Understanding High-Yield Savings Accounts and CDs

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Understanding High-Yield Savings Accounts and CDs

High-yield savings accounts and certificates of deposit (CDs) are excellent options for earning more interest compared to traditional savings accounts. Both are secure places to store your money, whether for short-term goals or long-term plans. However, they differ in terms of interest rates and accessibility. Let’s explore what sets them apart.

What Is a High-Yield Savings Account?

High-yield savings accounts typically offer higher annual percentage yields (APYs) than traditional savings accounts, which generally earn around 0.40%, according to the FDIC. Currently, it’s not uncommon to see rates over 4.5% for high-yield savings accounts. This allows your money to grow faster, especially if you’re building a substantial balance, like an emergency fund.

Pros and Cons of High-Yield Savings Accounts

Pros

• Higher-than-average interest rates: This helps your wealth grow faster.
• Liquidity: You can generally access your money without penalty, unless you exceed your bank’s monthly withdrawal limit.
• Safety: Most high-yield savings accounts are FDIC-insured up to $250,000 per depositor, per insured bank.

Cons

• Limited convenient withdrawals: This includes electronic transfers, though ATM withdrawals are usually unlimited.
• Potential fees: Some institutions may charge monthly fees or penalties if your balance falls below a certain amount. Overdraft and returned deposit fees may also apply.

What Is a CD?

A CD is designed for money you won’t need to access immediately. High-yield CDs offer higher APYs than most, but your funds are locked in for a predetermined period. Withdrawing money before the term ends usually incurs a fee, which can significantly reduce or eliminate your interest yield.

Pros and Cons of CDs

Pros

• Competitive interest rates: Some CDs offer much higher rates than the national average for savings accounts.
• Guaranteed returns: As long as you don’t withdraw early, your returns are guaranteed. CDs are also FDIC-insured.

Cons

• Liquidity issues: Early withdrawal usually results in penalties.
• Lower returns compared to the stock market: While CD rates can be appealing, the stock market has historically offered higher returns.

Should You Use a High-Yield Savings Account or a CD?

Both options offer higher-than-average interest rates and are considered safe places to keep your money. If you need easy access to your funds, a high-yield savings account might be the better choice, making it ideal for an emergency fund. On the other hand, a CD is suitable for money you don’t plan to use immediately, allowing it to earn interest over time.

The Bottom Line

There are various ways to grow your wealth and protect your savings. High-yield savings accounts and CDs are two effective methods that can enhance your financial health over the long term. For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to learn more about how we can assist you.

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