Think of your money as your employee. Every dollar should be constantly toiling and sweating to profit its boss.
There are two extremely low-effort, low-risk types of deposit accounts that will ensure your savings are working for you: certificates of deposit (CDs) and high-yield savings accounts (HYSAs). With CDs and HYSAs, there’s no buying and selling of stocks, no wringing your hands over a volatile market. You just deposit your money and your balance will earn interest at a high rate. The best HYSAs often breach 4.00% annual percentage yield (APY), while the best CDs may offer even more.
So which account is best for your financial situation? Let’s quickly compare these two account types to help you understand the big differences between CDs and HYSAs.
How CDs work
A certificate of deposit is much like a savings account—but with a twist.
CDs are popular because they tend to offer a higher APY than traditional (and sometimes even high-yield) savings accounts. In the current market you may be able to find CD rates of 4.50% or on occasion even higher.
But here’s the catch: You must guarantee the bank that you won’t withdraw your money for a specific amount of time (called a “term”). Touching your deposit early will result in an early withdrawal penalty, which may equal several months worth of the interest you’ve patiently accrued. In some cases, you might even lose some of your principal.
Banks and credit unions generally offer CD term lengths from three months to 10 years. In other words, no matter your financial goals, there’s likely a CD that works for you.
If the idea of losing access to your money for an extended period of time sours you, consider crafting a “CD ladder.” Decide how much money you want to invest, and split that figure between multiple CDs of different terms.
For example, you could open a one-year, two-year, and three-year CD. Each year, when a CD matures, you could redeposit your money into a new three-year CD. This would give you the option of accessing a portion of your investment each year without penalty.
Pros and cons of CDs
Pros
- May offer a higher APY than a high-yield savings account
- Extremely low-risk investment
- Guaranteed rate through the full term of the CD
- No monthly maintenance required
Cons
- Inability to liquidate your investment early without incurring a penalty
- Lower earning potential than riskier investments, such as stocks
- Minimum deposits can be high depending on the financial institution
How to open a CD
Opening a certificate of deposit is no more complicated than opening a savings account. You can often do it online, in-branch, or via phone.
Expect to provide information such as your name, birthdate, Social Security number, address, and likely a number for a government-issued ID such as a driver’s license too.
When you find the ideal CD for your situation (term length, interest rate, minimum deposit, etc.), you’ll need to fund your account with a check or direct deposit.
How high-yield savings accounts work
High-yield savings accounts are likely pretty recognizable to the average consumer, as they work essentially the same as a traditional bank account. You can move your money at will, penalty-free, just as you would with any savings account. In other words, you can transfer money in and out of your account at virtually any time (though your financial institution may limit your monthly withdrawals, with six per month being a common cap).
Just be aware that a savings account may charge maintenance fees if you don’t meet certain monthly requirements—like a specified minimum balance.
You may also not qualify for the highest APY depending on the amount of money you’ve got in your account. For example, a hypothetical HYSA may offer 4.00% APY on up to $20,000 and offer a paltry 0.01% APY for any additional funds.
Still, high-yield savings accounts are among the best vehicles out there for earning interest while also keeping your funds liquid. Note that you’ll often find such accounts from online banks rather than brick-and-mortar institutions, as the former can keep operating expenses down.
Pros and cons of high-yield savings accounts
Pros
- Often 10x (or more) return compared to a traditional savings account
- Easy to liquidate your money at virtually any time
- Extremely low risk for FDIC-insured accounts
Cons
- You may need to complete monthly activity to avoid maintenance fees
- Some HYSAs have terms that throttle the APY of extremely high balances
- Rates are not locked in for a specific term and are subject to change
How to open a high-yield savings account
Opening a high yield savings account is typically a snap. Similar to CDs, you can often open them online or via phone. However, the best HYSAs are usually offered with an online bank—so in most cases, you may not be able to apply in-person.
Once you’ve found an account that suits your needs, you’ll need to submit standard personal info like your address and Social Security number. You might also need to make an initial deposit within a short time frame.
CD vs. HYSA side-by-side comparison
| Certificate of deposit (CD) | High-yield savings account (HYSA) |
|---|---|
| High APY | High APY |
| Typically extremely low risk | Typically extremely low risk |
| Fixed rate for a predetermined amount of time | Rates can vary based on factors such as Fed decisions, economic conditions, etc. |
| Money can only be accessed penalty-free after the account terms | Money can be accessed at any time |
| Minimum deposits may be high | Often no minimum deposit |
| No monthly maintenance fees | Some banks charge monthly maintenance fees if certain conditions aren’t satisfied |
| High APY | |
|---|---|
| High-yield savings account (HYSA) | High APY |
| Typically extremely low risk | |
| High-yield savings account (HYSA) | Typically extremely low risk |
| Fixed rate for a predetermined amount of time | |
| High-yield savings account (HYSA) | Rates can vary based on factors such as Fed decisions, economic conditions, etc. |
| Money can only be accessed penalty-free after the account terms | |
| High-yield savings account (HYSA) | Money can be accessed at any time |
| Minimum deposits may be high | |
| High-yield savings account (HYSA) | Often no minimum deposit |
| No monthly maintenance fees | |
| High-yield savings account (HYSA) | Some banks charge monthly maintenance fees if certain conditions aren’t satisfied |
Can you lose money in a CD or HYSA?
You’re unlikely to literally lose money by opening a CD or a HYSA. In the event that a financial institution flounders, accounts at FDIC-insured banks are protected up to $250,000 per depositor—and federally insured credit union accounts are covered for up to $250,000 by the NCUA.
However, inflation might possibly grow faster than your earnings. In such a scenario, you might want to pull some funds out of savings and invest it in something more lucrative (though keep in mind this can also mean more risky) to hedge against inflation eating away at your spending power.
With a CD, keep in mind you have to weigh the early withdrawal penalty, and you might opt to keep your funds invested until they mature even if inflation is heating up
When you should have both a CD and a HYSA
CDs and HYSAs both accomplish the same thing in slightly different ways: giving you a respectable return for keeping your money stashed in the account. But their unique attributes make them appealing for different reasons. In some cases, it could be worth opening both.
HYSAs are ideal for an emergency fund, as you can quickly deploy your money toward unexpected events. In an ideal world, you’ll never have to touch it, and your money can work to earn interest.
CDs, on the other hand, are better for those who are confident that they can float a large sum of money for an extended period of time without needing it. Any money you can live without is well invested in a CD to lock in generous return rates for months or even years at a time.
All to say, if you’re looking for a low-stakes way to invest your money, consider putting as much as you can in a CD while keeping a rainy day fund in a HYSA for easy access.
The takeaway
Both CDs and HYSAs are effectively set-and-forget ways to increase your savings. If you’ve got a meaningful balance in the bank, it could be worth strategically opening both of these accounts. You could earn hundreds or potentially even thousands—of dollars per year for virtually no effort on your part. And, remember that you don’t need to open these accounts at the same institution where your main checking account is. You might find some of the best options at an online bank.