With the ever changing and volatile market, many investors are looking for more conservative cash savings options. I often have clients ask me what type of cash account is best for them. The answer, as always, is it depends on your goals. Two options I often recommend are High Yield Savings accounts and CDs. Usually the interest rates are similar (currently around 4.5%). However, interest rates aren’t the only factor to consider, and there are several other options to consider when deciding where to stash your cash.
High-Yield Savings Accounts
These are savings accounts with higher interest rates than average, which is around 0.4%, according to the FDIC. Similar to traditional savings accounts, they typically are federally insured at up to $250,000 per depositor, per insured bank and per account.
Why choose high-yield savings? Obviously, the high rate makes these savings vehicles appealing. Also, this is a great place to keep cash that you may need in the short term. The biggest drawback is rates go up or down as the Federal Reserve changes its benchmark interest rate. So, in the beginning, you could earn 5.3% on your deposit, but that amount could decrease with time.
See some of the best high-yield savings options, according to NerdWallet.
CDs
There are enough similarities between CDs and high-yield savings accounts to make the decision a difficult one. A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions. Typically, you keep your money in the CD for a specific length of time, or term, usually ranging from three months to five years. CDs offered by banks are also FDIC insured up to $250,000.
However, there are two important characteristics that distinguish them from a high-yield savings account.
- CDs lock in the interest rate for the term chosen. For example, if you purchase a 1-year CD at a 5.15% APR, that will be your rate until your term period is up in one year, known as when the CD matures.
- When you purchase a CD, you are committing to that time period. Withdrawing money early before it matures means paying a penalty fee to the bank.
Why choose CDs? CDs can be a good choice if you’re certain you won’t need your cash for several months or years and want a consistent rate of return. If you think rates may decrease, a CD would be a good option because you lock in that higher rate when you purchase it. On the flip side, you may want to stick with a high-yield savings account if rates are expected to increase.
See some of the best CD options, according to NerdWallet.
Still can’t decide between the two options? One strategy that gives you flexibility while still locking in the high APR rate is to create a CD ladder. This is a savings strategy where you divide your cash across multiple CDs with different maturity dates. The key is to mix short- and long-term CDs to give you consistent cash flow, plus high returns. When a CD matures, you can either keep the cash or reinvest it in a new CD.
Liz Frazier is a Certified Financial Planner (CFP), Forbes contributor, the author of Beyond Piggy Banks and Lemonade Stands: How to Teach Young Kids About Finance, and Director of Education at Copper Banking. Her goal is to simplify finance so anyone can live a financially healthy life. You can connect with her here for more information on financial planning or financial education.
