APY isn’t all that matters.
- Access to your money is just as important as your bank account’s APY.
- Certificates of deposit offer higher APYs, but you can’t access your money for a set period of time.
- Interest rates on bank accounts are rising right now, so you don’t want to lock your money away long term.
A high annual percentage yield (APY) is a huge selling point for a lot of bank accounts. The higher your APY is, the more money you make just for keeping your savings in the account. But you really shouldn’t base your bank account decision on this alone. Eye-catching APYs sometimes come with strings attached, as is the case with this popular type of bank account.
Sometimes a high APY isn’t worth it
A high APY is only one factor you need to consider when choosing a bank account. You also want to make sure the bank is FDIC insured, that it has good customer service and online tools, and that it enables you to access your cash when you need it.
That last one is what makes certificates of deposit (CDs) — especially those with longer terms — such bad investments right now. The best five-year CDs currently offer rates around 3.20%. That’s higher than what you can find with most of the top high-yield savings accounts. But in exchange for this guaranteed rate, you have to promise not to touch the money you put in the account for the full five years. If you withdraw your money early, you usually pay a penalty in lost interest.
That’s a problem for those who need to access their funds at a moment’s notice to pay for emergency expenses. It also makes CDs a bad choice for money you plan to use before the CD term is up.
Right now is an especially bad time to invest in a CD because interest rates on all bank accounts are rising. When you open a CD, that rate is usually locked in for the whole term. So if you open a CD for 3.20% right now and the bank later offers CDs with 3.50% APYs, you’re stuck earning 3.20% until your CD term is up.
Opening a CD could make more sense when rates are falling because you can lock in a rate that won’t drop for several years. But even then, it might not be the best home for your …….