High-yield savings accounts vs. CDs vs. money market funds
High-yield savings accounts vs. CDs vs. money market funds
When it comes to managing your cash, having the right tools in your financial tool kit can make all the difference. High-yield savings accounts, certificates of deposit (CDs), and money market funds are 3 popular options for short-term savings, each of which offers unique benefits. Understanding the differences between these savings products can help you make informed decisions that align with your financial goals, whether you're looking for the highest potential return or the greatest liquidity.
What is a high-yield savings account?
A high-yield savings account works very much like your other bank or credit union accounts, but they typically offer a higher interest rate compared with a traditional savings account. This makes it a great option for those looking to potentially earn more interest on their cash while keeping it accessible.
High-yield savings accounts are eligible for Federal Deposit Insurance Corporation (FDIC) insurance, which makes them a safe place to keep your money. They also typically don't have withdrawal penalties, so you can access your money whenever you need it. Some high-yield savings accounts limit the number of transactions you can make in a given period, so it's a good idea to check the details with the offering bank or institution.
If you're looking for higher returns without locking in your money, a high-yield savings account could be a smart choice.
How high-yield savings accounts work
High-yield savings accounts typically offer features like next-day bank transfers, checkwriting, and compatibility with apps like Venmo and PayPal, making them convenient and highly accessible.
Another key benefit is the compound interest you'll generate on your savings. This means that the interest you earn is added to your principal, and you start earning interest on that interest. Over time, this can significantly boost your savings.
In addition to convenience and earning potential, high-yield savings accounts are also insured by the FDIC or National Credit Union Administration (NCUA) for up to $250,000 per depositor, per bank or credit union. This provides a high level of security, ensuring that your money is protected against institutional failures.
While high-yield savings accounts are a great option for some, it's also worth considering cash management accounts, such as Vanguard Cash Plus. Here's how they differ:
- Cash management accounts. These accounts often have a combination of features, including checkwriting and the ability to link to other investment accounts.
- Cash management accounts can provide competitive returns by investing your money in a mix of short-term, low-risk investments.
- High-yield savings accounts. These accounts focus primarily on keeping your money accessible and offering a higher interest rate than a traditional checking account.
Both options have their merits, and the best choice depends on your specific needs and financial goals. Cash management accounts are generally offered by brokerages like Vanguard Brokerage, and they often have higher interest rates than traditional bank savings accounts. If you value a comprehensive financial management solution, a cash management account might be the way to go. For example, you can keep your Vanguard Cash Plus Account linked to your Vanguard Brokerage Account, so you can view your short-term and long-term investments in one place.1
Pros and cons of high-yield savings accounts
What is a certificate of deposit?
A certificate of deposit (CD) is a type of savings account that holds your money for a fixed term ranging from a few months to several years. Long-term CDs generally offer higher fixed interest rates than short-term CDs. Once the term ends, you can withdraw your money plus the interest earned or roll it over into another CD.
CDs are a low-risk way to earn more on your savings, especially if you don't need immediate access to your money.
How CDs work
A CD has a specific maturity period, which is the length of time you agree to keep your money in the account. During this period, you’ll earn interest at a fixed rate. If you withdraw your funds before the maturity date, you'll typically pay an early withdrawal penalty. The penalty can vary, but it often amounts to a few months' worth of interest.
When it comes to penalties, there's a difference between CDs bought from banks and those bought from brokers like Vanguard Brokerage. Bank CDs usually have penalties for early withdrawal, while brokered CDs might offer more flexibility. For example, brokered CDs can sometimes be sold on the secondary market, though you might have to sell at a loss if interest rates have risen.
Always check the terms and conditions to understand the specific rules and penalties associated with your CDs.
Pros and cons of CDs
What is a money market fund?
A money market fund is a type of mutual fund that's designed to offer a low-risk, stable investment option for money you may need to access in the short term, such as emergency funds or savings for a short-term goal.
When comparing a money market fund with a savings account, keep in mind that money market funds generally offer higher interest rates but come with a bit more risk, as they aren't insured by the FDIC. Money market funds can potentially lose value, though this is very rare.
