You work hard for your money. Now it's time for the cash you've saved to start earning its keep. Two low-risk, interest-bearing saving options: a certificate of deposit (CD) and a high-yield savings account. But what exactly are they, how do they work, and, most importantly, how do you choose between them? Here's what you need to know about CDs vs. high-yield savings accounts so you can decide which one is right for you.
What are CDs?
A certificate of deposit, or CD, is a type of savings account offered by banks. It comes with a fixed term and a fixed interest rate.
Unlike a typical savings account, when you buy a CD, you agree to leave that money untouched for a set period, anywhere from just 1 month to as long as 20 years. In return, the issuing bank agrees to pay you a fixed rate of interest during the time you own the CD until it matures.
What are brokered CDs?
While CDs are available for purchase directly from banks, brokered CDs are bought and sold through brokerage firms, including Fidelity. Buying a CD through a brokerage account lets an investor shop around for CDs from many different banks all in one place. The brokerage firm offers a wider variety of term limits and yields than a single bank does.
Advantages of CDs
- FDIC insurance. If you buy a CD through a federally insured bank, then up to $250,000 of your savings will be protected by the Federal Deposit Insurance Corporation (FDIC) if the bank fails. Important note: The $250,000 insurance covers all the deposit accounts under your name at a particular bank. So if you have both CDs and a checking account at Bank A, for example, the insurance applies to the total amount in your checking and CD accounts combined, up to $250,000. You might qualify for more than $250,000 in coverage at a single bank if your accounts fall into different ownership categories, such as single accounts, joint accounts, trust accounts, and certain retirement accounts.
- Low-risk earning potential. While investing in the stock market might earn you big returns, it comes with a fair amount of risk. CDs offer a low-risk way to keep your money growing (though your returns are likely to grow more slowly in a CD than the stock market).
- Higher interest rates than savings accounts. CDs typically earn more interest than a traditional (or even a high-yield) savings account. On June 17, 2024, for instance, the average rate for a 12-month CD was 1.86%, several times higher than the average savings account rate of 0.45%.1 And some CD rates were as high as 5.40% that same day.
- A predictable return on your investment. Because your interest rate is locked in when you open a CD, you'll have a predictable payout when your CD matures—you'll receive your initial deposit, plus the agreed-upon interest, as long as you don't cash out early. Your overall earnings at maturity won't drop if market rates fall after you buy the CD.
- Plenty of options to choose from. Between banks and brokerages, there are many options available to meet your needs, from short-term to long-term CDs to a range of minimum to maximum deposit amounts. There are also some CDs that are callable, meaning that the issuing bank could redeem the CD early. Callable CDs typically offer a higher rate than CDs protected against call risk with similar maturity dates. One risk: If a CD is called, interest payments stop, and if you want to buy a new CD, rates may be lower than what even call-protected CDs were offering previously.
Disadvantages of CDs
- Reduced access to your cash. While you're waiting for your CD to mature, you can't easily access that money should an emergency expense pop up.
- Penalties for early withdrawal. If you take out cash before your CD fully matures, you might have to pay the bank a penalty or, in the case of a brokered CD, sell it for less than its face value and incur a trading fee or markdown. This could eat away at the interest your CD has earned up to that point.
- Locked-in interest rate. If interest rates climb after you've tied up money in a CD, you won't be able to seek out a better rate for that cash until that CD matures.
- Research time. Interest rates for CDs with similar maturities could vary significantly between banks. If you want the best rate, you'll need to spend time researching all options available to you. (Seeking out brokered CDs, like those offered at Fidelity, could cut your research time because you can see many banks' offerings at a glance.)
What are high-yield savings accounts?
High-yield savings accounts provide competitive interest rates that tend to be much higher than traditional savings accounts.
While the average savings account interest rate in the US was 0.45% APY (annual percentage yield, or the rate you'd earn on your cash over the course of a full year) on June 17, 2024, some banks were advertising high-yield savings accounts with APYs over 5%, more than 11 times greater than the average APY.2
High-yield savings accounts are traditionally offered by online banks and credit unions. They can afford to offer higher rates because they lack brick-and-mortar locations' expenses. Interest on these accounts is variable, so the rate you start with might not stick around. It's typically compounded daily and added to the account monthly.
Advantages of high-yield savings accounts
- Funds are FDIC-insured. Just like with CDs, up to $250,000 of your money per depositor, per account category at a federally insured bank are FDIC-insured in case your bank fails.
- Higher interest than a traditional savings account. It's right there in the name: "high- yield" savings account. That means you're likely to get a higher interest payout than you would from a traditional savings account.
- Low risk. Like CDs, high-yield savings accounts let you build on your current wealth without much risk of losing any cash.
