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Understanding High-Yield Savings Accounts and CDs

High-yield savings accounts and certificates of deposit (CDs) are excellent options for earning more interest compared to traditional savings accounts. Both are secure places to store your money, whether you’re saving for short-term goals or long-term plans. However, they differ in terms of interest rates and accessibility. Let’s explore what sets them apart.

What Is a High-Yield Savings Account?

High-yield savings accounts typically offer higher annual percentage yields (APYs) than traditional savings accounts, which generally earn around 0.40%, according to the FDIC. Currently, it’s not uncommon to see rates over 4.5% for high-yield savings accounts. This allows your money to grow faster, especially if you’re building a substantial balance, like an emergency fund.

Money in a high-yield savings account is relatively easy to access, making liquidity less of an issue. You can usually link it to your checking account for easy transfers and set up automatic bill payments for recurring expenses. However, some financial institutions may limit the number of withdrawals and transfers you can make each month.

Pros and Cons of High-Yield Savings Accounts

Pros

• Higher-than-average interest rates help grow your wealth faster.
• Easy access to funds without penalties, unless you exceed the monthly withdrawal limit.
• FDIC-insured for up to $250,000 per depositor, per insured bank.

Cons

• Convenient withdrawals may be limited, including electronic transfers.
• Some financial institutions may charge fees or require minimum balances.

What Is a CD?

A CD is designed for money you won’t need to access immediately. High-yield CDs offer higher APYs, but your funds are locked in for a predetermined period. Withdrawing money before the term ends usually incurs a fee, which can significantly reduce or eliminate your interest earnings.

CD terms range from one month to five years, with longer terms generally offering higher APYs. At the time of writing, some CDs have rates over 5%. Strategies like CD barbell and CD laddering can help manage liquidity issues by splitting funds across CDs with different terms.

Pros and Cons of CDs

Pros

• Competitive interest rates that can significantly boost your savings.
• Guaranteed returns as long as you don’t withdraw early, helping with financial planning.
• FDIC-insured like other savings accounts.

Cons

• Limited liquidity, with penalties for early withdrawal.
• Returns may lag behind the stock market, which has averaged around 10% annualized returns over the last century.

Should You Use a High-Yield Savings Account or a CD?

Both options offer higher-than-average interest rates and are considered safe places to keep your money. If you need easy access to your funds, a high-yield savings account might be the better choice, making it ideal for an emergency fund. On the other hand, a CD is suitable for money you don’t plan to use immediately, allowing it to earn interest over time.

Many people find it beneficial to keep some money in a CD and some in a high-yield savings account, balancing accessibility and higher returns.

The Bottom Line

There are various ways to grow your wealth and protect your savings. High-yield savings accounts and CDs are two effective methods that can strengthen your financial health over the long term. For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals with confidence.

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