When held in a brokerage account, money market funds are covered by Securities Investor Protection Corporation (SIPC) insurance, which protects up to $500,000 in case the fund fails. Money market funds are also regulated by the Securities and Exchange Commission (SEC). The SEC requires money market funds to maintain certain levels of daily and weekly liquidity. The SEC has this requirement to help maintain fund stability and safety.
While money market accounts and money market funds sound similar and invest in similar assets, there are some important differences. Money market accounts are bank accounts, while money market funds are offered by investment firms. They also differ in terms of insurance coverage, fees, withdrawal restrictions, yields, minimums, and features.
How money market funds work
Money market funds are investment vehicles operated by financial institutions that pool money from many investors to purchase low-risk, short-term debt securities, such as Treasury bills, municipal debt, or corporate bonds.
Pros and cons of money market funds
Comparing high-yield savings accounts, CDs, and money market funds
How these account types compare
| High-yield savings accounts | CDs | Money market funds | |
|---|---|---|---|
| Interest rates | Slightly lower, with variable rates. | Higher, with fixed rates for the duration of their term. | Higher, with variable rates. |
| Liquidity and access to funds3 | Withdraw anytime (though some have a limited number of transactions per month). | Traditional bank CDs have early withdrawal penalties. Brokered CDs, like those offered by Vanguard Brokerage, don't have early withdrawal penalties, but their values can change based on the interest rate environment. So if you sell before it matures there's a chance you could lose money. | Withdraw anytime. |
| Risk and safety | FDIC insured up to $250,000 per depositor, per bank. Visit fdic.gov for details. | FDIC insured up to $250,000 per depositor, per bank. Visit fdic.gov for details. | Covered by SIPC insurance, which protects up to $500,000 (when held in a brokerage account). An explanatory brochure is available at sipc.org. |
| Fees and minimum balances | Low fees, low (or no) minimum balance requirements. | Low fees, minimum balance can vary. | Higher fees, minimum investment requirements vary. |
| Checkwriting | No | No | Yes, but there may be a limit on the number of checks per month. |
Interest rates
Slightly lower, with variable rates.
Liquidity and access to funds3
Withdraw anytime (though some have a limited number of transactions per month).
Risk and safety
FDIC insured up to $250,000 per depositor, per bank. Visit fdic.gov for details.
Fees and minimum balances
Low fees, low (or no) minimum balance requirements.
Checkwriting
No
Interest rates
Higher, with fixed rates for the duration of their term.
Liquidity and access to funds3
Traditional bank CDs have early withdrawal penalties. Brokered CDs, like those offered by Vanguard Brokerage, don't have early withdrawal penalties, but their values can change based on the interest rate environment. So if you sell before it matures there's a chance you could lose money.
Risk and safety
FDIC insured up to $250,000 per depositor, per bank. Visit fdic.gov for details.
Fees and minimum balances
Low fees, minimum balance can vary.
Checkwriting
No
Interest rates
Higher, with variable rates.
Liquidity and access to funds3
Withdraw anytime.
Risk and safety
Covered by SIPC insurance, which protects up to $500,000 (when held in a brokerage account). An explanatory brochure is available at sipc.org.
Fees and minimum balances
Higher fees, minimum investment requirements vary.
Checkwriting
Yes, but there may be a limit on the number of checks per month.
Which option is best for your financial goals?
When choosing the right savings vehicle for you, it's important to consider your financial goals, risk tolerance, and liquidity needs. Here's a breakdown to help you determine which option might best suit you.
- High-yield savings accounts. Suitable for investors who value flexibility and easy access to their money.
- CDs. Suitable for investors who can lock in their funds for a set period and want predictable, guaranteed returns.
- Money market funds. Suitable for investors who want a balance of high liquidity and yield with a low level of risk.
Explore the different cash and liquidity solutions offered by Vanguard
FAQs about high-yield savings accounts, CDs, and money market funds
You can buy a CD from a bank, credit union, or online financial institution.
Learn more about and view a list of Vanguard Brokerage's brokered CDs.
To open a high-yield savings account, simply choose a bank or online financial institution that offers one, then complete their application process. You can do this online or in person—just make sure to have your personal information and initial deposit ready.
To open a cash management account, select a provider that fits your needs, then fill out their online application. You'll typically need to provide some personal information and link to a funding source to begin.
