If you’re just starting as an investor, most people will tell you to invest in a high yield savings account or a CD. Both are great ways to earn a little extra on your money with high security. However, there are a few things you should know about both before you get started.
With extra cash in your bank account, you may feel like you have a big cushion. But if you want to achieve financial independence, your savings should be earning interest.
However, you don’t want to put the majority of your savings somewhere risky. What’s the point in saving all that money just to lose it on a bad bet?
We’re going to discuss two classic ways people have used to invest their money safely: High-yield savings accounts and certificates of deposit (CDs).
How high-yield savings accounts work
Both high yield savings accounts and CDs work as lending pools for banks. They lend out money held in your account to borrowers in exchange for interest. Some of this interest goes back to you. As a general rule, the less access you have to your funds, the higher rate of interest you’ll receive as you’re giving banks more freedom to use your money.
A high-yield savings account is a savings account that rewards you with a higher interest rate for allowing your money to sit in your account. Often run through online banks, most institutions require a minimum initial deposit to open the account. After that, you need to maintain your minimum balance at all times to get the best rates.
How does a CD account work?
A Certificate of Deposit (CD) is another type of savings account that pays a higher rate than a standard savings account. However, in a CD you must leave a large deposit untouched for a specific period (a fixed term). Terms can be as short as three months or as long as ten years.
Many institutions offer fixed interest rates as well. With a fixed interest rate, you are locked in at the rate that was assigned at the time of purchase while a variable interest rate fluctuates depending on market conditions.
The longer the term of the CD, the higher the interest rate. For example, if you invest for five years, you’ll get a higher rate than if you invest only for six months.
When the Certificate of Deposit reaches maturity (i.e. the fixed term has ended), you can cash out with the full interest amount, or reinvest for an additional period of time.
The differences between a high-interest savings account and a certificate of deposit account
For interest rates go to CDs
Overall, a CD offers higher interest rates than a high-interest savings account. Most CD accounts offer an annual percentage yield of slightly above 2%. High-yield savings accounts typically have lower rates, currently between 1–2%.
For liquidity, open a high-yield savings account
Another major difference between high interest savings and certificates of deposit is accessibility.
With a CD, you can’t make withdrawals before the maturity date of your investment without penalty. This might cost you several months’ worth of interest. A high-yield savings account has higher liquidity since you can still withdraw your funds to a checking account if needed.
If you plan to use your savings as an emergency fund, a high-yield savings account offers easier access than a certificate of deposit.
In terms of security, it’s a draw
In both high-interest savings accounts or bank CDs, your funds are fully protected by the FDIC and NCUA up to $250,000. They are both highly safe investment options.
CD’s can be used as collateral for loans
At banks, CDs can also be used as collateral for a loan.
While fair-rate loans are hard to acquire in tough economic times, most banks will offer low-interest rates on personal loans when a CD is used.
Should I open a high-yield savings account or a CD account?
You may be wondering between high-yield savings accounts vs certificates of deposit, which is best for you? That all depends on your circumstances.
A high-interest savings account is ideal if you think you may need to access your cash in an emergency.
On the other hand, a CD account is a good product if you want the safety of a bank along with a higher interest rate.
However, any form of investment is useless if it can’t beat inflation. Currently, it’s at 2% APY in the US. Neither a high-yield savings account nor a CD can beat that right now.
If you want to get actual returns on your investments you’re going to need a better option.
Earn 4% APY compounded every second with a Flex account
If you want to earn interest on your savings that beats inflation, you may want to explore newer options like a MyConstant Flex account.
We’re a P2P lending platform that offers you better and safer interest by letting you earn like a bank.
Our Flex investment account offers 4% APY through fully-collateralized P2P loans. You also get:
- Unlimited access to your money: Unlike with a savings account, you have full access to the money on your MyConstant account and can make withdrawals anytime you want.
- No fees: MyConstant doesn’t charge you to complete transactions like traditional banks. You can make transfers anywhere in the world for free (bank fees apply).
- No minimum balance: You don’t need a minimum account balance with MyConstant. You can withdraw as much or as little as you want.
- Global availability: Whether you’re in Asia, Africa, or America, you can transfer all earnings right from your MyConstant Flex account to your checking account.
All investment done with your money through our Flex lending pool is protected by collateral. That means that even if borrowers default, you won’t lose principal.
Investing outside of a bank isn’t the right option for everyone. However, if you’re prepared to take on a little risk to get real returns, signing up for a Flex account could be the right choice for you. Come see what we’re all about today.