The way we cover CDs here at The Motley Fool Ascent, you could be forgiven for assuming that these special timed savings accounts are perfect for everyone. Not so! Personally, I’ve been managing my money as an adult for over two decades, and I’ve literally never had a situation where a certificate of deposit was the right fit for me.
This is due to how CDs work. Namely, when you open one, you deposit a set amount of money for a set period. If you can keep the money in place for the duration of the CD’s term, you stand to earn a set amount of interest. For example, put $10,000 into a 1-year CD paying 5.25%, and in a year, you’ll have $10,525.
This is why CDs are a great option if you know for sure that you won’t need the money until a fixed date not very far in the future (the vast majority of CDs have terms ranging from three months to five years), and you want to know exactly how much interest you’ll earn. So if that doesn’t describe your situation, here are three better options for your money instead.
1. A high-yield savings account
Savings accounts are banking 101 — they are simple to use, easy to understand, and widely available from banks of all kinds. But if you want to benefit from higher APYs, open one with an online-only bank. They don’t have the overhead costs of running physical bank branches, so they pay higher rates on saved cash. The best ones also offer accounts with no fees and stellar mobile banking apps that make it easier to manage your money.
The Motley Fool’s Ascent’s list of the best high-yield savings accounts (HYSAs) features picks with APYs of 4.00%, 5.00%, and higher, just like CDs. But it’s important to note that in exchange for being able to pull out your money anytime, the rates on savings accounts aren’t fixed. They are variable and subject to change anytime. If the Federal Reserve decides to cut the federal funds rate next month, the rate on your HYSA will fall — but if you’ve locked money into a CD, that rate remains fixed for the duration of the CD’s term.
Why use it? A high-yield savings account is pretty darn perfect if you’re just getting started with saving some of your cash. You can open one with $0 in most cases and they’re easy to fund via a linked checking account or even Zelle transfers (this is how I send money from the bank I receive direct deposit with and the online bank that holds my HYSA).
2. A money market account
Do you like the higher yields of CDs and HYSAs, but want even more access to your money? A money market account (MMA) offers features of savings accounts and CDs (namely, that higher yield), but it also offers the easier access of a checking account. Many MMAs come with check-writing capabilities, or even a debit card that you can use to take cash out.
Again, your rate on an MMA isn’t fixed the way a CD’s rate is, but you’re still likely to do the same or even a little better with one of these versus a savings account. And the ability to reach your cash directly with one step makes this a good option for some savers.
Why use it? Got a stocked emergency fund or a pot of money you mostly maintain and add to, but also dip into occasionally? A money market account could be a great choice. Some MMAs require a minimum opening deposit, which makes them less appropriate for beginning savers than HYSAs, but if you can meet that, you’ll be golden.
3. A Roth IRA
A Roth IRA is a retirement account, but unlike a traditional IRA or 401(k), it’s your growth that will be tax free, not your contributions. You fund this account with after-tax dollars, and your contribution limit across all IRA accounts is $7,000 for 2024 (or $8,000 if you’re over age 50). There are also income limits to use a Roth, so double-check your eligibility.
You can open a Roth IRA with many different stock brokers, and use it to invest in a range of options. Your easiest is likely to be exchanged-traded funds (ETFs), which trade like stocks and track the performance of specific securities or benchmarks, like the S&P 500. And since the S&P 500 has earned an average annual return of 10% for the last five decades, if you can leave money invested for at least a few years, you’re likely to come out ahead here.
Why use it? If you’ve got a longer or undefined timeline for your money and are OK with taking on more risk for the privilege of growing it by more than a bank account can offer, a Roth IRA is worth a closer look. You can withdraw your contributions anytime — but must leave any investment profits alone until age 59 1/2, or face penalties.
As you can see, a CD isn’t your only option to grow your money. Those with savings accounts and money market accounts are also benefiting from higher APYs as of late, and a Roth IRA gives you the chance to grow your money for a less-defined future. Is one of these accounts a good fit for you?
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