Which is Better High Yield Savings Accounts or CDs?

Choosing between high-yield savings accounts and CDs is a big deal when it comes to planning your financial journey. 

It's a bit like deciding which road to take on a map—each has its own route, and you want to pick the one that gets you where you want to go most effectively.

In this episode, I'll break down the pros and cons of each option, empowering you to make the best decision.

We'll explore the difference between CDs (not the ones you play music on; we're talking certificates of deposit) and high-yield savings accounts. Are CDs making a comeback? Should you be using high-yield savings accounts instead? I've got all the answers right here for you!

Remember, there's no one-size-fits-all solution. It all depends on your specific financial goals and circumstances. But armed with the information we discuss in this episode, you can make an informed decision that best suits your needs.

IN TODAY’S EPISODE, I DISCUSS: 

• Pros and cons of CDs and high-yield savings accounts
• How to use a CD ladder for increased liquidity
• The benefits of high-yield savings accounts for short-term needs

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If you liked this episode, you'll love these ones:

• Should You Use a HELOC to Payoff Your Mortgage?
• Making Sense of Life Insurance - What to Avoid!
• Using Target Date Index Funds to Build Wealth
• Q&A Why Taking a 401K Loan Can Destroy Your Wealth

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Transcript

1:56

Well, here's a word that you hadn't. Heard in a while CDs. Not the CDs that you play music on, because those are outdated, but CDs as in certificates of deposit. Should you be using CDs in your investing portfolio today? Look, interest rates have gone up, savings. Rates have gone up. And so the question is, are CDs coming back into play? Well, in this episode of the affluent entrepreneur show, I'm actually going to compare CDs versus high yield savings accounts. Which is better for you? This is because of a question that came in from one of my team members. So, courtney, the answer is here for you, all right? And the rest of you there. So look forward to seeing you in the episode. Let's get this done. Let's do this. This is the affluent entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, mel abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom, because that's what it really means to be an affluent entrepreneur. All right, welcome to this episode of the affluent entrepreneur show. This one, I'm going to answer a question that came in from a team member, but I'm guessing, I'm just guessing. That some of you out there have. The same question or a similar question. And it's this question of what do you do with your liquid cash? Listen, interest rates have gone up, which. Is bad if you're paying interest, if. You are borrowing money, but it's good. If you're investing money, because now we have the opportunity to get something on our money without taking as much risk. The question is, where do we put. It and why do we put it there? Should we use CDs? Should we use high yield cash accounts or savings accounts? Which is better, when to use them? What are the pros and cons? Now, before we get there, I think it's important to really understand that no. Matter what it is we're doing with. Our money, when we're talking about building. An investment portfolio or building a money machine. As I talk about it, you always make your choices. You always make your decisions based upon your life vision first. In other words, the vision for your. Life informs the plan. Okay? Too often, we want to make one off decisions. We say, hey, I got an extra $10,000. What do I do with it? Well, that's tactical. That isn't a decision that you can make without looking at the plan and say, where does it fit in the plan? So where does liquid cash fit into your plan? Is it part of the peace of mind fund or an emergency fund? Is it part of a comfort fund? Is it part of a sinking fund for maybe a wedding, a birth, a house, home improvement, a new car? What is it there for? Because when we understand the plan, the plan then will define the strategy. Okay? And now we know the strategy that we're going to use. The strategy will then inform the tactics. Now you see, you have vision plan. Strategy before we ever get to tactics. So we don't want to define tactics without knowing the plan. So assuming that you've gone through that and understand that and we talk about this as part of the wealth priority ladder as to allocation, what do you do with each dollar bill? Where do you give it a job description, what's it meant to do, how are you going to do it? So we talk about that in that perspective. But assuming that that is in play, then the question really becomes CDs or high yield cash accounts. Well, let's just kind of define them first so we're clear on it. A CD stands for a certificate of deposit, okay? Most of the time it's at credit unions and banks and that kind of thing. And