Why a CD is better than these 4 popular alternatives

Although no one likes inflation, the higher interest rates we experience today persistent inflation problems have stimulated have been a boon for many savers. In recent months, some accounts have even offered rates of 5% or more, a significant jump from the 1% rates seen just a few years ago.

But not all account types allow you to take advantage of it. high rates in the same way – or for the same duration. So it’s important to choose the right types of accounts for your money, especially right now.

And if you’re trying to maximize the interest you earn on your savings, here’s why a certificate of deposit (CD) This particular account might be a better option than many other account types right now.

Find out what the best current CD account options are online.

Why a CD is better than these 4 popular alternatives

When it comes to your money, experts say a CD could make a lot more sense than these alternatives. Here’s why:

A traditional savings account

Traditional savings accounts have a lot lower rates than most CDs. In fact, according to the Federal Deposit Insurance Corp., the average savings account rate is currently 0.46%. CDs, on the other hand, offer much higher prices on average. In fact, many financial institutions and online banks offer CD with 5% APY and above right away.

“CDs pay more interest than the conventional savings account,” says Christopher Naghibi, executive vice president of First Foundation Bank in Irvine, California. “It’s also set for a fixed term, so it’s a good option for someone whose money is clear and doesn’t need access to funds.

This last part is essential, because many CDs come with early withdrawal penalties. So if you think you need access to your money before your CD matures, a savings account may make more sense.

Compare your best CD account options now.

A high yield savings account

High Yield Savings Accounts and CDs have more comparable interest rates than traditional savings accounts, but often, CDs will have Slightly higher annual percentage yields (APY) – at least according to certain CD conditions.

They also allow you to block this rate for a longer period. However, savings account rates are variable and often change based on Federal Reserve movements and market conditions.

“If you do not need access to your money during the term of the product, a CD may be a better choice for you because you’ve locked in your interest rate,” says Ben McLaughlin, president of banking platform Raisin. “With a high-yield savings account, the interest rate can go up or down.”

Just keep in mind that the money in CDs is not easily accessible.

“If you have an emergency fund that you might need to access at any time in a worst-case scenario, you may prefer a savings account,” says Naghibi.

A money market account

Money market accounts tend to offer higher interest rates than traditional savings accounts, although they often impose limits on the number of transactions you can make and the number of checks you can issue. There may also be minimum balance requirements.

“CDs typically offer higher interest rates than money market accounts, but with less liquidity,” says Taylor Kovar, a certified financial planner at 11 Financial in Lufkin, Texas. “Money market accounts offer more flexibility in accessing funds, but may generate lower returns.”

Like savings accounts, money market account rates change often because they are variable. This can be good or bad, depending on market conditions.

“CDs are generally best for savers who don’t need immediate access to their money and want to lock in a certain rate,” says McLaughlin. “With a money market account, your cash is more accessible but your rate is variable. If you suspect rates will rise, a money market account may be a good solution, but when you anticipate rates falling, savers may want to lock in at a great rate while they can.

The Federal Reserve should cut interest rates at some point this year, but this will depend on how the inflationary environment evolves. But if the Fed cuts rates, CDs might be a better option for maximizing your interest income in 2024.

A high-yield current account

Most checking accounts do not pay interest, and even those that do, like high yield checking accounts, offer low APYs compared to many other interest-bearing options. For this reason, CDs are almost always the better choice over checking accounts if you’re looking to grow your funds.

But again, CDs can make it difficult to access your money if you need it. before the account reaches maturityso they are best if you know you don’t need the funds for a specific period of time.

A CD might also be a better choice if your finances are unpredictable or you don’t know how much you’ll use the checking account.

“High-yield checking accounts may have requirements such as a minimum balance, making a minimum number of transactions each month, or receiving a certain amount of direct deposits,” says McLaughlin. “Be sure to read the fine print to fully understand the terms and conditions of the account you are considering.”

The essential

CDs are often the best choice to maximize your interest, but they are not suitable for everyone. On the one hand, they can make it difficult to access your money. If you need money urgently, you could pay a penalty for withdrawing money too early.

“Your money is inaccessible for the duration of the product terms, unless you want to incur a penalty for withdrawing before it matures,” says McLaughlin.

Some banks also offer CD without penalty, which you may want to consider if you’re not sure when you’ll need the money. Just be warned: “These generally offer lower interest rates,” says McLaughlin.