$40,000 CD vs. $40,000 high-yield savings account: 3 things savers should consider now
In a traditional economic climate, depositing a five-figure amount of money into a savings vehicle generally isn't advantageous. But the economy of recent years has been far from traditional.
With interest rates ricocheting from near record lows to their highest level in decades to falling again over the past year, it's been hard to determine what moves to make and what to avoid. But if you have tens of thousands of dollars in the bank to move around, that determination needs to be made correctly, with an informed approach. The consequences of a wrong choice could be costly.
For many savers, that still means turning to high-yield savings and certificate of deposit (CD) accounts, even for larger amounts like $40,000. Returns on both, after all, are still relatively high, and the risks of playing the stock market or investing in real estate are not applicable. Before determining which of these attractive accounts makes more sense now, however, it helps to break down a few determining factors. Below, we'll examine three to consider currently.
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$40,000 CD vs. $40,000 high-yield savings account: What savers should consider now
Here are three items to keep in mind before depositing $40,000 into either of these account types now:
The long-term interest-earning potential
Interest rates on both accounts are similar now, in the mid- to low-4% range. But rates on both have also declined, and only a CD comes with a fixed rate that will remain for the full CD term. So while it may seem like returns that can be earned are comparable now – and they are – they're unlikely to be in the future as high-yield savings account rates decline while the interest on your CD continues to compound at that high, fixed rate. Try to realistically calculate the long-term interest earning potential of each, then, to better decide which could be the more profitable home for your $40,000.
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The ability to keep a large amount of money untouched
If you do ultimately choose a CD thanks to the better returns, it may not necessarily be easy to obtain. That's because the interest will only be provided if you keep the account untouched for the full term, which can range from three months to multiple years, depending on which you choose. And that can be difficult to endure, especially with this much money and especially if the economy shifts again and you need to regain access.
An early withdrawal penalty on a $40,000 deposit, however, could easily negate all of the interest earned to that point. In other words, you should carefully determine your realistic ability to keep your money untouched with a CD. If unsure, move it into the high-yield savings account, which allows savers to maintain access instead.
The low-rate alternatives
Sure, you'll need to be strategic if depositing $40,000 into either a CD or high-yield account now. But the low rate alternative of a traditional savings account can still make this a worthwhile trade-off. Rates on traditional savings accounts are a minimal 0.39% now, according to the FDIC. That makes high-yield savings and CD account rates of 4.25% almost 1,000% more profitable.
And rates on traditional accounts, like all savings vehicles, are poised to fall further once rate cuts are issued. So, today's "low" 0.39% rate could become tomorrow's "high" one. Understanding this dynamic, savers would be better served by determining which alternative is better for their $40,000 (or if it could be more advantageous to put $20,000 in each account type instead).
The bottom line
Both CDs and high-yield savings accounts offer attractive locations for a $40,000 deposit now. To better understand their advantages, however, and to capitalize on them while rates are still high, savers should consider the above three items closely. An informed and strategic approach can be the difference between making that five-figure deposit grow further or having it whither away with a low rate, penalties and fees.