what you're doing with a CD is you're promising the bank, the institution that you were going to leave the money with them for a period of time. In other words, you lock it in. And this is the way that a. Lot of times in the past, this. Is the way we got higher returns because in return for you promising you're going to leave the money with them. They said, well, we'll give you a higher interest rate. But when interest rates declined, when we. Were sitting at 2% 3% lending rates and very, very little on savings accounts like 0.2% 0.1%, CDs were useless. They really didn't produce much. And when you take into consider inflation, you were losing money. And so it wasn't something that people used a lot and wanted to lock their money up with a bank at. That low of a rate, and then. With online banks coming into play and all that stuff, the idea of high yield savings accounts, high yield cash accounts came into play, and now people started to get involved with that. Now unlike a CD, you're not locked. In to a high yield cash account if it's the right type of cash account are the ones that I kind of tell my clients to work through. So which one's better? And the answer may be either depending on your situation, but they're different. So let's walk through some of the pros and cons. Let's start with the CDs and then we'll look at the high yield savings account and then we'll talk about how I might use them and when to play around. So let's just start with the CDs and I'm going to just jump to the iPad. For those of you that are following. Along CDs from a pro standpoint. One. Of the first things is that it actually gives you some safety. Okay? In other words, what ends up happening with CDs because it's with a financial institution depending on the amount, it's typically FDIC insured. So having that FDIC insurance certainly gives you a little more safety as to the potential loss of your money. Now there are insured limits depending on the bank. Typically it's $250,000 per account. There's some nuances there that you want to make sure you're clear on. So if you're putting money in that. Is more than 250,000, some of it might be exposed and not insured. So you want to be aware of that. In fact, with some of my larger. Clients we spread money out to make sure that there is enough insurance on their liquid safe funds to make sure that they're protected and we'll see how that differs with a high yield savings get high yield cash account also. Now the other pro with the CD is that they're predictable. If they turn around and say, hey. You'Re going to get two and a. Half percent, you're going to get 3%, you're going to get 4%, 5%, then you're going to get it, you're going to get it for the term of the CD, it doesn't matter what the interest rates do. So if you buy a CD for six months at 5%, you will get six months of 5%. After the six months is up, all bets are off. Okay? And it may reset, it may be higher, maybe lower, that becomes an issue. Now the third pro I think is liquidity control. Now. You are locking your money up. In a CD but they have a definite term. So if you do that, we'll walk through the idea of a CD ladder so you understand how this can play out. You can adjust the term to fit the needs. If I know that I don't need this money for a year or 18 months or six months, I can actually pick a CD to fit my liquidity and maximize the returns during, during that. Time frame and do that. Now the last pro I think is. That it's low risk. It's not huge returns, but it's low. Risk also in the sense of. The. Fact that it is not volatile, it's not exposed to the market and you have insurance on it to make that happen. Okay, so if those are the pros. What are the cons of CDs? Well, I think that there's a couple of them. When we talk about the cons. The. First is that you get lower returns. Than you could in the market. I mean the market typically is up between eight and 11% depending on which stat you look at on the long term basis. Now in any given year it could be down 25%, up 30%. But when you look at it on. A long term basis, the returns on a CD are going to be lower than the returns in the market, but. You give up the volatility. You don't have the volatility. You're not exposed to the kinds of downs and ups that you have in the marketplace now. So it has lower returns. Number two is that there's penalties. If. You want to withdraw early. Okay? So if you try to take the money out before the term is up, it could cost you a lot. All right? They are going to penalize you based. Upon how many months and then typically it's number of months of interest. Okay? My mom had a CD. I had a CD at one point in time. And then when the High Yield Savings Accounts went up but the CDs didn't follow at the time. It actually was more beneficial for me to pay the penalty and move into a High Yield Savings Account because it literally took two months for me to recover the penalty and then move on from there. So there are early withdrawal penalties that you need to be aware of. And I know that