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A CD could be a good way to earn more on your money in the long term.
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Interest rates on savings accounts and certificates of deposit (CDs) follow the federal funds rate.
You might open a CD if you can part ways with your money for at least a year to earn over 4% APY.
A high-yield savings account may be a better option if you need more immediate access to your money.
The Federal Reserve has raised interest rates several times in 2022 in an effort to address inflation levels by slowing economic activity.
When the Fed increases the federal funds rate, savings interest rates will also generally increase. If you would like to grow some of your money in a savings account, two strong options are high-yield savings accounts and certificates of deposit (CDs). Here’s how to decide which account may be the better choice for you.
Which is better, a CD or a high-yield savings account?
If you can afford to part ways with a portion of your savings for at least a year, a CD could be a good way to earn more on your money in the long term without taking on any risk.
While you can’t access money in a CD for anywhere from three months to five years without paying a penalty, you do lock in a fixed interest rate. With a high-yield savings account, you can access your cash whenever you want, but the interest rate can change at any time in accordance with the Federal funds rate.
Some of the best CDs available right now are offering annual percentage yields (APY) up to 4.50% APY for a 1-year term and up to 4.75% APY for a 5-year term. Meanwhile, the best high-yield savings accounts are mostly earning between 3.25% and 3.83% APY.
The CME FedWatch Tool predicts the Federal Reserve is more likely to increase the federal funds rate in the upcoming Federal Open Market Committee meeting than decrease the federal funds rate. If interest rates were expected to rise, it may not be the right time to open a long-term CD because you may miss out on a higher rate while your money is tied up.
No-penalty CDs do exist, which don’t levy a fee for dipping into your CD early — but the rates aren’t as competitive. The same goes for shorter-term CDs, like three or six months.
In most CDs, you can’t add or remove money from the account after the initial funding period until the maturity date or you’ll forfeit some of the interest you earned as a penalty. Most don’t allow partial withdrawals either. For those reasons, a CD is usually not the best place for an emergency fund or other money you’ll need in short order.
If you anticipate needing to dip into your CD for cash, stick to a high-yield savings account. The higher interest rate isn’t worth it if you’re going to be forced to give up the earnings anyway.