In case you haven’t heard, savings account rates are pretty great right now.
This year’s unprecedented federal interest rate increases (the Federal Reserve’s main weapon in its fight against runaway inflation rates) have been costly for homebuyers and borrowers, but they’ve only benefited savers.
[READ MORE: The Fed Just Hiked Rates Again. Why This Time Is Different and What it Means for Your Wallet]
Two of the best ways to take advantage of today’s high rates are with a high-yield savings account or certificate of deposit (CD). Both are secure places to keep your savings, and guarantee a return on your balance. High yield savings accounts allow you to make regular contributions and withdrawals over time, while CDs require one upfront deposit, which you can only withdrawal at the end of the CD term.
High-yield savings rates are also variable, meaning they can fluctuate as rates move up or down. CDs, on the other hand, have fixed interest; the rate you lock in at opening is what you’ll earn for the entirety of the term.
Rates among the top high-yield savings accounts have shot up in recent months from less than 1.00% APY to nearly 4.00% today. CDs have seen a similar boost, and some of the best CD rates today offer over 4.50% APY.
To show you how those percentages translate into real cash in your bank account, we did the math to determine exactly how much you could earn in a year with various savings balances at the top rates available today.
Here are a few scenarios featuring made-up people and circumstances, to help show what these rates can look like in real life:
You won’t find these top savings account rates just anywhere. Traditional savings accounts from large national banks are still offering pennies on the dollar by comparison. If you’re looking to benefit from today’s high savings rates, look for a high-yield savings account from an online bank with minimums, fees, and other account details that fit your financial goals.
Example 1: $1,000 in a 3.90% APY High Yield Savings Account
David is a college student and has spent the past two summers working full-time at a coffee shop in his hometown. A majority of the money he makes over the summer goes toward textbooks and other fees for the fall semester, but David has about $1,000 left that he wants to put away until he can start contributing more regularly after graduation.
Because his actual savings balance is limited, David is primarily focused on earning the absolute best interest rate.
He finds a high-yield savings account with an online bank that offers 3.90% APY, one of the top rates available right now. Because the account is variable, David knows that the rate will fluctuate over time. He’s OK with that, though: he wants to maintain the option to make contributions when he receives extra cash on holidays or from his part-time on-campus job.
Assuming the account remains at 3.90% over the course of a year, David’s initial $1,000 deposit would turn into $1,039, even without any additional funds.
- Starting Balance: $1,000
- Balance After 1 Year: $1,039
Example 2: $1,000 Plus $300 Monthly Contributions in a 3.00% APY High Yield Savings Account
Eve doesn’t have much money in savings, but she recently learned the importance of an emergency fund; she had to cover a few hundred dollars in unexpected vet bills when her dog suffered a minor sickness.
After reading about emergency fund best practices, Eve decides to move what savings she has left (about $1,000) from a conventional savings account to a high-yield savings account. She wants to make things convenient by opening an account with another bank she already has a relationship with, so she’s willing to forgo the absolute best interest rate. Still, she finds she can earn a solid 3.00% APY at the other bank she already uses. Even though it’s not the highest available rate right now, it’s still much more than the 0.10% she was earning with the conventional account.
Eve also reevaluates her budget and monthly spending. She determines she can save an additional $300 per month by canceling some monthly subscriptions and cutting back on how often she dines out. She automates her contributions so $150 is deposited directly from her paycheck to savings each bi-weekly pay period.
Given the 3.00% interest rate, her initial $1,000 deposit, and $300 monthly contributions, Eve’s total savings balance would equal nearly $4,680 after one year.
- Starting Balance: $1,000
- Balance After 1 Year: $4,679
Example 3: $10,000 Plus $100 Monthly Contributions in a 3.50% APY High Yield Savings Account
After a few years of establishing themselves in their career field, Jamie just changed jobs and got a great sign-on bonus at their new company. Because they have student loan debt, they’ve decided to put a portion of the bonus in a savings account and put away regular monthly contributions they’ll use to pay down a portion of the debt once federal loan payments resume next year.
They’re already putting additional money into savings to build their emergency fund, so they decide on a $100 monthly contribution toward the new student loan sinking fund, or a savings account designated for a specific purpose. After looking into different high-yield savings account options, they decide on a bank with a great 3.50% interest rate that has historically remained toward the top of high-yield savings rate offerings.
If the bank maintains that 3.50% rate over the course of a year, and Jamie continues to save $100 per month on top of their initial $10,000 balance, they could have a total of $11,569 to put toward their student loans in a year.
- Starting Balance: $10,000
- Balance After 1 Year: $11,569
Example 4: $10,000 in a 4.20% CD
Alex and Ty recently got engaged. They’ve started wedding planning, but have found scheduling with friends and family across the country to be more difficult than expected. As a result, they’ve settled on a far-off wedding date two years in the future.
Pooling their money, they find they already have a combined $10,000 saved that they can put toward the wedding. To avoid spending it in the meantime, the couple decides to lock the money in a high-interest 18-month CD. They agree on the 18-month term length to ensure they won’t touch the money in the near term, but it’ll still be available for final deposits and last-minute spending ahead of the big day.
After doing some research, they find a competitive 4.20% APY 18-month CD term with an early withdrawal penalty they can agree to. They don’t plan to touch the money, but they know that anything can happen, and would rather be aware of the cost upfront in case they need to withdraw from the account before maturity.
At the end of the 18 months, Alex and Ty’s initial $10,000 deposit would multiply to a total $10,637.
- Starting Balance: $10,000
- Balance at Maturity: $10,637
Example 5: $20,000 in a 4.50% CD, Withdrawn Early
Aubrey just moved to a new city. She plans to buy a home in the city but is subleasing while she gets to know different neighborhoods and the city’s housing market better.
She has a large portion of her down payment already saved and decides to put it in a 12-month CD, with the plan to purchase a home in a year. She finds a competitive 4.50% APY 12-month CD and deposits her $20,000 in savings. When the CD matures, Aubrey expects to boost her initial deposit to a total of $20,900.
Pro Tip
A no-penalty CD is like a hybrid account between a high-yield savings and a CD. These accounts offer interest rates today that are more comparable to high-yield savings accounts, but if there’s a chance you may need to withdraw your money early, a no-penalty CD will allow a one-time withdrawal of your balance without requiring the fees of a traditional CD account.
But things don’t quite go according to plan. Five months into her CD term, Aubrey finds her dream home in the new city: it’s within her budget, close to work, has easy access to plenty of stores and restaurants, and is even walking distance to the park where she likes to walk her dog.
The 12-month CD that Aubrey’s down payment is held in has an early withdrawal penalty of 180 days worth of interest on the principal balance of $20,000. That’s about $440. Since the CD has only been open for 5 months, Aubrey’s earned about $375 in interest so far. In all, Aubrey will lose about $65 on her initial deposit to withdraw her money early and buy the house she wants.
- Starting Balance: $20,000
- Balance Upon Withdrawal (After Penalty): $19,935
Bottom Line
High-yield savings accounts and CDs are both great options for building your savings, whether you want to secure your future with an emergency fund or you have a specific goal — like a wedding, new car, or home down payment — in mind.
Even if some accounts are better for certain goals than others (a flexible high-yield savings account is ideal for your emergency fund, for instance), it’s important to choose a bank based on your individual goals. Look for account details like any minimum deposit or balance requirements, fees you might take on for certain account activities, transfer and withdrawal options, and more.
For more information about saving money today, here are a few additional resources from NextAdvisor:
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