Saving money isn’t just about the amount you put aside; it’s also about where you deposit it. With interest rates elevated, savers with a substantial cash balance can earn meaningful returns without market risk.
Current Savings Options
Certificates of deposit (CDs) and high-yield savings accounts are offering attractive yields. Choosing between them can be challenging, especially with the uncertain interest rate outlook.
The Federal Reserve has kept rates steady since the beginning of the year, helping savings yields remain competitive. It’s unlikely the Fed will lower its benchmark rate soon, with inflation high and escalating. However, deposit rates may decrease once borrowing costs ease, so careful selection of options is advised.
If you’ve saved $50,000, even small differences in annual percentage yields (APYs) can lead to significant differences in earnings over a year.
CD Earnings Potential
Current 1-year CD rates range between approximately 4.11% and 4.15%. Assuming no account fees or penalties affect the balance, a $50,000 deposit would earn:
- $50,000 at 4.11%: $2,055.00 upon maturity
- $50,000 at 4.15%: $2,075.00 upon maturity
The fixed rate guarantees around $5.68 per day in earnings, irrelevant to Fed actions until next July.
High-Yield Savings Account Performance
A high-yield savings account at 4.10% would deliver similar returns: a $50,000 deposit would generate approximately $2,050.00 over 12 months. This result is close to what the 4.11% CD would produce, with a $25 difference from the higher CD rate.
The key distinction is the variable rate in savings accounts. If the Fed raises rates to counter inflation, savings accounts might surpass the CD rate. Conversely, if rates drop, savings yields fall correspondingly, while CDs maintain their original rate.
Additionally, high-yield savings accounts allow accessible funds without penalties, which is valuable for savers who might need part of their $50,000 before year’s end.
Conclusion
A $50,000 investment in a 1-year CD this July could earn approximately $2,055 to $2,075 by next summer, depending on secured rates. A similar high-yield savings account would produce around $2,050, offering flexibility through a variable rate and penalty-free cash access.
Neither option is definitively superior. The decision hinges on preferring a fixed rate’s certainty or the flexibility and potential rate changes associated with a variable rate. What remains clear is that $50,000 left in a traditional savings account, averaging well below 1% nationally, misses the chance for a more productive return over the year.
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