Ready to get started? Open a Vanguard Cash Plus Account
The right account type for you will depend on your needs and the specific features and functionality you're looking for. Cash management accounts often offer higher interest rates and more flexibility than traditional savings accounts. However, they may come with different fees or minimum balance requirements. It's a good idea to compare the features and terms of both types of accounts to see which one best fits your financial goals and needs.
To invest in a money market fund, your first step is to choose a fund that aligns with your financial goals and risk tolerance. Then you can open an account with the financial institution managing the fund and deposit your initial investment. Most funds have a minimum investment requirement.
You can learn more about Vanguard money market funds and get started here.
The amount you should invest in a high-yield savings account, CD, or money market fund depends on your financial goals, risk tolerance, and liquidity needs. It's a good idea to assess your short-term and long-term financial plans and consider diversifying your investments to balance risk and return.
As a starting point, you might consider how much you have (or need) to allocate to your emergency fund.
Consulting with a financial advisor can also provide personalized guidance.
High-yield savings accounts and CDs are generally considered low risk and are FDIC insured, which means your funds are protected up to $250,000 per depositor, per insured bank. Money market funds, while typically low risk, can potentially lose value, though this is very rare. Money market funds are designed for stability, and although they're not insured by the FDIC, they may be eligible for up to $500,000 of coverage under SIPC when held in a brokerage account. It's important to understand the risks and protections associated with each type of account.
1Your account may be subject to various restrictions to reduce the risk of fraud. Your transactions may be subject to a 7-day holding period as well as daily transaction limits. Generally, new accounts will be subject to a 60-day holding period for cash and check deposits. During this time, you can invest with this cash, but cash deposits into your account may only be returned to the bank account from which the cash was withdrawn. After the holding period is complete, your funds will be fully available to transfer or withdraw.
2Vanguard average expense ratio for money market funds: 0.11%. Industry average expense ratio: 0.24%. All averages are asset-weighted. Industry averages exclude Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2024.
3Firms may have restrictions on the withdrawal of recently deposited funds.
All investing is subject to risk, including the possible loss of the money you invest.
For more information about Vanguard mutual funds, obtain a mutual fund prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
The fund is only available to retail investors (natural persons). You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1 per share, it cannot guarantee it will do so. The fund may impose a fee upon the sale of your shares. An investment in the fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor is not required to reimburse the fund for losses, and you should not expect that the sponsor will provide financial support to the fund at any time, including during periods of market stress.
Bank deposit accounts and CDs are guaranteed (within limits) as to principal and interest by the Federal Deposit Insurance Corporation, which is an agency of the federal government.
All brokered CDs may fluctuate in value between purchase date and maturity date. CDs may be sold on the secondary market, which may be limited, prior to maturity subject to market conditions. Any CD sold prior to maturity may be subject to a substantial gain or loss. Vanguard Brokerage does not make a market in brokered CDs. For information regarding FDIC coverage eligibility, visit fdic.gov.
Vanguard Brokerage Services is a division of Vanguard Marketing Corporation (VMC). VMC is a member of SIPC, which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at www.sipc.org.
The Vanguard Cash Plus Account is a brokerage account offered by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC. Under the Sweep Program, Eligible Balances swept to Program Banks are not securities: They are not covered by SIPC, but are eligible for FDIC insurance, subject to applicable limits. Money market funds held in the account are not guaranteed or insured by the FDIC but are securities eligible for SIPC coverage. See the Vanguard Bank Sweep Products Terms of Use (PDF) and Program Bank list (PDF) for more information.
Cash Plus bank sweep program balances are held at one or more Program Banks, earn a variable rate of interest, and are not securities covered by SIPC. They are not cash balances held by Vanguard Brokerage Services (VBS), a division of Vanguard Marketing Corporation (VMC); VMC is not a bank. Balances are eligible for FDIC insurance subject to applicable limits. See the list of participating Program Banks (PDF).
Bank savings accounts offer different services and features than a Vanguard Cash Plus Account. For example, savings accounts often offer features like overdraft protection, ATM access, bill pay services and other conveniences that Cash Plus Accounts do not offer. Cash Plus Accounts allow you to hold certain securities that bank savings accounts cannot hold. In addition, Cash Plus Accounts are subject to fraud prevention restrictions such as holding periods and transaction limits, which may not apply to a bank savings account. There may be other differences between these products that you may want to consider before choosing which option is best for you.