CD vs. HYSAs: Which Is the Right Safe-Money Strategy for You?

The post CD vs. HYSAs: Which Is the Right Safe-Money Strategy for You? by Margaret Jackson appeared first on Benzinga. Visit Benzinga to get more great content like this.

In today’s volatile economy, finding a safe place for your money that offers a solid return is important. For many savers, the search often leads to two low-risk options: certificates of deposit and high-yield savings accounts. 

Both are excellent alternatives to a standard savings account, but they serve different purposes and come with tradeoffs. 

This article will examine how each account works and ideal use cases to help you understand which strategy aligns with your financial goals. 

Certificate of Deposit

A certificate of deposit is a savings account that holds a fixed amount of money for a set period of time. In return for hanging on to your money, the bank pays you a fixed interest rate, which is generally higher than a standard savings account. 

The tradeoff is that your money is locked up until the CD matures. 

How CDs Work

When you open a CD, you agree to deposit a specific amount of money for a predetermined term, which can range from a few months to several years. 

For example, you may open a one-year CD with $10,000 at a 5.25% annual percentage yield, and the bank guarantees that rate for the entire year. If you withdraw the money before the year is up, you’ll usually pay a penalty, such as several months’ worth of interest. 

When your CD matures, the term ends, and you can withdraw your money and the accrued interest without penalty. 

Pros:

• Better rates: CDs often offer higher fixed rates than high-yield savings accounts, especially for longer terms. The fixed rate also protects you from interest rate drops.
  
  
• Encourages discipline: Because there are penalties for early withdrawals, you may be less tempted to dip into your savings.
  
  
• FDIC-insured: Like other savings accounts, the Federal Deposit Insurance Corp. insures CDs for up to $250,000 per depositor, per institution. 

Cons: 

• Low liquidity: Your money is locked up. If you need it for an unexpected expense, you’ll pay a penalty that can erase your interest gains and, in some cases, a portion of your principal.
  
  
• Interest rate risk: If interest rates rise after you’ve opened your CD, you’ll be stuck with the lower fixed rate. 

CDs are best for savers who have a clear financial goal with a defined timeline and an emergency fund already in place. If that’s you, you’ll be able to set aside a chunk of cash and not need to touch it. 

They’re also good for savers who have longer-term plans for their money. If you’re saving for a car purchase in two years, a wedding in three or a home down payment in five, you can sacrifice liquidity for a guaranteed return. 

High-Yield Savings Account

A high-yield savings account offers a significantly higher interest rate than a traditional savings account. Unlike a CD, an HYSA is flexible and liquid that you can deposit into and withdraw from at any time without a penalty. 

How HYSAs Work

HYSAs are like regular checking or savings accounts but with better interest rates. The rates are variable, meaning the bank can change the annual percentage yield at any time. 

You can usually transfer money in and out easily through an online portal or mobile app. Most HYSAs are offered by online-only banks, which have lower overhead costs and can pass those savings on to customers through higher rates. 

Pros: 

• High liquidity: You can access your money anytime without penalty, making it ideal for an emergency fund or short-term savings where you might need cash on short notice.
  
  
• Flexibility: You can deposit or withdraw any amount whenever you want. You are not locked into a term.
  
  
• Interest rates: When the Federal Reserve raises interest rates, your HYSA’s APY will likely increase as well.
  
  
• FDIC-insured: The same FDIC protection applies to HYSAs as it does to CDs, ensuring your funds are safe. 

Cons: 

• Variable rates: The interest rate can drop any time, reducing your earnings. You lose the certainty of the fixed returns that CDs offer.
  
  
• Potentially lower APY: The APY on an HYSA is often lower than for a long-term CD because of the liquidity benefit. 

HYSAs are good for savers who prioritize easy access to their money. The goal is to have a secure and accessible place to keep an emergency fund or save for short-term goals. If you value the peace of mind that comes from knowing your money is both growing and available, an HYSA may be right for you. 

Where to Find CDs and HYSAs

You can get CDs from most banks and credit unions. Online banks often offer the most competitive rates. Look for institutions like Marcus by Goldman Sachs, Ally Bank or Discover Bank. When shopping for CDs, compare APYs and early withdrawal penalties. Consider a ladder strategy where you stagger CDs with different maturity dates to maintain some liquidity. 

HYSAs are most commonly found at online banks like Ally Bank, Capital One 360 or Synchrony Bank. To open one, you’ll usually link an external bank account for easy transfers. Look for an account with no monthly fees and a competitive APY.

Frequently Asked Questions

The post CD vs. HYSAs: Which Is the Right Safe-Money Strategy for You? by Margaret Jackson appeared first on Benzinga. Visit Benzinga to get more great content like this.