Eight Alternatives to a Traditional Savings Account
The following is presented for informational purposes only. For more detailed information and assistance selecting a savings vehicle, consult with a qualified financial planner.
Savings accounts just aren’t what they used to be. Long gone are the halcyon days of the 1980s when a traditional passbook savings account could earn you upwards of 6 percent annual interest. Today, the average rate for such accounts is 0.06 percent. That’s an annual return of about $0.60 for every $1,000 you put into savings.
That’s not very motivating.
While interest rates are low all over, there are other options available that can help you earn a better return on your money.
Money market accounts
A money market account is essentially the same thing as a traditional savings account, except with a few added limitations, including a minimum balance and a maximum number of withdrawals that can be made each month. In return for meeting these standards, you get a slightly higher interest rate.
You can check the Federal Deposit Insurance Corporation (FDIC) website to see the current national rate for money market accounts.
Money market funds
Money market mutual funds are short-term investments in relatively low-risk securities, such as U.S. Treasury bills. They’re most often sold through brokerage firms and aren’t insured by the FDIC. You get a dividend payout at the end of each month, which is typically higher than the average savings rate.
Certificates of deposit
If you can afford to set some money aside for a while, you could consider investing in certificates of deposit (CD). With a CD, the longer the deposit period, the higher the interest rate. At present, one year CDs can get you a rate between 0.35-0.60 percent, while a five year CD can get you an interest rate as high as 0.90 percent.
As your money is essentially inaccessible when tied up in a CD, many financial advisors suggest creating a “CD Ladder” by purchasing multiple CDs with different maturity dates. This can help decrease your risk and keep part of your cash liquid.
High yield checking accounts
In general, the interest rate offered on checking accounts (when offered at all) is usually lower than the rate offered for traditional savings accounts. Some financial institutions, however, offer high yield checking accounts with slightly more favorable interest rates.
The trick is that these accounts often require that you meet certain standards, such as maintaining a minimum balance, making a minimum number of transactions with the account, and connecting the account to your regular paychecks through direct deposit. It’s a potentially worthwhile option if the criteria make sense for your existing habits.
I-bonds are sold by the US Treasury. Their primary selling point is that the interest rate is based on the rate of inflation (the “I” in I-bond) and is recalculated twice each year.
Like CDs, this product is time-sensitive, so you won’t have access to your money until the bond reaches maturity. On the plus side, I-bonds can earn interest for up to 30 years and are usually tax-exempt. On the negative side, when the rate of inflation is low, the return is equally low. Also, you may pay a penalty if you try to cash out the bond after less than five years.
Per a Treasury announcement in November 2020, the current composite rate is 1.68%.
A stock represents a share in a company. The performance of your stock, therefore, depends on the performance of the companies in which you’ve invested. If those companies become more valuable, so does your stock. But if those companies lose value, you will likely lose money as a result.
Investing in the stock market can be risky, though the potential is there for a higher return than you could get from most other savings vehicles. Your best bet is to find a stock broker with a good track record that you trust and familiarize yourself with the market before putting significant money into stocks.
Because it’s primarily a retirement savings vehicle, the money you put into a Roth IRA (individual retirement account) likely won’t be available until you reach a specified withdrawal date (usually when you turn 59 and a half). That said, as a long-term investment, this kind of retirement account can yield a very nice return, thanks to years of compound interest on rates generally over 8 percent annually.
If you want to take a more active approach with your savings, you could become a lender through a peer-to-peer lending service, such as Prosper and Lending Club.
There is risk involved in this process, but it’s mitigated somewhat by careful vetting of potential borrowers and the fact that you only provide a portion of any individual loan. This means if a borrower takes out a $3,000 loan, your stake may be as little as $25. The rest of your personal investment is spread out across multiple loans, so even if one or two borrowers default, you’re still unlikely to lose money. The return on this variety of investment can be greater than 10 percent.
There are, of course, many other places you can put your money – from internet savings accounts to municipal bonds to the space between your mattress and your box spring. Whichever route you take make sure you understand the risks involved and that your choices align with your short and long-term goals.
If you're struggling to find the cash in your budget to start building your savings, talk to a nonprofit credit counselor. The advice is free and can help you find the solution to whatever challenge has been holding you back!