On $2,000 held for six months, the gap between 4.5% and 5% APY buys $4.89 in extra interest. APY—annual percentage yield—is a yearly measure that includes interest earned on earlier interest.
Say these are insured US bank deposits. Keep both rates unchanged, leave the interest in the accounts, and ignore taxes and fees for now.
The money is for an insurance bill due at the end of those six months. Your brokerage also offers Treasury bills and money market funds. The comparison starts with when the cash can reach the insurer.
Start with the day you need it
Your cash reserve can have several deadlines. The insurance bill has a six-month horizon. An unexpected repair could demand cash tomorrow.
Both need liquidity: the ability to turn a holding into spendable money when needed, without an unacceptable delay or loss. A safe balance can still arrive too late.
Compare three things: what backs the balance, how it reaches your spending account, and whether the quoted yield can change.
Four places, four sets of terms
- A savings account is a bank deposit with a rate that can change. The bank sets its withdrawal and transfer terms.
- A certificate of deposit (CD) is a deposit for a set term. This comparison uses a fixed-rate bank CD; its contract sets the terms for taking money out early.
- A Treasury bill, or T-bill, is short-term US government debt. At maturity it pays face value, the amount it promises to repay. An early sale can bring less.
- A money market fund pools investors' money to buy short-term debt and cash instruments. You own shares in the pool.
| Vehicle | Protection | Access | Yield |
|---|---|---|---|
| Savings | FDIC within limits | Transfer terms | Variable APY |
| Bank CD | FDIC within limits | Term or early exit | Fixed APY |
| T-bill | Treasury obligation | Maturity or sale | Check basis |
| Money fund | No FDIC | Redeem, then transfer | 7-day; varies |
In the US, the Federal Deposit Insurance Corporation (FDIC) protects eligible bank deposits against bank failure up to $250,000 per depositor, per insured bank, per ownership category. Categories describe how you own an account, such as individually or jointly. Your savings and CDs in the same category at one bank share that limit.
A fund's net asset value (NAV) per share is what it owns minus what it owes, divided by the number of shares. Government and retail money funds generally aim to keep this at $1: a stable NAV. Income comes through fund payments, even when the share price stays at $1. That $1 goal is not deposit insurance; fund investors can lose money.
A money market deposit account is a bank deposit, despite the similar name. The word “fund” changes what you own. For cash held through a broker, protection depends on the product behind the balance.
Put the yield on the same clock
Six months earns only part of the annual amount. Your $2,000 earns $44.50 at 4.5% or $49.39 at 5%. On $200, the gap is about $0.49.
A rate gap is easier to judge with a dollar sign in front of it. These dollars compare two APYs; a savings rate can change along the way, while a fixed-rate CD follows its contract.
A money fund's seven-day yield takes its last seven days of income after expenses and expresses it as a yearly rate. This is a different measure from a bond fund's 30-day SEC yield; neither is a bank APY or a promise for the year ahead. Check whether a temporary fee waiver, a reduction in charges, lifts the quote.
For a T-bill held to maturity, subtract what you pay from the face value you receive. Compare those dollars over the same holding period. Its annualized discount yield uses face value; investment yield uses the purchase price and a different day count. Neither belongs in the APY formula.
Choose terms that fit the bill
- Savings fits an uncertain date when its transfer terms work. The rate can fall, but there is no maturity date to wait for.
- A bank CD fixes the rate for an agreed term. That helps when the dates match; early withdrawal can cost money when they do not.
- A T-bill offers a scheduled payment. Needing cash sooner can mean selling for less and arranging a transfer.
- A money fund lets cash earn income inside a brokerage account. You take fund risk and need to allow for redemption and bank transfers.
Suppose the 5% offer is a CD that matures after the insurance bill is due. Its contract lets you withdraw at six months for a $25 charge. The interest left is $49.39 − $25 = $24.39, versus $44.50 from the 4.5% offer. The higher rate leaves you with less money.
Getting money out of a holding and getting it into your spending account are separate steps. Each route ends with the same test: cash ready to pay the insurer.
TreasuryDirect requires transferring a bill to a bank or broker before an early sale, and its holding and transfer rules limit when you can do that. Money fund shares can generally be redeemed on a business day; an outside bank transfer has its own timetable.
For the 5% bank CD, deposit insurance within the limits protects against bank failure. It does not remove the $25 withdrawal charge or establish when the money reaches your spending account.
The 4.5% offer leaves more interest in this case. It fits the six-month bill only if its transfer terms meet the deadline. With the arrival dates still missing, the next step is to get them from the providers before treating either balance as ready cash.
These interest amounts count dollars; inflation affects what they buy.
Money with a longer horizon can have a different job in a bond portfolio. This money has an insurance bill to pay.
In short
- Match cash to a spending date before comparing yields.
- Deposit insurance protects eligible bank balances; a fund's $1 NAV is a goal, not that protection.
- Maturity, redemption and spendable bank cash can happen at different times.
- APY includes compounding; a seven-day yield annualizes recent fund income.
- A withdrawal charge can cost more than the extra interest a higher rate earns.