Why you should split your funds between a CD and high-yield savings account now

In the current inflationary context, it may be difficult to decide where you will store your savings. No matter where you choose to do it, it’s important that your money generates a return that matches or exceeds inflation. Your savings will lose purchasing power if your returns are lower than current inflation rate (3.5%).

Two options to consider that can outpace inflation right now are certificates of deposit (CDs) And high yield savings accounts. But these are different types of accounts with very different functionality. And, given the uncertainty surrounding consumer interest rates, it may make sense to split your funds between the two. This is especially true with the Federal Open Market Committee meeting of the Federal Reserve – the meeting at which the Fed discusses monetary policy – ​​scheduled for April 30.

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Why you should split your funds between a CD and a high-yield savings account now

Are you torn between a CD and high yield savings account? “Consumers can split their savings between CDs and high-yield savings accounts to get the best of both worlds,” says Derek Miser, investment advisor and CEO of financial planning firm Miser Wealth Partners. Here are three benefits of doing it now:

We don’t know where interest rates are going

Even if the Federal Reserve were to reduce its federal funds rate in 2024, stubborn inflation and strong job growth to have altered these expectations. Given the uncertainty surrounding interest rates, splitting your funds between a CD and a high-yield savings account can be an effective savings strategy.

“By investing their savings in both CDs and high-yield savings accounts, they are able to optimize their savings strategy,” says Miser. “If interest rates change, having savings in both types of accounts can help mitigate risk by ensuring you’re not overly exposed to swings in one direction or the other.”

If interest rates fall, your fixed-rate CD will help you maintain significant income. And if interest rates rise, your variable rate high yield savings account can produce a better yield.

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Both options currently offer attractive returns

Whichever route you take, you can expect generate a significantly higher return with a CD or high yield savings account than with a traditional savings account. According to the FDIC, the average traditional savings account in the United States earns just 0.46% annual return. That’s significantly lower than the current inflation rate of 3.5%, meaning most traditional savings accounts generate an inflation-adjusted loss.

Some of today’s best High-yield savings accounts offer annual percentage yields (APY) ranging from 4.25% to 5.25%, producing a positive inflation-adjusted return. Major CDs offer APYs ranging from 4.30% to 5.36%, providing another means of producing a positive inflation-adjusted return.

CDs and high-yield savings accounts serve different purposes

It’s also important to keep in mind that CDs and high-yield savings accounts work differently in terms of liquidity.

“CDs will provide consumers with stability and high return potential over time,” Miser says. But these accounts lack liquidity. In fact, you will have to leave your money in the account for its entire duration. term (generally ranging from a few months to several years). If you leverage your CD earlier, you will generally pay a penalty.

“High-yield savings accounts provide consumers with more liquidity and accessibility,” says Miser. You can typically access money in your high-yield savings account up to six times per month. However, if you need to mine more, you could be penalized for it.

SO, CDs are an efficient home for your long-term savingsor savings you have for a specific purpose with a specific period of time, while high-yield savings accounts provide an effective home for your emergency savings, giving you more liquidity in the event of a financial emergency.

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The essential

If you’re looking for a safe place for your savings that earns a significant return, high-yield savings accounts and CDs are great options right now. Dividing your funds between the two in today’s uncertain interest rate environment can simultaneously protect your savings against inflation and interest rate risk. That is, provided you choose a high-yield CD and savings account, with APYs higher than the current inflation rate.

There are also other reasons to consider splitting your savings between these accounts. Not only do large accounts on both sides offer attractive returns, High-yield CDs and savings accounts offer different levels of liquidity. As a result, high-yield savings accounts are an attractive home for the portion of your savings that you might need to access in an emergency and CDs are an effective home for the rest.