Which Is Better for $5K in Savings: a CD or a High-Yield Savings Account?

CDs and high-yield savings accounts are safe and FDIC-insured and sport attractively high interest rates. But if you have $5,000 and you wanted to choose one, which would be the best place for your money? For some folks, there's a clear answer, while others will need to weigh the pros and cons carefully. If you're undecided, let's examine both options closely.

Which will pay more interest?

In the past, CDs have paid savers at higher interest rates than savings accounts, which has been one of their major perks. However, thanks to the Federal Reserve's relentless campaign against inflation, which has driven borrowing rates and thus interest rates higher, some high-yield savings accounts are actually on par with some CDs.

But it depends on the length of the CD's term. Right now, short-term CDs, ranging from 3 to 12 months, have higher interest rates than savings accounts, while long-term CDs -- like a 4-year CD -- are paying at comparable rates. This isn't accidental. Banks believe the Fed will lower borrowing rates in the future and are thus assigning lower rates on long-term CDs to match this expectation.

That doesn't mean long-term CDs are the least lucrative option. Yes, they have lower APYs, sometimes even lower than today's top-paying savings accounts. But CD rates are fixed, whereas savings accounts have variable rates. A 5-year CD may not pay as much as savings accounts now but in five years, the rate environment could be different. It's quite possible you could have a CD rate between 4% and 5% APY at a future time when savings accounts are once again paying a much lower rate.

On the other hand, this fixed rate could work against you. You might lock into a 5.05% CD rate on a 2-year CD. But if the Fed continues raising borrowing rates, that same CD could start paying out at 5.25% a few months later. It's difficult to time CD rates and to lock in CDs at their "peak." But if you're concerned about missing out on a higher rate, a bump-up CD could be an option worth looking into.

In sum, CDs will likely earn more interest than savings accounts. That doesn't mean CDs are the right place for your $5,000, but if earning the most interest is important to you, CDs are a compelling choice.

Which has more flexibility?

The problem with CDs is that once funds are locked in, they're no longer easy to access. Unless you have a no-penalty CD -- another compelling option for $5,000 -- you'll likely pay an early withdrawal penalty. This penalty could be equal to as little as several months of interest to as high as one year or more.

This is the advantage of savings accounts. These accounts let you withdraw money with greater flexibility. While some high-yield savings accounts have limits on how much you can withdraw (per Regulation D), cash money is usually only a bank transfer or ATM withdrawal away. This makes a savings account better for money you'll need in the near term, as well as emergency funds.

This ease of access, however, could work against you. Having $5,000 in a savings account might tempt you to spend it. It's fine if you need to spend the money on something you need -- like replacing the tires on your car or paying a hospital bill -- but if that $5,000 is burning a hole in your pocket, you might be better off locking it up in a short-term CD.

So, which is better for $5,000?

Well, perhaps both. In truth, you might be better off splitting your $5,000 between a savings account and a CD. The CD could help you lock into today's great rates, while the savings account could offer greater flexibility.

At the end of the day, the question comes down to at least two things: Which account minimizes the risk of losing money (that is, early withdrawal penalties or interest lost to a lower APY)? And which account maximizes your potential earnings? If a CD or a savings account could answer both of these, great. If not, get creative. Make a strategy that works for your household -- you might even want to consider CD ladders -- and don't be afraid to forgo earning high interest if it means protecting your money.