we said liquidity. Control, but there's also limited liquidity. If all of a sudden something happens. And you need the money all of a sudden and you have it locked in, you can't get to the money. Without paying a penalty. So that is certainly one of the cons. Now the other con that sometimes we. Don'T think about is interest rate. Interest rate risk, okay? And here's what I mean by this. Is that you are in a situation where you lock yourself in to a CD rate. Let's say you say I'm going to buy a two year CD and in. That two year CD you get 4%. I don't know, I'm picking numbers out of the air. Okay? But during that two years the interest. Rates go up to five and a half percent. Well, you're locked in. So now you're at risk of being. At a lower than market rate locked in unless you're willing to take penalties. Now it works for you on the other side, say that you're at 4% locked in for two years and interest rates drop. Well, now you got the benefit of it. So there is interest rate exposure that could be a pro and a con in doing that. So that's how I see CDs. And then let's talk about the High. Yield Savings Account and how that differs. And then let's look at how CDs could be used and where I use high Yield savings versus CDs in our work. Okay? So let's just jump back and. Let'S. Look at the High Yield Savings Account. And let's look at the pros on this. And the first pro is absolute liquidity. A properly created high yield savings account has three characteristics. One, it is 100% liquid. That means that I can get at it within 24 48 hours. Two, there are absolutely zero fees involved. With it, so they're not charging you. To have your money. And three, it is 100% insured, okay? So the High Yield Savings Account gives you more liquidity than a CD because you're not locked in for a period of time, okay? Now there's some exposure there because of. The liquidity and everything. But the fact is that you can get at the money without penalties. You don't have that issue. Now the second pro is that a lot of the online accounts have higher interest rates. So you can get a higher rate. Of return with the liquidity that you can't get in a regular savings account. Now CDs have now started to catch up to the High Yield Savings account but you still have to lock in. To get the rate, okay? Now the other thing is you have safety here too, because what they do. Just like CDs, they're usually FDIC insured. Now here's the interesting thing. Many of these online banks that you. Get these high yield cash accounts from are networks of banks. And when they network banks together, they're layering the insurance limits on top of each other. For instance, some of these banks will actually insure up to three to $5 million because of the layered effect of the network of banks. Whereas if you go to a single bank, you can't get that high of insurance. So potentially when you start to deal with higher numbers, a High Yield Savings account may be better from an insurance and a safety standpoint per se to make that happen. Now what are the cons of these? And there are some cons that we need to think about. The first is that they're variable. Unlike your CD, your rate isn't locked. Your rate can change, your rate will change. And so it's really important to understand that if rates go up, you will participate. If rates go down, you will participate. You are along for the ride. You aren't guaranteed a rate of return and so you may have to deal with that. Now there's another thing to think about here is that some of these High Yield Savings accounts, they use teaser rates. So they'll give you a really high. Rate for the first 5000 or they'll. Give you the real high rate for the first three months. So beware of those teaser rates because then all of a sudden they adjust downwards. So you want to make sure that there's a consistent history of rates that are consistent with market rates. Now that also leads to this other. Element of inflation risk, okay? Because it's variable as inflation adjusts, then you may or may not keep pace. They may not adjust as fast. Now some of these will adjust really fast, others don't. So you want to be aware of. How these things play out. And then the third is opportunity cost. You're putting money into a High Yield Savings account and you're taking it out. Of the market to participate at possible higher returns. Now, I'm not saying not to use it. I want to be clear. I think that high yield savings accounts are a really big part of your. Arsenal and your portfolio used for the. Right reasons and so can CDs. What I want you to start to look at is, okay, if I want. To use CDs, how do I do it? And then I want to talk about how I use the high yield savings account. So if I were to use CDs. Then what I would do is I would do something called a CD ladder. Here's why. What we're trying to create is an environment where I have access to liquid funds on a regular basis. Yes. If I take and say I'm going to put a five year CD in place and I put 20,000 or$10,000. Into a five