CD vs. High-Yield Savings Account: What's the Better Place for Your Savings Right Now?

Chris Neiger, The Motley Fool


Grey-haired woman holding glasses rests hand on chin and looks thoughtful.
Grey-haired woman holding glasses rests hand on chin and looks thoughtful.

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There's an ongoing debate these days about whether it's better to put your money into a certificate of deposit (CD) or a high-yield savings account. Let me say right off the bat that you probably can't go too wrong with either choice.

Both accounts offer a high annual percentage yield (APY) and are FDIC insured, making them safe places to keep cash.

But there are some key differences. Let's take a look at a few of them, and why I personally think high-yield savings accounts are better for most people.

Why CDs make sense

There's a strong case for high-yield CDs. Many of them have APYs of 5.00% or higher, and you can choose a term length that suits you, like 12 months or even several years (though right now, generally the longer the term you choose, the lower the APY you'll be able to snag).

Here are some of the benefits of CDs:

  • The APY rate is fixed for the length of the CD

  • You can choose how long your CD term length is

  • As long as you leave your money in the account, your returns are guaranteed

Those are significant benefits of CDs, but they come with a few caveats. First, you'll only earn the full APY if you leave your money in the CD for the entire term length. Take it out early, and you could face a penalty of 90 days of simple interest for CDs under two years or 180 days of interest for CDs with longer terms.

Paying a penalty effectively lowers your APY. For example, let's assume you put $5,000 into a 12-month CD that pays a 5.00% APY but then withdraw the money early for a house repair. You'd pay about $60 in penalties, and your effective APY would drop to 2.50%.

The second drawback is that your money is locked away for a set time. This rigid approach to money management doesn't exactly align with life's ups and downs and the unexpected financial expenses that come with them.

Still, if you can commit to locking up your money in a CD for the entire term, earning a guaranteed APY is a good option for some people.

Why a high-yield savings account makes sense

Like with CDs, there are some good reasons to choose a high-yield savings account. Here are some of the best ones:

  • They don't have term lengths

  • There aren't any fees for taking your money out

  • You can withdraw or add money as you please

All of the above benefits share one thing in common: flexibility. High-yield savings accounts are a popular option because there are few to no restrictions on how much you can put into the account, how much you can withdraw, or when you can access it.

But there are some disadvantages, too. Namely, a high-yield savings account's APY can change. If the Federal Reserve lowers interest rates later this year, your account's APY could fall along with it.

Still, a savings account's flexibility, paired with its high yield, make it a fantastic option for most people.

I think savings accounts are a better choice

I've tried to make the case for CDs and savings accounts here, but at the end of the day, I'd choose the savings account almost every time.

I personally think most people will benefit from the flexibility. Life happens, and most people can't afford to have thousands of dollars tied up for any extended period.

Sure, a CD guarantees your rate, but that benefit is lost if you use the CD for an emergency expense, like a home or car repair. That's why I think a high-yield savings account works best for most people. So, trade some potential APY adjustments for a whole lot of financial flexibility and get yourself a high-yield savings account.

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