While consumers continue to battle inflation and the higher interest rates meant to tamp it, there aren’t many attractive investments and savings vehicles to explore. With higher rates come higher borrowing costs for everything from credit cards to personal loans and mortgages. But there has been a silver lining for savers: significantly higher interest rates on high-yield savings and certificates of deposit accounts.
Compared to the minimal 0.43% being offered on regular savings accounts, savers are essentially losing money by not depositing $1,000, $5,000 or more into one or both of these types of accounts. And with the Federal Reserve discussing an additional rate hike (or more) for later this year, now is the optimal time to get started. But which should you open before another Fed rate hike? Or should you proceed with both?
Should you open a CD or savings account before another Fed rate hike?
CDs and high-yield savings accounts both have substantial benefits now. That said, the decision to open either ahead of another potential Fed rate hike is a personal one. Here’s what you should know to better inform your decision:
Why you may want to open a CD now
CDs generally have slightly higher interest rates than high-yield savings accounts do (rates are at about 5% for a CD versus the 4.5%, approximately, that can be secured with a high-yield account). So if the interest rate is your top priority, you may want to open a CD now.
That said, interest rates may soon head upward once again — and the interest you can earn on a CD may rise with it. While that increase isn’t expected to be substantial, every little bit helps. And waiting to see what the Fed does next could be worth it for you.
However, if the Fed keeps rates the same, or doesn’t raise them again for a few more months, you will have lost out on a few interest-earning months while waiting for a better opportunity. Remember: CD terms and the interest rates that accompany them are locked until the CD expires. So you’ll need to time your account opening correctly to earn the most interest.
Why you want to open a high-yield savings account now
While the rates on high-yield accounts aren’t likely the very highest that can be earned now, they’re still many times higher than regular savings accounts. And they could go higher again, depending on what the Fed does. And, unlike CDs, which lock savers in at the rate they open their account with, high-yield savings accounts have variable interest rates. So savers won’t have to do anything to their account if rates again tick up — the account will automatically adjust to the higher prevailing rate.
Compared to CDs, this may be the better option for those savers who want the flexibility to take advantage of any future rate hikes. But they’ll likely have to do it at a lower starting interest rate than they would have gotten with a CD. Still, it may be worth it in order to be best positioned for any additional Fed activity.
When you may want to open both
With all of the above considerations in mind, many savers may elect to proceed by splitting their funds into both account types at the same time. This dual approach can let savers earn money immediately with a high-interest-earning CD while also better positioning themselves to earn even more with a high-yield account if or when rates rise again. No matter which option you choose — or if you decide to do both — just don’t let your money stagnate in a regular account. With the benchmark interest rate the highest it’s been in decades, now is a great time to earn more on your savings. Get started here now!