High-Yield CDs vs. High-Yield Savings Accounts: Which is Better?

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What Is a High-Yield CD?

A high-yield certificate of deposit (CD) is a type of deposit account that offers a higher interest rate compared to some other savings accounts. This higher rate serves as an incentive to keep your money invested for a longer period. High-yield CDs are ideal for savers who prefer low-risk investments but still want to grow their money.

How Does a High-Yield CD Work?

When you open a high-yield CD, you deposit a fixed sum of money for a specified term, which can range from a few months to several years. During this term, your deposit earns interest at a higher annual percentage yield (APY) compared to traditional CDs. At the end of the term, you receive your initial deposit plus any interest earned.

Minimum deposit amounts for high-yield CDs can vary, often being at or below $5,000, and some CDs have no minimum deposit requirement. APYs can also differ between financial institutions, with current rates often exceeding 4%, depending on the term length. For example, a $1,000 deposit in a 12-month high-yield CD with a 4.5% APY would earn $45 in interest, compared to just $14 with a traditional CD offering a 1.4% APY.

Be aware that withdrawing your money before the CD matures may incur a penalty, usually calculated as a number of months’ worth of interest. However, some institutions may waive this penalty if the CD has been held for a minimum period.

High-Yield CD vs. High-Yield Savings Account

Both high-yield CDs and high-yield savings accounts are excellent options for saving money. The best choice depends on how long you are willing to leave your money in the account. High-yield CDs generally offer higher returns for longer terms, while high-yield savings accounts provide more flexibility for accessing your funds.

High-Yield CDs:

• Fixed interest rate for the term length, beneficial if rates decrease during the term
• APY depends on the financial institution and term length; longer terms often yield higher APYs
• May or may not have a minimum deposit requirement
• Early withdrawal may result in a penalty

High-Yield Savings Accounts:

• Variable interest rates that can change, beneficial if rates increase
• APY depends on the financial institution, interest compounding frequency, and account balance
• May or may not have a minimum deposit requirement
• Generally allows more frequent access to funds, though there may be withdrawal limits

Get Your Money’s Worth

If you’re seeking a low-risk way to earn more interest and generate decent returns without needing access to your money for a set period, a high-yield CD might be the perfect solution. However, keep in mind that accessing your funds before the maturity date could result in a penalty.

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