I'm a former banker, and there are 5 times I recommend putting your money in a high-yield savings account over a CD - even if the CD has a better interest rate

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In exchange for a higher interest rate with a CD, you have to lock your money away for a specific period of time.

A certificate of deposit, or CD, is a unique type of financial account. With a CD, you may be able to earn a higher interest rate than a typical savings account. However, in exchange for a higher interest rate, you have to lock your money away for a specific period of time.

Time-bound savings accounts make sense in a variety of situations, but there are many times when a high-yield savings account is a better choice. Let's take a look at five times when a high-yield savings account could be preferable over a CD.

You're saving for emergencies

Financial emergencies are like natural disasters. We hope they'll never happen, but we should always be prepared. 

But unlike a 100-year flood or a major earthquake, people are hit with unexpected costs every day. Car repairs, home repairs, injuries, and illnesses can all take a big bite out of your savings. But only if you have savings ready.

Because emergencies are pretty much always a surprise, you need to have quick access to your emergency savings. CDs lock away your funds until a specific future date, so they don't work for emergency funds.

You can find a better interest rate

Interest rates vary from bank to bank. For example, regular savings accounts at some US banks pay just 0.01% on your savings. High-yield savings accounts pay around 1.60% to 1.90%. Depending on the CD term and the bank, you might find a better interest rate with a high-yield savings account.

If you do plan to lock your money away in a CD, compare high-yield savings account rates and CD rates at several banks. If you don't get a big enough premium with a CD, you might as well just stick with the savings account.

You're not sure when you'll need the money next

A CD could make sense for some long-term savings goals. If you are saving up for a new car or a down payment for a new home, putting your savings into a CD can earn you more interest in some cases, as we discussed above. But putting a down payment in a CD isn't always the right decision.

You could find a great deal on a home or car and be ready to make a purchase, but your money could still be in the CD until a future date. If you want the money early, you'll typically pay an interest penalty. If you are not sure you can live without the money with a high level of certainty, you're better off with a high-yield savings account.

You have more money than FDIC or NCUA limits protect

The FDIC and NCUA insure your deposits at US banks and credit unions. The standard deposit insurance coverage level is $250,000 per depositor per bank. That means you can save up to $500,000 in a joint account at one bank with full coverage in case the bank goes out of business.

If you have enough savings to worry about the limits, you may want to diversify your savings across banks and account types. Instead of adding a CD at your regular bank, this could be a good time to look at high-yield savings accounts at an online bank that offers competitive rates with no time-bound wait for your cash.

You want to keep adding to your savings every month

Most CD accounts require a fixed deposit when you open the account. At the maturity date, they can be renewed or you can withdraw your funds. 

But what happens if you want to contribute to your savings more often? A home down payment, for example, may take years to save. With a CD, you can't easily make a deposit to add funds.

While some savvy savers may split up their funds into a combination of CD and high-yield savings accounts, it takes a bit of work to keep tabs on everything. If you want to save in one place and add to it every payday, every month, or on any regular schedule, a high-yield savings account is probably best.

Think carefully before locking your money away in a CD

If you truly won't need the money for a while, a CD could be a good place to store your money. For my money, however, I prefer high-yield savings. I don't want to risk an interest penalty when I need my hard-earned cash.

For longer-term financial needs, I keep most of my assets in investments. But for my emergency fund and shorter-term savings goals, high-yield savings is the right choice.

Eric Rosenberg is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online personal finance side hustle full-time.

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