- Easy access to funds. Money in a high-yield savings account isn't locked up for a specific period. You can deposit and withdraw your funds whenever you want—though there might be dollar-amount and withdrawal limits depending on the institution—while still accruing interest.
- Possibility for a rate increase. Because high-yield savings accounts offer a variable interest rate, you might earn even more should interest rates rise.
Disadvantages of high-yield savings accounts
- Possibility for a rate decrease. While a high-yield saving account's variable interest rate could boost your earning potential, it could also hurt it if market rates dip.
- Interest rates might be lower than CDs. In exchange for a high-yield savings account's cash liquidity, you could see lower rates than you would on a CD at the same bank.
- Withdrawal limits. While high-yield savings accounts generally let you access your money as needed, the bank might enforce limits on how much or how many times you can withdraw each month. Plus, since most high-yield savings accounts don't come with checks or ATM or debit cards, you might have to transfer cash to another account before withdrawing it. That might take a couple of days. If checking account features and a high yield are important to you, you could consider a cash management account instead.
- Minimum balance required. Some high-yield savings accounts require a minimum balance before you can earn the highest APY available. Read the fine print to know the amount you must maintain in your account to qualify for the highest rate.
- Online only. Part of the reason high-yield savings accounts can offer such attractive APYs is because they're often offered by online-only banks that don't have to pay for brick-and-mortar locations or issue checks and ATM or debit cards. That means all your transactions and interactions with the bank will happen online.
CDs vs. high-yield savings accounts
While both CDs and high-yield savings accounts are considered low-risk ways to earn interest, this chart makes it easy to see the key differences between the 2.
| Certificate of deposit (CD) | High-yield savings account | |
|---|---|---|
| Interest rate variability | Fixed from the time the CD is opened through maturity | Variable throughout the life of the account; usually compounds daily |
| When you can withdraw money without penalty | Generally when the CD matures (term lengths vary) | Anytime (some accounts have a monthly limit on the amount or number of times you can withdraw) |
| When you can deposit money | Only one initial deposit, typically | Anytime |
The annual percentage yield (APY) offered on CDs and high-yield savings accounts can vary greatly depending on a variety of factors. These include CD term length, the offering bank, and the date a CD or savings account is opened—and what market rates are like at that moment. Generally, though, a bank's best available CD rate is higher than their best high-yield savings account APY. For instance, at 3 different banks on the same day, the best rate for CDs was between .05% and .50% higher than the best rate that same bank offered for high-yield savings accounts.3
Which is better: CDs or high-yield savings accounts?
It depends. Your financial goals will play a key role in helping you choose between a CD vs. a high-yield savings account.
Because CDs lack liquidity, they are better suited for goals on specific timelines that match CD maturity dates. Let's say you'd like to put a down payment on a house 3 years from now or buy a new car next year. You can purchase a 1-, 2-, or 3-year CD to help build up the money you've saved for those larger purchases.
High-yield savings accounts, on the other hand, are better for building and maintaining emergency savings since the cash is more readily available in case an unexpected expense comes up. And you can continue to deposit money throughout the life of the account. These accounts are also suitable for short-term savings goals, like buying concert tickets when they go on sale next month.
Creating a CD ladder
If investing a lot of money in a long-term CD gives you pause, consider creating a CD ladder. This strategy could help you maximize yield while offering slightly more liquidity. To build a ladder, you put money into multiple CDs with varying maturity dates. So you could put some cash into longer-term CDs and other funds in CDs that mature sooner.
How to buy a CD or open a high-yield savings account
Buying a CD or opening a high-yield savings account is a fairly simple process. Once you find the CD or high-yield savings account that works best for you, contact the bank, credit union, or brokerage firm to begin the account opening process.
To buy CDs through Fidelity if you already have a Fidelity account:
- Log into your account and select "News & Research" and choose "Fixed Income, Bonds & CDs" from the dropdown.
- Scroll down and click the "CDs & Ladders" tab.
- Once you find the desired CD, click the Buy button.
Since high-yield savings accounts are often offered by online banks, opening one likely requires setting up a new account with the institution. If you prefer to keep your accounts under one umbrella, have easy access to this money, and have the choice of a Fidelity Money Market Mutual Fund or FDIC-insured option4 for your uninvested cash, consider opening a Fidelity Cash Management account instead. The Fidelity Cash Management account is a brokerage account designed for spending and cash management. It offers competitive rates and more flexibility to make withdrawals than a CD. You also would get checkwriting, a debit card, and global ATM reimbursement for easy access and liquidity. The Fidelity Cash Management account allows you to invest in securities, but as with any money you invest, there's a risk of loss. Opening a Fidelity Cash Management account is easy: Just log into your Fidelity account, fill out the application, and begin transferring money into the account.