

Not sure which option is right for you? Use our savings calculator to compare the returns between a CD or HYSA. Enter your savings amount, term length, and interest rates to see which option will help you reach your financial goals faster.

To cut down on time to find competitive savings products, visit Raisin. We bring together an exclusive network of federally regulated bank and credit unions that provide attractive interest rates for both HYSAs and CDs.

Many of our partner banks and credit unions offer competitive rates while supporting their local communities. By selecting savings products offered from our partners, you’ll know your money is with a federally regulated financial institution and earning great rates. Click below to view all savings products currently available on the Raisin platform.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.