Bank CD or high-yield savings account? Here’s how you can choose.

Saving money is like taking a road trip–there’s often more than one way to get there. If you want to reach your financial goals faster instead of taking the scenic route, a high-yield savings account or a Certificate of Deposit (CD) can help you earn more without taking detours on the way.

Both account types are low-risk and offer a higher interest rate than a checking account or basic savings account. By placing your extra cash in a high-yield savings account or CD, you can earn a higher return on your savings.  Here’s how they work so you can choose the right one for you.

How high-yield savings accounts work

A high-yield savings account earns more interest than the typical savings account, allowing you to grow your savings without taking on unnecessary risk.

Just like a regular bank account, a high-yield savings account is typically insured by the Federal Deposit Insurance Company (FDIC). This means that your deposited money is protected up to $250,000 per depositor per bank.

You can also add money to the account at any time, making it an easy place to put your excess cash.

A high-yield savings account is a smart step for anyone on their savings journey. You can open an account immediately, and some banks do not require a minimum deposit and do not charge a monthly account fee. This makes it easier to build up a nest egg, even if you’re just starting out or can only add a small amount here and there.

A high-yield savings account is an ideal place to put money when you need easy access to your cash. It’s also a good place for an emergency fund when you don’t know if or when you’ll need it.

Keep in mind that the interest rate for a high-yield savings account isn’t guaranteed and can fluctuate with the market. This is because the rate is often impacted by decisions the Federal Reserve makes to the Fed Funds Rate, which is the interbank rate or the interest rate that banks charge other institutions to borrow funds.

If you want a guaranteed return on your cash or think rates are going to decrease, a Certificate of Deposit (CD) may be a better option. That said, even if the interest rate changes, a high-yield savings account is likely to provide a higher return on your cash than if it was in a regular savings account or interest-bearing checking account.

This type of account may limit the number of withdrawals you can make in a month. You can withdraw as much money as you want in any one transaction, but if you make too many individual withdrawals per month you might have to pay extra fees. This makes it a good account to use when you need to access the money quickly but don’t expect to make frequent withdrawals. When it comes time to spend, move the money you need over to your checking account so you can avoid transaction limits.

How CDs work

A Certificate of Deposit is another type of account where you can earn a higher yield on your cash. Unlike a high-yield savings account, you deposit the money for a fixed term, which can help you earn a higher interest rate.

Like a high-yield savings account, a CD account is also insured by the FDIC, so your money is protected. However, unlike a high-yield savings account, you can’t add money to a CD once it is opened. For example, if you open a six-month CD for $500 and want to add $250 one week later, you will need to open up a new CD for that extra $250.

People often use a CD when they have extra cash they don’t need to immediately access and would like to earn more interest on the deposit. While you don’t always need a minimum deposit amount, it usually makes sense to open a CD when you have a chunk of money set aside that you won’t need any time soon.

Unlike a high-yield savings account, the interest rate is fixed for the entire term of the CD, so you know how much you’ll earn no matter what happens in the market.

If you have a specific savings goal, a CD can help you ensure that you will achieve it. This is because CDs offer a range of terms, from three months to 5 or more years.

CDs can also help you reduce your overall risk by giving you a guaranteed return as a hedge against other investments that may go up or down.

Keep in mind that CDs let you lock in an interest rate. If you think rates will go down, this can be a win. However, if rates increase then generally your money will be locked into a lower rate over the length of the CD term, unless you withdraw early. Keep in mind that penalties may apply if you do.

When comparing a high-yield savings account and a CD, there is no wrong or right answer; it just depends on your approach to managing cash. Both offer competitive rates and are typically FDIC-insured.

In fact, many people use high-yield savings accounts and CDs together as a strategic way to grow their savings. They open a high-yield savings account as a place to put extra money and meet their liquidity needs. Once the high-yield savings account has enough cash to meet their short-term needs, they will then shift extra money into CDs that can offer a guaranteed return on cash they know they won’t need for a while.

Comparing high-yield savings and Certificates of Deposit (CD)

Your journey towards your financial goal can start right now. All it takes is three quick steps to open a high-yield savings account or Bank CD from Morgan Stanley Private Bank

1. Open your account on etrade.com in just minutes.
2. Make a deposit using any of our easy ways to fund.
3. Sit back and watch your money grow.