CD vs. High Yield Savings Account: Which is Right For You?

By Jackie Lam

PUBLISHED May 09
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10 MINUTE READ

If you're a savvy saver, you may be mulling over your savings account options, and asking which is best: A certificate of deposit (CD) or high yield savings account? While both are excellent choices that can provide gains, the answer falls largely on your financial goals and timeframe. Below, we outline the major differences between a CD vs high-yield savings account, and how to choose which type of account to stash your cash.

CD vs High Yield Savings Account

You probably have your head wrapped around the basics, but here's a refresher:

CD Accounts

A CD account is a type of savings account that generally offers relatively high interest rates with low risk. Once you decide on a term, which typically ranges anywhere from three months to five years, you promise to leave your money in that CD until it matures.

If you pull out the funds before the CD maturity date, you typically get hit with an early withdrawal penalty, which can be a portion of the interest earned or even more if the withdrawal is early in the CD term. The interest rate for a CD is locked in for the duration of the term.

High Yield Savings Accounts

A high yield savings account is another way to grow your money risk-free, and it has more flexibility: You can put cash in and take out cash anytime.

A high yield savings account has the same perks as a standard savings account, except it features better-than-average savings rates. But unlike a CD, the interest rates for savings accounts are variable—which means the rate can fluctuate depending on decisions made by the Federal Reserve. Ultimately, each financial institution makes the final call on whether to change rates, and just because the Fed changes rates does not automatically mean a bank will change its rates.

Most CDs and high yield savings accounts are FDIC-insured—so your money is protected if your bank is an FDIC member.

CD vs High Yield Savings Account: How to Choose

Deciding which savings vehicle is best can be a head-scratching affair, no doubt.

Start by setting financial goals and doing some planning. Your goals can—and will—change over the course of your life. And so might interest rates. That being said, you can only plan for what you know in the present.

To determine whether to park your funds in a CD or in a high yield savings account, write down your financial goals and the timeframe for each goal. Define whether they're short-term, medium-term, or long-term goals. A short-term goal is something you'd like to hit within the next 1-2 years, a medium-term goal is between 2-5, and a long-term goal is anything longer than 5 years.

Let's look at some examples:

Financial Goals	Timeframe
Emergency fund, splurge fund, opportunity fund, big-ticket purchases (i.e., computer, furniture, phone, TV), vacation, home renovations, paying off credit card debt	1-2 years (short-term)
Down payment for a car or home, seed money to start a small business, paying off student debt or a personal loan	2-5 years (medium-term)
Retirement, paying off a mortgage, saving for a child's college education or "dream fund"	5+ years (long-term)

Align Financial Goals with a Savings Account

Once you've determined your financial goals and timelines, here are some suggestions to figure out which option is best for you.

Everyday Spending: High-Yield Savings Account

Let's say you intend to use your savings to cover everyday purchases or unexpected expenses that pop up. This might include:

• Slower work months with lean or inconsistent/variable cash flow
• Larger, one-time purchases (i.e., computers, smart home devices, gifts or purchases for special occasions)
• Seasonal purchases (i.e., back-to-school, short summer trips, holiday shopping)

Because you'll need to tap into your cash on a rolling basis, and exactly how much you'll need varies, a high yield savings account gives you the flexibility. Plus, you'll be able to grow that money while it's parked in your savings.

Emergency Fund: High Yield Savings

Emergencies pop up when you least expect them. And since exactly how much you'll need for that, say, that urgent root canal or busted car engine is unpredictable, keeping your money in a savings account you can access at any time will offer ease and peace of mind.

Here's the kicker: Synchrony Bank offers a high yield savings account with a competitive interest rate. Plus, there's no minimum deposit, no minimum, balance, and no monthly fees.

Same-Year Goals With Different Amounts: High Yield Savings Account

If you have goals and planned purchases for the next year, then a high yield savings account is probably a good bet. That's because you'll still be enjoying great, higher-than-average interest rates but you can tap into the money whenever you please. It's the ultimate flexibility.

Short-Term Goals: CDs

For short-term goals—think saving for a vacation or for a big-ticket item—a CD might be the choice for you. If you're sitting on a lump sum of money and feel comfortable locking it in for a fixed term, a CD has a lot to offer. For instance, if you have money that you plan to use for a vacation next year, you could sink your savings into a CD and earn a decent return.

Medium-Term Goals: CDs

For goals and purchases that fall anywhere between two and five years, if you can afford to park your money in a CD for a predetermined amount of time, then a CD could help you grow your savings. For financial goals with a timespan of two to five years, consider a CD. Stowing that money away where it's left untouched in a CD will help it grow safely. You can play around with Synchrony Bank's interactive CD rates calculator to see how much you could earn in interest over time.

If you're feeling a bit non-committal about leaving a chunk of cash for several years because of rising rates, consider a bump-up CD. The beauty of a bump-up CD is that you can reap competitive interest rates—possibly even higher than a high yield savings account—and have the option for a one-time rate increase should the rate offered by your bank for that particular CD term rise.

Long-Term Goals: CD Laddering

If you want to optimize your interest earnings but still retain access to some of your cash, consider setting up a CD ladder.

Let's say you have different goals with different timelines. You might want to tap into some funds in six months to purchase some gadgets during Cyber Monday, and you also want to buy a teardrop trailer for family vacations in three years' time.

Here's how the tactic works: You drop your money into a series of CD accounts, each with term lengths that mature at different times. For instance, $500 in a 6-month CD, $500 in a 9-month CD, $500 in a 12-month CD, and so forth. Then, once a CD reaches its maturity date, you can either pull the money out to use or renew it into a new CD with a new fixed term to continue earning on your savings.

CD laddering allows you to enjoy the best of both worlds of competitive interest rates and flexibility.

The Bottom Line: Is a CD or High Yield Savings Account Right For Me?

To recap, here's when you should consider saving in a high-yield saving account versus a CD:

	High-Yield Savings	CDs
Everyday Expenses	X
Emergency Fund	X
Short-Term (1-2 years)		X
Medium-Term Goals (2-5 years		X
Long-Term Goals (5+ years)		X

By being mindful and having greater awareness of your financial goals, and know-how about what resources and options are at your disposal, you can make the best decisions for your savings. At the end of the day, it's about feeling empowered about your money choices—and earning the highest possible interest rate while you're at it.

Jackie Lam is an L.A.-based money writer whose work has appeared in Salon.com, Forbes, Refinery29, Business Insider, and BuzzFeed, among others.

LEARN MORE: Expert Advice: How Can Money Markets Fit into My Savings Plan?