CD rates at online banks will earn you more interest in a day than a y

Thanks to the Federal Reserve’s streak of hikes to the federal funds rate, interest rates on all types of consumer financial products have soared in 2023. That means borrowers are paying more on debt, such as personal loans, credit card balances, and mortgages than they have in decades. 

Interest rates on savings accounts at the big banks are right about where they’ve always been, around 0.10%-0.20%. But if you’re open to considering an online bank, the opportunity is much bigger. Whether you opt for a high-yield savings account or a CD, you can find accounts that deliver APYs higher than 5.00%. 

How does that translate in terms of hard cash? Let’s say you have $10,000 to deposit and don’t plan on adding any money to the account for a year.

A $10,000 deposit will earn $1 in interest over a year.

That same $10,000 deposit will earn $525 in interest over a year.

In one year, the $10,000 deposit will grow by $560. (You can get this rate right now on a 1-year CD at Limelight Bank.) 

To put it another way, in either a high-yield savings account or the 1-year CD at one of the best online banks, you will earn more interest in one day than you would after a year in a savings account at many big traditional banks.

The biggest decision you need to make is how long you can afford to lock away your money. In this article we’ll explain the difference between high-yield savings accounts and CDs, and how to put together the most beneficial mix for your finances.

CDs allow you to lock in an interest rate for the entire term of the CD. That means even if macroeconomic conditions change and interest rates elsewhere go down, you’ll still get the same return on your CD as promised at the outset. The tradeoff is that you need to leave your money in the CD for that entire time period or pay an early withdrawal penalty (unless you opt for a no-penalty CD).

CDs come in a range of terms with differing minimum deposit requirements, so you can find one that suits your financial situation. The most common terms are between 3 months and 5 years, though 1-year CDs are generally offering the highest rates right now. Here are a few of the best 1-year CD rates:

APY: 5.60%
Minimum deposit: $1,000

APY: 5.50%
Minimum deposit: $10,000

APY: 5.50%
Minimum deposit: $25,000

APY: 5.40%
Minimum deposit: $1,500

APY: 5.36%
Minimum deposit: $0

APY: 5.35%
Minimum deposit: $1,000

APY: 5.25%
Minimum deposit: $0

CDs not only help you hedge against market fluctuations; they also keep your money safe. As long as a bank is a member of the FDIC (as all the banks listed in this article are), then your money is insured up to $250,000 per depositor. 

When the CD term is up, you’ll typically have about a week to decide what to do next. Options include renewing the CD at the current rate, rolling the money into a different account, or withdrawing it. If you opt to do nothing, the bank will renew the CD on your behalf.

Looking for more liquidity? Next up: everything you need to know about high-yield savings accounts.

Interest rates on high-yield savings accounts are also excellent right now. Rates are peaking above 5% for the first time in more than a decade-and-a-half thanks to not just the Fed’s rate hikes, but also the proliferation of online banks. Online banks don’t have to pay for maintaining physical locations, and they pass their savings on to customers in the form of higher interest rates.

Unlike CDs, high-yield savings accounts allow you to access your money whenever you want, though some may limit you to six or fewer withdrawals a month. That makes high-yield savings accounts a perfect place for saving toward goals, like a down-payment on a house or a big vacation. (High-yield savings accounts at FDIC-insured banks are protected up to $250,000 per depositor, just the way CDs are.) 

Interest rates on high-yield savings accounts are variable, which means they can go up or down depending on what’s going on in the larger market. While the highest APYs on savings accounts aren’t as high as ones on the best CDs, they’re still quite good these days, and having your money readily available may make the slightly lower rate worth it to you. Here are a few of the top high-yield savings accounts right now:

APY: 5.25%
Minimum balance: $0

APY: 5.25%
Minimum balance: $0

APY: 5.20%
Minimum balance: $0 ($100 to open)

APY: 5.05%
Minimum balance: $5,000 

APY: 5.01%
Minimum balance: $0 ($10 to open)

Since high-yield savings accounts don’t have time-bound terms, you can keep your money in the account for as long as you want. You can also add to it as often as you like. Just make sure that you understand any minimum balance requirements for receiving the best APY and/or avoiding monthly maintenance fees.

Opening a new high-yield savings account isn’t as complicated or time consuming as you might think. It’s simple to shop around online for a combination of APY, fees, minimum balance requirements, and other factors that work best for your situation. Once you select an account, it takes just a few minutes to set up the account.

For the vast majority of people, the old adage holds true when it comes to their money: Don’t put all your eggs in one basket. Translated to your finances, that means you’ll want to have a healthy mix of accounts that diversify your risk while helping your money grow. Consider the following types of accounts:

High-yield savings account: This is where you’ll build your emergency fund and save toward shorter term goals. In general, you’ll want to have three to six months of living expenses on hand in case you experience a financial disruption like a job loss. Money in a savings account is safe as long as the bank is FDIC insured.

CD: A CD will typically grow your money slightly faster than a savings account. However, the money will not be accessible until the CD matures. CDs are a great place to save toward longer term goals while still having the peace of mind that your money is secure.

Checking account: You use a checking account to pay for everyday expenses, including your rent or mortgage, utility bills, and credit card bills. In most cases you can withdraw and deposit money as often as you’d like, with no penalty, though the tradeoff is that few checking accounts earn interest. You’ll want to keep enough money in a checking account to comfortably pay your bills each month without overdrawing the account but not so much that you miss out on higher interest rates offered by other types of accounts. Checking accounts are also FDIC insured. However, you’ll want to make sure that you trust anyone you pay from this account, as FDIC insurance does not cover scams that trick you into paying money.

Investment accounts: These could include a retirement account like an IRA or an employer-sponsored 401(k), a money market mutual fund, a portfolio you build with a financial advisor, or any combination of these. Investment accounts are the most reliable way to build long-term wealth, but they do carry some risk. The accounts will rise and fall with fluctuations in the stock market; however, over many years people typically come out ahead if they’re able to ride out the ups and downs.

Right now, interest rates on high-yield savings accounts and CDs are the highest they’ve been in recent memory, thanks in part to the Federal Reserve. However, now that inflation is starting to cool, many analysts believe the Fed will begin winding down its rate-hiking campaign by the end of the year. 

That means that now is the time to strike if you want to take advantage of red-hot interest rates. What’s more, if you open a CD with a term of 1 year or more, you’ll be able to lock in an excellent rate that would carry you through if interest rates begin to fall. Future you will be glad you did it.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the Home and Financial Services Editor for the Hearst E-Commerce team. Email her at [email protected].