3 times you should choose a high-yield savings account over a CD

Both high-yield savings accounts and certificates of deposit (CDs) have a lot to offer savers today. 

These accounts are popular options for keeping your money safe, thanks to FDIC insurance on deposits and helping boost your balances with great APYs. Given the current high interest rate environment, you can earn upwards of 4% to 4.5% — and sometimes even over 5% APY — on either type, though CDs generally have slightly higher rates overall. 

But while both CDs and savings accounts can work together to help you reach your financial goals, they also serve different purposes. In fact, there are specific cases in which a high-yield savings account, with added flexibility and different account features, may be the better option.

Want to earn more on your savings today? Compare the best savings rates available now here. 

3 times to choose a high-yield savings account over a CD

Even if both types of accounts have a place in your overall financial plan, these are a few examples of when it may be beneficial to choose a high-yield savings account rather than a CD. Here are three: 

When you want to make contributions

If you're just beginning to save, you may not yet have a large balance. Instead, it's common to create a savings plan from your monthly budget and make regular contributions toward your savings goals. In this case, a high-yield savings account is definitely the better choice for you.

CDs require you to make a deposit at opening, on which you'll earn interest throughout the CD term. Most often, you won't be able to make additional contributions after opening. That means you'll need the full balance saved before you open your account.

High-yield savings accounts, on the other hand, can be great for active savers. You can make regular contributions to your principal, and help your overall balance grow even more as interest accrues over time.

Start earning more interest on your savings today and compare the best rates available now!

When you're saving for emergencies

You can use a CD for your emergency fund, especially if it has a short term length or is a no-penalty CD. But a high-yield savings account is the better option for most savers. That's because savings accounts are more flexible for transferring money out of your account when you need it

If you have your emergency savings in a CD and take on an unexpected expense, you'll risk an early withdrawal penalty fee. This fee is typically a portion of your interest earned, and could potentially wipe out all your interest earnings (and in some cases even part of your principal). Even beyond the penalty, withdrawing from a CD early means you'll need to take your entire balance, rather than just the amount you need.

Because high-yield savings accounts allow you to make withdrawals at any time and in any amount, they're the more flexible option for using your emergency savings without penalty whenever you need it. Some banks may limit savings transfers to no more than six per month, but this is still a much more generous threshold than with CDs. 

When you think interest rates could rise

A big difference between savings accounts and CDs is the type of interest they earn. CDs carry fixed interest rates, which remain the same throughout the lifetime of the account. High-yield savings accounts, in turn, have variable interest rates that move up and down over time, generally following federal interest rate trends.

For savers, that means it's best to maintain flexibility with a high-yield savings account when rates are rising, then lock in a great CD rate just before rates move back down again. 

In today's economy, the choice can be a bit of a challenge. Most recently, the Fed opted to pause interest rates — though they may still resume additional rate hikes before the end of this year. If you believe rates could still move upward across the current rate cycle, it may be a good choice to stick with a high-yield savings account.

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The bottom line

Saving money in the right type of account can make a big difference in helping you reach your goals. While CDs are great for some types of savings, high-yield savings accounts can be most beneficial for savers looking to make contributions over time, save for emergencies or take advantage of rising interest rates. If that aligns with your goals, start today by comparing the top savings rates for your balance.