High-yield savings accounts and CDs have interest rates near 5%
Compared to the average interest rate of 0.6% you get for checking accounts , moving money from your debit account into either one of these savings accounts can be a smart move. But which one should you choose? The answer depends on what you plan to do with the money, and when you'll spend it.
Since the start of 2022, the highest interest rates on high-yield savings accounts (HYSAs) and certificates of deposit (CDs) have surged from nearly 1% to closer to 5%, making them a much more attractive place to put your cash.
HYSAs have higher interest rates compared to regular savings accounts, and the best rates are typically offered by credit unions or smaller online banks. The interest rate is not fixed, which means that it goes up or down based on factors such as inflation, competition between banks and changes to the Federal Reserve's benchmark interest rate.
Several online banks currently offer interest rates of about 4.5%, which works out to $450 in annual interest for a balance of $10,000. That's about $400 more than what you could get before interest rates started rising last year.
While you'll want to look for a high rate when shopping for an HYSA, there are other considerations, too. Some accounts may come with maintenance fees, limits on withdrawals and minimum balance requirements.
CDs are different from savings accounts in that they have a guaranteed, fixed interest rate over a fixed term, such as six months, one year or five years. Typically, long-term CDs have slightly higher interest rates than short-term CDs.
CDs also tend to offer higher interest rates than HYSAs. Currently, you can find interest rates for one-year CDs that are about 5%. For a balance of $10,000, that works out to $50 extra dollars in annual interest compared to an HYSA.
But the trade-off for higher interest rates on CDs is that you're expected to lock in those funds for the entirety of the term. It's possible to withdraw the money earlier than that, but you'll be charged a fee that can be worth several months' interest on the balance.
Both HYSA and CDs are considered safe, low-risk accounts, as both are insured by the FDIC for up to $250,000 per depositor. And unlike stocks or bonds, there's no risk that your money will decline in value.
Source: CNBC
