CDs and High-Yield Savings are Over-Rated

Much effort; little benefit

With interest rates higher than they’ve been in a generation, high-yield savings accounts (HYSA) and CDs are the rage. I’m not sure why as for short-term savings, they’re meh and for long-term savings, they’re a poor investment choice.

Why am I so negative?

First, details. If the CD or savings account is at a different bank from your checking account, you need to open a new account, get another 1099 at the end of the year, let them know if you move, remember another log-in credential, remind yourself of why you did it to begin with, etc.

Second, vigilance. Banks have been known to play a game or two with their inducements (Shocker!). You get the high rate when you open the account but a few months later, poof, it’s gone. Even more mysteriously, the high rate is still being advertised but you somehow missed the fine print about “new accounts only” or “limited time promotion.”

Third, decisions. For CDs, you need to remember when it comes due and then decide if you want to cash it out or renew it, and if so, for what term? Also, if you need the money before the CD comes due, then you pay a penalty.

Lastly, value. Yes, these savings accounts are FDIC-insured but this guarantee isn’t free as you pay for it by receiving a lower rate than is otherwise available.

Too much detail, vigilance, and decision-making for too little value.

What’s a better alternative?

For short-term savings, I prefer a money market fund (MMF) that’s part of a brokerage account at a place like Vanguard or Fidelity, where you presumably already have an investment account of some sort (e.g., a Roth IRA). If you don’t already have an investment account and have money to save, it’s time to get one.

If you do already have one, there’s no additional paperwork. And, you can link the MMF to your checking account so it’s safe and easy to send money in either direction.

MMF yields are typically a bit higher than CDs or HYSAs. As of this writing:

• Ally, my favorite bank, has a 12-month CD rate of 4.5% and a HYSA rate of 4.2%

• Vanguard’s MMF yields 5.3%

• Fidelity’s MMF yields 5.0%

If you’re wondering, the rate difference between Vanguard and Fidelity roughly reflects the difference in their expense ratios (0.11% versus 0.42%) as they’re making similar investments.

These MMFs are safe. They do not have an FDIC guarantee, but they invest in short-term, mostly government securities — Treasury bills, more or less. So, they’re safe — both from a credit- and interest-rate risk.

These MMFs are always going to yield roughly the current short-term Treasury bill rate, less the fund’s expense ratio. You don’t need to pay attention to when your CD comes due or if your bank ends your promotional rate and you can withdraw the money at any time, penalty-free.

If you’re curious, the current rate for short-term Treasury Bills is ~5.4%. You could buy them directly but the hassle factor isn’t worth the slightly higher rate.

If you’re saving the money for a longer-term purpose, then you’re probably better off investing it in some stock or bond mutual funds where you’ll earn higher returns over the long run. Plus, you’ll get some experience with investing and interacting with mutual funds and that will serve you well as it is a good life skill to learn.

Skip the HYSA and the CD. Instead, use a MMF at a place like Fidelity or Vanguard where you likely already have an investment account, or you should get one.