{"id":4110,"date":"2023-05-04T10:37:19","date_gmt":"2023-05-04T14:37:19","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/cds-vs-high-yield-savings-accounts-where-can-you-earn-5-5-after-feds-rate-hike-this-is-time-sensitive\/"},"modified":"2023-05-04T10:37:19","modified_gmt":"2023-05-04T14:37:19","slug":"cds-vs-high-yield-savings-accounts-where-can-you-earn-5-5-after-feds-rate-hike-this-is-time-sensitive","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=4110","title":{"rendered":"CDs vs. high-yield savings accounts \u2014 where can you earn 5.5% after Fed\u2019s rate hike? \u2018This is time-sensitive.\u2019"},"content":{"rendered":"

Hello and welcome to Financial Face-off, a MarketWatch column where we help you weigh a financial decision. Our columnist will give her verdict. Tell us whether you think she\u2019s right in the comments. And please share your suggestions for future Financial Face-off columns by emailing our columnist at lalbrecht@marketwatch.com.\u00a0<\/em><\/strong><\/p>\n

Higher interest rates have made it more expensive to carry a balance on your credit card or take out a car loan, but on the flip side, there\u2019s an opportunity to earn more interest on cash savings. You can do this by opening a high-yield savings account or buying a certificate of deposit (CD). (This column will focus on those two options; you can read about other cash investments here.)<\/p>\n

\n

A high-yield savings account is a bank account that pays better interest than a traditional savings account. Savers can now get annual percentage yields (APYs) above 5% on some high-yield accounts, according to DepositAccounts.com. Online-only banks often offer the best rates on this type of account because they don\u2019t have the expense of maintaining physical branches, said Ken Tumin, senior industry analyst at LendingTree and founder of DepositAccounts.com.<\/p>\n

A CD is an account in which you deposit money and then keep it there for a certain period, like six months, one year or five years. At the end of that period, you can withdraw the money plus the interest it\u2019s earned. At the moment, some CDs are earning as much as 5.5%, according to DepositAccounts.com.<\/p>\n

So if you\u2019re looking for a place to park cash, does a high-yield savings account or a CD make better sense?<\/p>\n

Why it matters<\/h6>\n

\u201cNot too long ago, it didn\u2019t really matter what you did with your cash and now all of the sudden it\u2019s extremely important,\u201d said Grant Meyer, a certified financial planner and founder of GTS Financial in Bloomington, Minn.<\/p>\n

That\u2019s because the Federal Reserve embarked on a series of interest rate hikes last year that continued Wednesday when it moved its benchmark rate up to a range of 5% \u2013 5.25%. When rates first started going up in 2022, savers went on the hunt for short-term ways to stash cash. They wanted to avoid getting locked into a particular rate while rates were on a swift upward trajectory.\u00a0<\/p>\n

\u201cNow it\u2019s the exact opposite,\u201d Meyer said. \u201cYou want to consider locking in long-term because, most likely, we\u2019re not going to see substantially bigger increases. The rates are around as good as they\u2019re going to get. It\u2019s definitely worthwhile, while you can, to lock this in. This is time-sensitive. This is something where six months go by, you put it off, you may not be able to get this rate again.\u201d<\/p>\n

Indeed, the Fed signaled Wednesday that it could be done lifting rates for the time being. The Dow Jones Industrial Average
\n DJIA,
\n -1.10%<\/bg-quote>,<\/span>
\n Nasdaq Composite Index
\n COMP,
\n -0.66%<\/bg-quote>
\n and S&P 500
\n SPX,
\n -0.88%<\/bg-quote>
\n were all down slightly on Thursday morning after the Fed\u2019s decision. <\/p>\n

While CDs on average have better rates than high-yield savings accounts, they\u2019re not for everyone. Your cash is essentially inaccessible until the CD term ends, and if you need to withdraw money before then, you\u2019ll get charged a penalty. With high-yield savings accounts, you can usually take money out at any time, though accounts typically limit the number of withdrawals you can make in a month.\u00a0<\/p>\n

The verdict<\/h6>\n

High-yield savings account.\u00a0<\/p>\n

My reasons<\/h6>\n

They may not grow your cash as much as a CD would, but I\u2019m choosing high-yield savings accounts as the winner because Americans need all the help they can get when it comes to building savings. Financial planners generally recommend having a cash emergency fund that could cover three to six months of your expenses. But 32% of households say they wouldn\u2019t be able to pay for a $400 unexpected expense like a car repair or a surprise medical bill with cash or its equivalents, according to the Fed\u2019s latest report on Americans\u2019 economic well-being.\u00a0<\/p>\n

For people who are just starting to build their cash savings, high-yield savings accounts are a quick and easy way to jump in. Many don\u2019t charge fees or have minimum balances, so you can start with next to nothing.\u00a0 They\u2019re also very liquid, meaning that your cash stays pretty much at your fingertips, though it can sometimes take a few days to transfer money from a high-yield savings account to a checking account, Tumin noted.<\/p>\n

But be aware that the term \u201chigh-yield savings account\u201d has no formal definition. Banks can slap that label on any account. It\u2019s up to you to check the rate that a bank is offering and compare it against other banks and credit unions (look at local or smaller banks too, because they\u2019ll sometimes have better rates than big national banks).\u00a0<\/p>\n

Remember that the rates on high-yield savings accounts are variable. That means they can change at any time. Someone deciding between a one-year CD with a 5% rate and a high-yield savings account with a 5% rate might want to go with the high-yield savings account so they could easily get their hands on their money, Tumin said. \u201cThe only issue with that is that it might change into a falling rate environment in the next few months, and by the end of year instead of being 5%, that savings account might be paying 2% or 3%, for example. If you had that CD you\u2019d still be getting 5%,\u201d he said.<\/p>\n

Is my verdict best for you?<\/h6>\n

On the other hand, rates on CDs appear to be hitting their peak, so this is your chance to lock in those higher-than-usual yields. Once you\u2019ve established a cash emergency fund, CDs can be one way to boost yields on your cash. Some people even build CD \u201cladders\u201d to protect their cash.<\/p>\n

There\u2019s one quirk to be aware of at the moment with CDs. Traditionally, CDs with the longest terms (like five-year ones) have the best rates. But at the moment shorter-term CDs are offering higher rates than longer term ones, a phenomenon known as an \u201cinverted yield curve.\u201d This can signal a pending recession, which is relevant here because the Fed would likely lower rates in the event of a recession. That\u2019s another reason you may want to act fast to take advantage of higher rates.<\/p>\n

\u201cIn the end, it\u2019s important to understand when you need your money and scan the landscape for the various types of products and their accompanying interest rates before committing to any one of them,\u201d said Eric Roberge, a certified financial planner and founder of Beyond Your Hammock.\u00a0<\/p>\n

\u201cCDs and savings accounts can be great for securing money you need in the short term, but they have historically offered interest rates under the average long-term inflation rate,\u201d he added. \u201cSo, if safety is your goal, they can be great. But, if growth is your goal, then you may want to look at vehicles that expose your money to a little more risk, but also more return in exchange for that increase in risk.\u201d<\/p>\n

Tell us in the comments which option should win in this Financial Face-off. If you have ideas for future Financial Face-off columns, send me an email at lalbrecht@marketwatch.com.<\/em><\/strong><\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Hello and welcome to Financial Face-off, a MarketWatch column where we help you weigh a financial decision. Our columnist will give her verdict. Tell us whether you think she\u2019s right in the comments. 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