It’s a lucky time to have savings in the bank. Thanks to the Federal Reserve’s 17-month run-up in the federal funds rate, which drives the interest rates banks and credit unions offer, you can earn record-high yields on deposits, whether they’re in a savings account, a certificate of deposit (CD), or both. So how should you choose?
What Pays More: CDs or Savings Accounts?
Typically, CDs pay higher interest rates than even high-yield savings accounts. That’s because CDs require you to keep your funds committed for a set period of months or years. Banks and credit unions make up for that loss of flexibility by offering the incentive of a more attractive rate.
On the flip slide, you may earn a lower annual percentage yield (APY) by keeping your money in a savings account, but in return, you can withdraw funds or make additional deposits essentially anytime you like.
That said, a comparison between the best CD rates and the best high-yield savings accounts can get a bit more complicated. One reason is that there is not one set of top rates for all CDs, but rather top rates that vary by CD term. For instance, today’s top savings account rates are lower than most of the best short- and mid-term CD rates. However, they pay more than the top long-term CDs.
The CD terms paying the highest yields fluctuate over time, however, since the rates banks and credit unions are willing to pay consumers is influenced not just by where rates are now, but by where they expect interest rates to move in the future. So when they think the Federal Reserve will lower interest rates down the road, they are less willing to promise high CD rates on long terms.
You can see this is playing out right now, in a period where the Fed has already aggressively raised the federal funds rate, but with the general expectation that rates will probably come down in 2024 or 2025. As a result, the best 6-month, 1-year and 18-month CDs are paying higher rates than the best high-yield savings accounts, but long-term options like 4-year and 5-year CDs are paying less.
Should You Lock Your Rate or Keep Your Funds Flexible?
If you have so much money in cash savings that you won’t need any of it for several years down the road, the math is simple: Locking in one of today’s record CD rates for three, four, or even five years is almost certainly going to earn you more than keeping it in a savings account. Here’s why.
Savings and money market accounts pay a variable interest rate. That means the bank can change your rate at any time and without warning. Right now, interest rates are at record highs. But that party can’t last forever. And when rates begin to come down in the future, your savings account rate will come down as well.
While the big advantage of CDs is that you can lock in a rate today and keep it for the full term of the CD, not everyone has money they can afford to tie up in a CD for a long time. So if you’re not sure when you’ll need to access your money, keeping it in a liquid savings or money market account can be smarter.
Pros and Cons: High-Yield Savings Accounts vs. CDs
|High-Yield Savings Accounts||Certificates of Deposit|
|Pros||• Let you withdraw at any time (sometimes with limits)
• Rates nearly as good as CDs right now
|• Higher rates than savings accounts usually
• Fixed rate for the entire CD term—great when rates are falling
• Early withdrawal penalties may thwart the temptation to spend
|Cons||• Don’t earn quite as much as top-paying CDs
• APY can fall any time without notice
• Easier withdrawals may tempt you to spend
|• if you need the money early for an emergency, you’ll pay a penalty
• Most CDs don’t let you add more to the account
• Fixed rate could cost you in a rising rate environment
One of the best options is the hybrid strategy. You move a portion of your savings you feel comfortable living without for a while into a CD with a term that feels reasonable to you. Then you keep the other portion of your funds in a high-yield savings account. When rates go down, you’ll start earning less on the money in your savings account, but you’ll be able to access it without worry, should you need it.
Why It’s So Important to Shop Around
Whether you choose a CD, a high-yield savings account, or both, your smartest move is to shop around to find a top-paying option. The rates offered by your primary bank or credit union may be a fraction of what you can earn if you do your homework and open your account at another institution.
As you can see, the difference between the top rates in the country and the national averages is stark. You can earn three to five times more with a top CD, and as much as 12 times more with a top savings account than if you settle for an average rate.
If you’re considering a high-yield savings account for some of your funds, it’s also smart to check the best money market accounts. Sometimes they pay more than the best savings accounts, but sometimes they pay less. The only real difference is that money market accounts offer check-writing, so if that’s not a critical feature for you, your best move is to shop both types of accounts and choose whichever will pay you a higher APY.
How High Will Savings and CD Rates Go This Year?
On July 26, the Federal Reserve raised the federal funds rate for the 11th time in 12 meetings, continuing its fast and furious campaign to combat decades-high inflation. Since March 2022, the central bank has raised its benchmark rate a cumulative 5.25%, taking the fed funds rate to its highest level since 2001. In turn, rates on all kinds of bank deposit accounts have surged over the last year and a half.
But where will rates go from here? The answer is that no one knows right now. The Fed has only signaled that it will take each rate-setting meeting one by one, and decide whether to further raise the fed funds rate or hold it steady after seeing the latest economic data. The Fed will not meet again until September 19-20, meaning the current benchmark rate will stay steady at its current level for another seven weeks at least.
With the Fed’s July increase less than a week in the rearview mirror, some banks and credit unions are expected to nudge their savings and CD rates a bit higher in coming weeks. But the impact will probably be minor, since the latest Fed increase was small compared to the massive hikes of 2022 and earlier in 2023.
If the Fed opts in September—or at a later 2023 meeting—to raise the federal funds rate again, it’s reasonable to assume bank and credit union deposit rates will inch a little higher still. But it’s too soon to reliably predict what the Fed will do in those meetings.
At some point further down the road, it will become clear that the Fed has reached the end of its rate hikes and will hold its benchmark rate steady before ultimately lowering it. When that signal comes through, you can expect savings account and CD rates to begin their decline.
Rate Collection Methodology Disclosure
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide, and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account’s minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don’t meet other eligibility criteria (e.g., you don’t live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.