Finding the right savings option for your hard-earned cash is like creating a perfect melody – it takes time, patience, and a good understanding of the different instruments. High-yield savings accounts (HYSAs) and certificates of deposit (CDs) are a harmonious duo, producing sweet tunes of financial growth for your savings.
With rising interest rates, HYSAs and CDs are becoming more attractive than ever. Since the beginning of 2022, the highest interest rates on these low-risk accounts have surged from under 1% to nearly 5%. As an alternative to the average interest rate of 0.6% on checking accounts, moving your money into an HYSA or CD can be a wise move.
HYSAs typically offer higher interest rates than regular savings accounts, with the best rates usually offered by credit unions or smaller online banks. Some online banks currently offer rates of about 4.5%, which translates to $900 in annual interest for a balance of $20,000. However, when choosing an HYSA, it’s essential to consider other factors, such as maintenance fees, withdrawal limits, and minimum balance requirements.
CDs, conversely, provide a guaranteed, fixed interest rate over a fixed term, ranging from six months to five years. Long-term CDs typically offer slightly higher interest rates than short-term CDs. Currently, you can find interest rates for one-year CDs that are about 5%, which means a balance of $20,000 would earn you an additional $100 in annual interest compared to an HYSA.
But remember the trade-off for higher interest rates on CDs is that you need to lock in your funds for the entire term. It’s possible to withdraw the money earlier, but the fee may deduct several months’ interest on the balance.
HYSA and CDs are considered safe, low-risk accounts insured by the FDIC for up to $250,000 per depositor. Unlike stocks or bonds, there’s no risk of losing money due to market fluctuations.
HYSAs may be a better option if you need emergency funds or cash immediately. On the other hand, CDs are better if you have a specific timeline for when you need the money, like for a future home or car purchase. Your savings goal should match the CD’s duration, maximizing your interest return.
Choosing between HYSAs and CDs is like selecting the right notes for a perfect melody – it depends on your specific financial goals and timeline. However, with rising interest rates, these low-risk accounts are producing harmonious returns that are hard to ignore.