When most folks are picking a bank account, whether it’s a savings account or a certificate of deposit (CD), they typically gravitate toward the ones with the highest interest rates. It’s easy to see why: a higher rate often means more money in your pocket.
However, things aren’t always straightforward, especially when it comes to CDs, since they require you to lock your money away for a while, sometimes years. Savvy investors are aware of this, which is why they’re steering clear of short-term CDs even though these currently have the highest interest rates. Let me explain why and suggest where your money might be better off.
Interest Rates Aren’t Everything
The interest rate, along with the time you invest your money, determines how much you earn. Imagine you’re deciding between a 6-month CD or a 12-month CD, each offering a 5.00% APY. With a $10,000 investment, the 6-month CD would yield around $247, while the 12-month CD would bring in $500. Not exactly rocket science: longer investments lead to bigger returns.
But the longer your money is tied up, the more you need to consider. Hence, banks usually offer higher rates on long-term CDs to persuade people into investing for longer periods. Recently though, high inflation has catapulted short-term CD rates above long-term ones, leaving investors puzzled about the best place for their funds.
Our Picks for the Best High-Yield Savings Accounts of 2024
Breaking it down, let’s explore some top choices:
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American Express® High Yield Savings: Offers a competitive 4.00% APY.
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Capital One 360 Performance Savings: Offers a 3.90% APY, with rates that can change. Check their website for the latest updates.
- Western Alliance Bank High-Yield Savings Premier: Currently providing an impressive 4.46% APY, with a minimum initial deposit of $500.
With inflation cooling off and rates on the decline, future CDs are likely to offer less in interest. If your plan is to invest for a few years, jumping into a short-term CD right now might not be the smartest move.
Consider a scenario where you have $10,000 to put in CDs over three years. You’re choosing between purchasing three 1-year CDs and one 3-year CD. The 1-year CD presents a tempting 5.00% APY now, but the 3-year option only offers a 4.00% APY. Fast forward a year, and the 1-year rate might sink to 3.50%, and by year three, it could dwindle to 2.00%. Here’s how that would play out with your balance:
| Year (1-Year CD Rate/3-Year CD Rate) | Three 1-Year CDs | One 3-Year CD |
|---|---|---|
| Year 1 (5.00%/4.00%) | $10,500 | $10,400 |
| Year 2 (3.50%/4.00%) | $10,868 | $10,816 |
| Year 3 (2.00%/4.00%) | $11,085 | $11,249 |
In this example, locking in the higher rate for longer with a 3-year CD would have been a wiser choice, offering a slight advantage over the short-term CD route.
Where Should Your Money Go Instead?
Where to stash your cash really depends on your comfort level with risk and when you’ll need the funds. If CDs are your choice, medium to long terms are presently preferable—just be ready to have limited access to your money for a while. Our experts have compiled a list of some of the top CD options available today.
While CDs work for some, they might be too conservative or too risky for others. For an emergency fund or cash you’ll need soon, high-yield savings accounts offer a far better solution. Check out our list of top high-yield savings accounts to see those offering 4.00% APY or better right now.
For those focusing on longer-term growth, say seven years or more, investing in the stock market might be the way forward—assuming you’re okay with the potential risk. While you could face some losses, the gains might exceed the best CD rates, providing a much better return on your investment.
