With the Federal Reserve hiking interest rates over the past year, investors and savers can now earn decent returns on their cash. High-yield savings accounts and certificates of deposits (CDs) are two ways to boost your returns on savings. Here’s what you should know about each and when you should choose one over the other.

What is a high-yield savings account?

High-yield savings accounts are savings accounts generally available through online banks that offer higher rates of interest than traditional bank savings accounts. The national average savings account pays a 0.25 interest rate as of June 2023, according to a recent Bankrate survey, while the best high-yield savings accounts come with interest rates above 4 percent.

High-yield savings accounts function similarly to traditional savings accounts and may limit the number of withdrawals you can make in a month. They’re also FDIC-insured, which means you’re covered up to $250,000 per account holder if your bank fails.

What is a certificate of deposit (CD)?

A certificate of deposit, or CD, also can help you earn additional income on your cash, but your money will be tied up for a specific period of time and withdrawing the money early will come with a penalty. CDs may be offered at various time periods, but they typically range from three months to five years. Longer-term CDs usually offer higher rates than short-term CDs, but this may not be true if the yield curve is inverted, which means short-term rates may be higher than long-term rates.

When your money is invested in a CD, you won’t have access to it the way you would in a savings or checking account. When the CD’s time period ends, referred to as the CD’s maturity date, you’ll have access to the money again and can reinvest in another CD or do as you wish with the cash.

If you need to access the money prior to a CD’s maturity date, you’ll pay an early-withdrawal penalty, which means you’ll lose some amount of interest and principal. However, there are steps you can take to avoid early withdrawal penalties on CDs.

High-yield savings accounts vs. CDs

High-yield savings accounts and CDs can both present solid options when it comes to your savings. Here’s what you should consider about each:

High-yield Savings Accounts CDs
Access to money? Yes, but may be limited to a certain number of monthly withdrawals. Early withdrawals typically come with penalties.
FDIC-insured? Yes Yes
Interest rate Significantly higher than traditional savings accounts May be higher than high-yield savings accounts, depending on CD term.
Good for Emergency fund savings, short-term goals Short-term goals where you’re confident you won’t need the money before the CD matures.

If you’re looking for a place to park short-term savings or money that you may need quick access to, such as an emergency fund, a high-yield savings account is going to be your best option. While CDs may offer slightly higher interest rates, you’ll have to pay a penalty in order to access money held in a CD prior to maturity.

You may want to use a strategy known as CD laddering, where you invest in CDs of various terms so you’ll have a regular series of CDs maturing in case you need access to the money. The money can then be used or reinvested in another CD to “build back” the last rung in the ladder. This strategy allows you to earn higher rates by reinvesting the money into longer-term CDs.

Bottom line

High-yield savings accounts and CDs can both help you earn additional interest on your savings. Be sure to understand the differences between the two, and keep in mind that you’ll typically pay a penalty for accessing money held in CDs prior to their maturity date. Meanwhile, high-yield savings accounts are a great place to put your emergency fund savings because you’ll still have easy access to the money if necessary.