High-yield savings accounts versus CDs: Where $10,000 earns more
A new analysis suggests that while high-yield savings accounts and certificates of deposit offer similar yields, the choice between the two depends on whether investors prioritise liquidity or rate certainty.
A financial analysis published by Yahoo Finance has compared the one-year interest earnings of a $10,000 deposit in high-yield savings accounts (HYSAs) versus certificates of deposit (CDs). The report highlights that while average savings accounts currently earn just 0.38 per cent annual percentage yield (APY), competitive HYSAs and 12-month CDs can both yield upwards of 4 per cent APY.
The analysis calculates that a $10,000 deposit in a competitive 12-month CD earning 4.15 per cent APY would yield $415 over one year. In comparison, the same amount in an HYSA earning 4 per cent APY would earn $369. According to the Federal Deposit Insurance Corporation (FDIC), the average 12-month CD rate is approximately 1.71 per cent APY, meaning the most competitive products offer significantly higher returns than the market average.
The primary distinction between the two instruments lies in rate stability and liquidity. CDs offer a fixed rate for the duration of the term, locking in the guaranteed APY for the entire period. However, this comes with restricted access to funds, as early withdrawal penalties can reduce or eliminate interest earnings if the deposit is accessed before maturity.
Conversely, HYSAs feature variable interest rates that can fluctuate with broader economic conditions. While this means the rate could rise or fall at any time, HYSAs provide greater liquidity, allowing depositors to access their cash without penalty. The analysis notes that if interest rates rise after opening an account, an HYSA is advantageous, whereas a CD is preferable if rates fall, provided the investor does not need to make early withdrawals.
The report advises that the choice depends on individual financial goals. HYSAs are considered ideal for emergency funds due to their accessibility, while CDs are better suited for savings with fixed timelines, such as a purchase planned at least 12 months out. For those seeking a balance between rate certainty and periodic access to funds, the analysis suggests a "CD laddering" strategy, which involves opening multiple CDs with staggered maturity dates.
Investors are also urged to consider factors beyond the headline rate, including minimum deposit requirements, promotional versus ongoing APYs, and compounding frequency. The report recommends looking at the APY, which accounts for compounding, rather than the base interest rate, and to be aware of fees such as monthly maintenance or excess transaction charges that can erode earnings.
