We all know saving money is important, but what’s the best place to put your savings to make the most of that money? That depends.
Both high-yield savings accounts and certificates of deposit can help you increase your earnings through high interest rates and the magic of compound interest. But they each have pros and cons, and knowing what these are can help you figure out how to best maximize your savings. Here's what you need to know to decide.
Should you put $1,000 into a CD or a high-yield savings account?
The best type of account to use for your $1,000 savings depends on your financial goals and needs. In general, CDs are better for money you can set aside for a specific period, while high-yield savings accounts are better for funds you may need to access at any time. These aren't the only things to consider, though.
Read on to see the key pros and cons to keep in mind when choosing between the two types of accounts.
What to know about CDs
A certificate of deposit, or CD, is a savings product that allows you to lock in an interest rate by agreeing to leave your money alone for a fixed period. The period, or term, depends on the CD you choose -- typical CD terms range from a few months to several years. When the term ends, you get back the money you deposited plus any interest you've accrued.
Pros
- High APY: With a traditional savings account, you could get a rate as low as 0.01% annual percentage yield, or APY. The best CDs offer APYs that may top 5%.Â
- Fixed rate: Your CD rate stays the same for the entire term. Even if overall rates change, your earnings won't. Savings accounts, on the other hand, have variable rates, so your rate could change at any time.
- Federally insured: If you open a CD with an FDIC-insured bank or NCUA-insured credit union, your money is guaranteed up to $250,000 per account, per person if the institution fails.Â
Cons
- Less accessibility: If you need your money before the CD term is up, you may face an early withdrawal penalty. This could cost you several months of interest earnings. If you think you may need your funds before the term ends, consider a no-penalty CD.
- Inability to add more funds later: CDs typically don't allow you to deposit money after you've opened the account.
- Potential for lower returns: The downside of a fixed rate is that if overall rates go up, you won't enjoy the extra earnings they bring.
What to know about high-yield savings accounts
A high-yield savings account, or HYSA, is a type of savings account that offers significantly greater earnings than a traditional savings account. HYSAs have a variable rate that can change without notice, but they allow you to add and withdraw money at any time without penalty.
Pros
- High APY: HYSAs offer APYs several times higher than traditional savings accounts. The best high-yield savings accounts offer rates that may exceed 5% APY.Â
- Easy access to funds: Unlike a CD, HYSAs allow you to withdraw funds whenever you need to, penalty-free. There may be a limit to how many withdrawals you can make, but your cash isn't locked up the way it is in a CD.
- Federally insured: Just like CDs, HYSAs are protected for up to $250,000 if the institution is FDIC- or NCUA-insured.Â
Cons
- Variable rate: Savings account rates can change at any time. So if overall rates go down, your earnings will likely drop too.
- Limited or no branch access: Many top HYSAs are from online-only banks. If you prefer in-person customer service, you may want to stick to a big bank with physical branches near you.
- Potential fees: Some HYSAs allow you to withdraw funds only a certain number of times per month, and extra withdrawals could mean you pay a fee. In addition, some HYSAs have minimum balance requirements you must meet to avoid fees. Look for a no-fee savings account to avoid these charges.
CD vs. high-yield savings account: How to choose
Whether you should choose a CD or high-yield savings account for your $1,000 comes down to your individual financial situation and preferences. Here are some things to consider when deciding:
- When you'll need the money: A high-yield savings account lets you access your money as you need it. A CD won’t allow you to withdraw funds until the term ends unless you're willing to pay a penalty.
- APYs: CDs have fixed rates, so you don’t have to worry about your APY changing throughout the CD term. This protects your earnings from rate cuts but means you could miss out on extra earnings if rates go up. High-yield savings accounts have variable rates, so your rate could change at any time. If rates go down, your earnings likely will too -- but if rates go up, your earnings could increase.
- How much you want to put aside now: With a CD, you deposit an initial lump sum and that’s it. An HYSA lets you continue adding funds to grow your balance further.
- What you're saving for: If you want to use your money for an emergency fund, an HYSA is the best place since it will be readily accessible. If your cash is earmarked for a specific goal, such as buying a home or paying for a wedding, a CD with a term that fits your time line could be a better fit.