year CD, then it's. Locked for five years and I got all the penalties. If I need the money early, that's. Going to maximize in many cases the returns. But what happens if we sat back and said, but what if I need the money in a year or two. Years or three years? So this is what we do. We create a ladder of CDs. Talk about it a ladder over a five year ladder. Okay? How this works is that you have a one year CD, a two year CD, a three year CD, a four year CD and a five year CD. And let's say you had$20,000 to invest, okay? You had $20,000 to invest. What you would do is allocate it equally. So I would put$4,000 here in a one year CD,$4,000 here in a two year CD,$4,000 here in a three year CD, and so on all the way down. And now you know that at minimum. Every year you have access to $4,000. Now here's how this ladder works. Once your one year CD matures in one year, you're now going to move it to a five year CD at $4,000 plus whatever interest is in there. So you move it down and the reason you move it to a five year CD, this is the laddering. It's just like a relay race is. Now because one year is up, this. Will mature in one year. This is in two, three, four, and. Then you're adding the new one down here and you keep laddering. And what that allows you to do is to, in a sense, dollar cost average into your CDs. But what it gives you is ongoing. Annual liquidity while trying to maximize the. Returns in a CD environment to do that. Now, I don't have laddered CDs at this stage. Most of my stuff is really in a situation where I have it in high yield savings accounts. Now why do I do that and. How do I do that? Here's how I look at this. I use high yield savings accounts or. CDs for my liquid funds. It's for my liquid funds, which means. That it could be a lot of different things. My peace of Mind fund or emergency fund. So my emergency fund is in there. Because I need it liquid, I need it safe and I need it insured. Okay? So my Peace of Mind fund is in there. I could put my tax fund in. There because it's short term money that I need. I'm going to need it to pay taxes. This goes to this. Next reason is short term needs. If you are going to need money for something in the next three to five years, I actually would say even four to five years, then I would not put it in the market because you're going to be subject to the volatility and you could get hit with a downturn when you need the money. So I'm going to take a lower. Return with the insurance and make sure. That I have liquidity and that my principal is taken care of. So short term needs, that could be things like I need to do an improvement. We're going to have to replace the car. We want to buy a house. It's a sinking fund of sorts, which is the other one is that I would use it as a sinking fund. For future big buys. Okay. The other thing that I would use it for is a temporary and mine. Is being used this way right now, holding tank. Okay. So I park money there where I'm earning five point three, five point four percent in an insured environment until I see opportunities that I want to invest in. Okay. And then I move it out and make the investment. Then I move it out and do the thing. So I'm not rushing into investments. I know that I'm getting five, five and a half percent. It's liquid, it's insured, it's safe, and I look for the right investment to move it in. This is where I start to use the high yield savings accounts to make that happen. So which is better? And it just depends. You want to look at the math, you want to look at the rates, you need to look at your requirements. You need to look at your circumstances. When do I need the money? Does it make sense to lock it up in year increments or multiple year increments? Or can I get something close in a high yield savings account? Now knowing that if interest rates drop, then the high yield savings account isn't going to give you the returns that you are used to because that's going to go down with it. So hopefully that starts to make sense. So that's CDs, that's high yield savings accounts, they both have a place in your portfolio in your financial world. The question is what works for you? I happen to be a lot in the high yield savings account arena. More so than CDs. I'm starting to look at CDs because the rates have finally caught up to the world. All right, but not in it yet. So hopefully that makes sense. Hopefully you found this of value. If you have questions just like Courtney did, do me a favor. Send them my way to askmelnow.com. Let's get them answered. Let's light the path to your financial freedom. All right? Let's make it happen. All right? Until I get a chance to see you on the road, see you on. A journey on the next episode. Or out there while I'm speaking. As I always say, always, always strive to live a life that outlives you. See you in the next episode. Cheers. Thank you for listening to The Affluent entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur facebook group now by going to melabraham.com/group, and I'll see you there.