As inflation continues to rise and the benchmark interest rate remains at a 22-year high, many Americans are closely examining their personal finances. With eroded purchasing power and higher borrowing rates, individuals are seeking ways to cut spending and protect their savings. However, leaving money in a regular savings account is no longer a viable option, as the annual interest rate is just 0.43%, according to the FDIC.
Instead, individuals are turning to high-yield savings accounts and certificates of deposit (CD) accounts, which offer significantly higher interest rates. Currently, high-yield savings accounts can provide an interest rate of 4.5% or more, while CDs offer slightly higher rates. By choosing to split their deposits between a high-yield savings account and a CD, savers can benefit from both options.
One advantage of maintaining both accounts is the flexibility it provides. While a CD offers higher interest rates, the money is locked away for the full term, and withdrawing it early would result in a penalty. On the other hand, a high-yield savings account functions similarly to a regular savings account, allowing easier access to a portion of the funds. By splitting the deposit, individuals can earn the higher rate from the CD while still having access to some of their money through the high-yield savings account.
Another benefit of splitting deposits is positioning oneself for future rate increases. CDs offer a reliable fixed rate throughout the term, regardless of fluctuations in the rate environment. However, high-yield savings accounts have variable rates that align with the economy and the federal funds rate. By maintaining both accounts, individuals can earn interest at the locked CD rate while also taking advantage of potential rate increases with the high-yield savings account.
Furthermore, splitting deposits can enhance financial literacy. Opening both a high-yield savings account and a CD allows individuals to gain a better understanding of these financial tools. This knowledge can help them make informed decisions about their financial goals and determine which option suits them best.
In light of the current economic conditions, experts recommend considering both high-yield savings accounts and CDs for depositing amounts such as $1,000 or more. By doing so, individuals can benefit from the flexibility of a high-yield savings account, the predictability of a CD, and the opportunity to earn higher rates. Additionally, individuals can avoid the limitations of regular savings accounts, which offer low interest rates and fail to keep up with inflation.
Ultimately, the decision between a high-yield savings account and a CD depends on personal circumstances. If there is uncertainty about needing the funds in the near future or if an individual believes interest rates will rise again, a high-yield savings account may be the better option. On the other hand, if an individual believes interest rates have peaked and desires predictability and protection against impulse purchases, a CD may be more suitable.
Regardless of the chosen option, it is crucial to avoid leaving money in a regular savings account. By taking advantage of high-yield savings accounts or CDs, individuals can grow their savings at a quicker pace and protect their funds from inflation.