High Yield Savings vs. Certificates of Deposit vs. Treasury Bills vs. Money Market Funds (2024)

Every dollar that flows into your household should serve a purpose, even if its primary goal is sometimes to sit in an account until you need it.

As we become more financially sophisticated, we find ourselves using multiple types of accounts to ensure we are good stewards of our resources.

Each account type serves a different purpose in our portfolios and our lives. Putting them all together will ensure we protect our lifestyle, save for the future, and set up the next generation of investors.

Four ways to earn interest. Before learning to invest for dividends, we must understand all the benefits of investing for interest.

Investing for interest (debt) gives us steady returns at the cost of growth (equity). However, we invest for interest to protect the principal while gaining some income.

Today, let’s discuss four essential ways to earn interest on your hard-earned money: high-yield savings accounts, certificates of deposit, treasury bills, and money market funds. Let’s begin.

High-yield savings accounts. High-yield savings accounts (HYSAs) provide us with high interest rates and the quickest access to our funds.

Because of our instant access to our funds, HYSAs are the best place to save our emergency funds. The Federal Deposit Insurance Company (FDIC) also ensures HYSAs up to $250,000.

You can even attach a cashback debit card to your HYSA that will automatically add your rewards to your HYSA. I use this tactic with my Discover cashback and HYSA.

Certificates of Deposit. Most brick-and-mortar and online banks offer their customers certificates of deposit (CDs). CDs lock up your money for a specific time in exchange for slightly higher interest rates.

It's good to use CDs when you find interest rates appealing. A guaranteed interest rate is great, especially if you are retired and depend on the income.

Many people use CD ladders to keep their CD income growing continuously. When one CD matures, they purchase another one. Using multiple different sizes and timeframes gives the savers maximum interest rate protection.

Treasury Bills. The US government offers many debt instruments to its citizens. US Treasuries trade on the largest bond market in the world.

In fact, many people consider US treasuries the most important financial product in the world because everything trades against them (read more).

Treasury Bills offer investors access to short-term US government debt. The government provides Treasury Bills in maturities of 4, 8, 13, 17, 26, and 52 weeks (or 1-month, 2-month, 3-month, 4-month, 6-month, and 1-year).

This allows investors to maximize interest rates down to one-month products. Also, investors do not pay state taxes on interest from Treasury Bills.

If you are an active investor, you can follow the bond markets to find optimal times to purchase Treasury BIlls and get the highest rates available.

Money Market Funds. Market Market Funds (MMFs) exist inside brokerage accounts. They can serve as a “holding pen” for your money before you invest or between investments.

I like to think of MMFs as high-yield savings accounts inside your brokerage account. It's good to keep your money close to the stock market in case you find a good investment.

There are taxable and tax-free MMFs that you can purchase. The FDIC does not insure MMFs; however, the Security and Exchange Commission (SEC) has tight regulations on these products to protect investors.

High Yield Savings vs. CDs vs. Treasury Bills vs. Money Market Funds. So, which of these financial products is suitable for you? This may be a trick question.

All these products exist in different worlds, meaning they can co-exist. For example, an online bank is the best place to start a high-yield savings account.

I have seen credit unions with the best rates on CDs. Treasury Bills exist on the bond market through the TreasuryDirect website. Money Market Funds operate inside of your brokerage account.

As you build a fully funded emergency fund, you will want to utilize all these investments to your advantage. Let’s examine how I would create a $60,000 emergency fund using these products.

Block #1. I would use $20,000 in a high-yield savings account for the first block. In my situation, the most expensive emergency would be needing a new roof or air conditioner. Both of these are less than $20,000.

Block #2. For the next tranche, I would put $10,000 in a certificate of deposit. I am not a massive fan of CDs because I can take more risk for more reward. I would look for a 24-month CD that offers a great rate I want to keep.

Block #3. I would keep $15,000 floating in Treasury Bills if short-term interest rates exceed 4%. As soon as long-term rates on 30-year bonds are higher than short-term rates, I would lock in 30-year bonds.

Block #4. I would use dividends from my brokerage to grow a $15,000 position in a money market fund passively. The power of compounding will assist with its growth.

Putting it all together. Ultimately, you will use all of these accounts in tandem to get you to your goal of financial freedom.

Once you begin to research the different products, you’ll learn that each has its own intricacies. Intelligence is the ability to make finer distinctions so that you’ll want to become more knowledgeable about these products.

For example, HYSAs and CDs will cost you federal and state taxes. Treasury Bills don’t pay interest; you purchase them at a discount to par. They mature at the higher price.

Money market funds are great but don’t offer the same FDIC protections. You’ll want to ensure you purchase these from a reputable company.

Let’s say you receive a $100,000 inheritance and want to purchase a home in two years. You may want to lock up the money in a 24-month CD.

Let’s say Tesla (TLSA) hits an all-time high, and you are retiring within the next three years. You may want to take profits on TLSA and invest in a money market fund. Then, you can research what products you need to build an income-investing portfolio for retirement.

Conclusion. There is no one-size-fits-all; it’s all about what allows you to sleep at night. On the surface, using only a high-yield savings account seems like the most straightforward answer.

However, that is only because interest rates are fairly high (over 5%). I remember in 2020 when my interest rate went from 2% to 0.5%.

Depending on what you need from your investments, you may need to transfer to higher-yielding products. For example, you may need to convert Treasury Bills to Treasury Bonds or money market funds into high-yield bond funds.

You’ll always want to keep your immediate emergency fund ($10,000 to $20,000) in a HYSA. But keeping $250,000 at 0.4% may be doing you more harm than good.

The more nuanced your thinking, the better results you will get. Use these products in various situations to position yourself and your family for a bright future. Good Luck!

Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.