CD vs. High-Yield Savings Account: Which is Better? CD vs. High-Yield Savings Account: Which is Better?

Two of the most common low-risk, interest bearing savings options are Certificates of Deposit (CDs) and high-yield savings accounts. Both have unique benefits and drawbacks depending on your individual savings goals, and below we'll dive into more about how each of these types of accounts works, their benefits, drawbacks, and how you might choose between the two.

What is a Certificate of Deposit, or CD, Account?

A CD is a type of interest-bearing account opened for a specific period of time that earns a fixed income on the initial amount deposited. CDs generally have a higher interest rate than traditional savings accounts, but once you open the account you won't be able to withdraw money until the account's maturity date without incurring an early-withdrawal penalty.

CD's come in terms ranging from a few months to five years, with the term largely determining the interest rate you receive on the account -- generally the longer the CD term the higher the interest rate. Other than these distinguishing features, CDs function similarly to traditional savings accounts in that you'll receive monthly or quarterly statements and compounded interest payments added directly to your account balance

What Are the Key Benefits of CDs?

There are several features that make CDs a good investment option if you're looking to grow your savings:

1. Guaranteed Return on Investment: When you open a CD account, you'll lock in an interest rate for a set term. This means that even before you commit to opening an account you can easily predict what your return on investment will be (this is particularly easy with Leader Bank's CD Comparison Calculator). 
2. Fixed Interest Rate:With a fixed-rate CD, you won't need to worry about market fluctuations negatively impacting your rate once your account is opened. CD's have fixed rates, so you'll know that the CD rate you lock in when you open your account will remain the same until your account matures -- even if interest rates fall in the market.
3. Higher Rates Than Savings Accounts: CD's generally have higher interest rates than regular savings accounts (and sometimes even high-yield savings accounts).
4. Flexible Term Options: Most financial institutions offer a wide range of CD terms anywhere from a few months up to five years. This allows you to choose a term that aligns with your savings goals and will help ensure that you have access to your funds when you need them.
5. FDIC Insured: The Federal Deposit Insurance Corporation (FDIC) will insure funds in your accounts at one financial institution (including your CDs) up to an aggregate amount of $250,000. At Leader Bank, you'll have access to additional Federal Deposit Insurance Corporation coverage for your deposits up to $100 million through the IntraFi Cash Service (ICS)

What Are Disadvantages of CDs?

It's worth mentioning that while CDs have many advantages like those mentioned above, there also some drawbacks to take into consideration before opening an account:

1. Limited Access to Your Funds: You won't be able to access your initial investment (or the interest you've earned) during your account term without incurring an early withdrawal penalty.
2. Early Withdrawal Penalties: Most financial institutions will assess you a fee or penalty if you withdraw funds from your CD before it matures. These will be clearly outlined in your account terms, and are most often charged as several months' interest -- the longer the account term the more month's interest you could be assessed.
3. Fixed Interest Rate:While this can be a benefit of CDs if market interest rates fall after you open your account, it can be a drawback if market interest rates rise once you've locked your CD rate in.
4. Lower Potential Earnings Than Other Investments:As we mentioned above CD's are a low-risk investment because they offer a guaranteed rate of return. And while CD's often offer better rates than a traditional savings account, they typically earn less than stocks and bonds over time.

What is a High-Yield Savings Account?

Like the name indicates, a high-yield savings account (sometimes referred to as an HYSA) is a type of savings account with an interest rate that is significantly higher than a traditional savings account. Like CDs, high-yield savings accounts are an interest-bearing deposit account, but unlike CDs they allow regular access to your initial investment without penalty. Another key difference is that high-yield savings accounts have variable interest rates, meaning your interest rate can change after you open your account as interest rates are hiked or cut by the Federal Reserve.

What Are the Key Benefits of High-Yield Savings Accounts?

Like CDs, high yield savings accounts have some key benefits that can make them a lucrative option depending on your personal finance goals:

1. Higher Interest Rates Than Conventional Savings Accounts: While their rates may not match those of CDs, high-yield savings accounts offer higher rates than regular savings accounts. If you need regular access to your initial investment but still want to get more return on your investment, a high-yield savings account can be a happy medium between CDs and standard savings accounts. 
2. Low Risk: Like CDs, high-yield savings accounts are a good, low-risk option for growing your savings when compared to, for example, volatile stock investments. You won't be at risk of losing your initial investment with a high-yield savings account.
3. Liquidity: Your initial investment won't be locked up for any period of time and you'll be able to withdraw funds as needed without being assessed a penalty or fee.
5. Rates Could Rise: With a variable interest rate, the rate on your high-yield savings account could increase after you open your account if the Federal Reserve hikes rates.
7. FDIC Insured: Like with CDs, your accounts at one financial institution (including your high-yield savings accounts) are insured by the FDIC up to an aggregate amount of $250,000 (with the option of additional insurance through IntraFi Cash Service at financial institutions like Leader Bank).

What Are Drawbacks of High-Yield Savings Accounts?

1. Lower Interest Rates Than CDs: Because they offer more free access to your funds, high-yield savings accounts often have lower interest rates than CDs.
2. Rates Could Fall:The flip side of a variable rate is that if the Federal Reserve cuts rates, the rate on your account could decrease.
3. Withdrawal Limits: While there aren't early withdrawal penalties associated with high-yield savings accounts, some financial institutions will cap how many withdrawals you can make from your account each month (Leader Bank does not enforce these limits on savings accounts).
4. No Checks or Debit Cards: High-yield savings accounts don't come with checks or a debit card, so you may need to transfer your funds to a different account to withdraw or use them.
5. Minimum Balance Requirements: Some financial institutions have a minimum balance requirement for high-yield savings accounts (Leader Bank does not), so depending on your initial investment amount this type of account could be a non-starter at some banks.

So Which is Better: High-Yield Savings Account or CD?

It should come as no surprise but the answer to this question totally depends on your personal financial goals! Both of these account types are great, low-risk ways to earn interest and bolster your savings.

If you don't need regular access to your funds and are okay giving up some liquidity, CDs are a great way to grow your savings. For instance, if you have a nest egg for a big purchase you want to make next year (think buying a new car or a home), a 12-month CD could be a great, low-risk investment option for you.

However, if you're going to need more regular access to your initial investment and don't want to tie it up in a CD, a high-yield savings account can be a smart way to increase your savings while maintaining flexible access to your funds.

How to Get Started

Leader Bank offers a range of Certificate of Deposit accounts with terms ranging from one month to five years as well as several savings accounts. Opening an account can be done online and takes just a few minutes to get started!

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