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Savers always need to be careful about where they store their money (and where they avoid doing so). This has been especially true in the economic climate of recent years, with factors such as , higher , and to contend with. In this atmosphere, the account you keep your money in is critical if you want to protect the principal and, potentially, earn a decent amount of interest at the same time. But does that mean it's worth moving your money out of the traditional savings account it's currently in?
With options like , and all as viable alternatives in today's still-elevated interest rate climate, savers may be contemplating the benefit of making a switch.
This could be the smart move with a CD account, in particular, since it has a that will remain immune to rate changes during the full (or length). To better understand the merits of an account switch, however, those with a few thousand dollars in savings may want to first calculate the interest-earning potential. For example, when matching a $5,000 CD against a $5,000 traditional savings account, which would earn more interest right now? That's what we'll calculate below.
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Calculating the interest earnings on a CD is simple, thanks to the fixed interest rate it comes with. But doing the math on a traditional savings account is a bit more complicated since rates here are often variable and subject to change over time.
While you won't have to give up access to your funds the way you would with a CD, that accessibility feature is often outweighed by the much higher interest rate CD accounts come with, especially now. To see the difference, we calculated the interest-earning potential on a $5,000 CD tied to a few available rates and terms and matched it against a $5,000 deposit into a traditional savings account, assuming the latter's rates remain the same for the same duration. Here's what that looks like:
Just by looking at the difference in rates between CDs and traditional savings accounts, savers can tell the vast difference in earnings potential. But when actually calculating the returns, the discrepancy becomes stark. Savers can be guaranteed $100 or more on a $5,000 CD, depending on the term.
But with a traditional savings account at today's , they're unlikely to make more than $30, and that's on the assumption that this average doesn't decline any further, as it likely will if rate cuts are issued later this year. Understanding this dynamic, then, and the potential to , most savers would benefit from locking in a high CD rate now, while they still can.
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A high-yield savings account, on the other hand, is a viable alternative to both a CD and a traditional savings account. This account type comes with almost as high as CDs, and they won't make savers give up access the way a CD would. The only caveat here, however, is that rates are also variable and subject to change over time.
So the interest earnings, while comparable to a CD right now, may not remain so for much longer. Savers will need to weigh the reality of rate cuts to come versus what they can earn right now against the fixed rate of a CD to determine their optimal course of action. In many cases, it may be smartest to just and remove all money from the traditional savings account.
While there may be some confusion and indecisiveness when choosing between a CD and a high-yield savings account, there should be none when stacking a CD against a traditional savings account. With the former offering savers a fixed rate multiple times higher than the traditional savings account and with the potential for the traditional account rate to decline further, moving $5,000 or more into a CD or even splitting the funds between the CD and a high-yield savings account will generally be favorable for most savers now. Just don't leave money in the traditional account. With so many other, more advantageous options available, by not making a switch now.
