Savings accounts are widely used as a reliable place to park cash. With a savings account, your money can earn interest but be available to withdraw as soon as you need it.
However, a savings account isn’t necessarily maximizing the amount of work your money can do for you. Let’s take a closer look at the pros and cons of savings accounts and some higher-yield alternatives to savings accounts that may better fit your needs.
Benefits Of Savings Accounts
Savings accounts are widely used for a reason: for many people, they present an easy, accessible way to store extra cash while keeping it readily available. Any cash in your savings account accrues interest, too, so you’re earning money just by saving.
Savings accounts are simple to open and offered by almost every banking institution, from national banks to local credit unions. When you need money from your savings account, you can withdraw it at any time from an ATM or connect it to your checking account to serve as protection against overdrafts. Your money also isn’t locked into any single savings account. If you switch banks, it’s easy to transfer your savings over to a new account.
In addition, savings accounts can be opened even if you don’t have much money to stash away just yet. Most banks require a minimum deposit of $25, but some let you open a new savings account with as little as $1.
Another benefit to savings accounts is that your money is protected by the US government. Nearly all savings accounts come with up to $250,000 in deposit insurance, meaning the government will pay you back if your bank goes out of business and you can’t withdraw your money.
Downsides Of Savings Accounts
The biggest disadvantage to savings accounts is that while you earn interest, the rates are typically very low. Right now, savings accounts return on average just 0.09% per year. With inflation targeted around 2%, that means that your money is actually losing value the longer it sits in a savings account. In effect, the accessibility and protection that savings accounts come with aren’t free.
On top of that, your interest payments can lag far behind your deposits. Many banks only compound your savings once a month or even once a year. So if you’re making steady deposits, it may take a while before you see your interest payments increase.
Another downside to savings accounts is that they aren’t infinitely accessible. Thanks to a government rule, if you withdraw money more than six times in a month, you may have to pay a fee or even have your account closed.
Alternatives To Savings Accounts
While savings accounts can work well for some people, they’re not the only option you have for putting your money to work. Below are six of the best alternatives for storing your savings.
High Yield Checking Or Savings Accounts
High yield checking and savings accounts are just like standard checking and savings accounts, except that they offer higher than average interest rates. For example, banks like Ally and Discover Bank offer high yield savings accounts with interest rates of 0.60% per year, compared to the national average of 0.09% per year.
There’s almost no downside to a high yield checking or savings account. Most don’t have higher minimum deposits than traditional accounts, and they typically don’t carry extra fees. Just keep in mind that even the best high yield accounts still don’t outpace inflation, so your money will still lose value over time.
Money Market Accounts
Money market accounts are a lot like high yield savings accounts. When interest rates go up, you might find that money market accounts offer better interest rates than most high yield savings accounts. But in today’s low-rate environment, it’s hard to find money market accounts that are much more lucrative. At the same time, money market accounts typically require a minimum deposit of $10,000 or more if you want to get the top advertised interest rates.
The main advantage of a money market account, then, is that it comes with some checking features. You can write checks from your money market account, and some banks will also give you a debit card. So, these accounts can be good if you want a checking account that carries the interest rate of a high yield savings account.
Certificates of deposit (CDs) require you to commit a specific amount of money and lock it away for several months to several years. Once your money goes into a CD, you cannot access it until the CD’s maturity date without paying a penalty.
Banks typically offer a variety of CDs with different minimum deposits, term lengths, and interest rates. While you lose access to your money for a time, a CD typically pays a much higher interest rate than a high yield savings account or money market account. So, this can be a safe investment if you don’t expect to need access to your savings for a period of time.
Annuities have a lot in common with CDs. You have to lock away a large minimum deposit for a period of years in exchange for a relatively high interest rate. While you might find annuities with higher interest rates than comparable CDs, the two types of investments tend to have similar payouts.
The main advantage to annuities is that your interest payments are tax-free until withdrawal. With CDs, you have to pay tax on your interest every year, even if you cannot access your money. So, annuities can make sense if you’re in a higher tax bracket now, but your annuity won’t mature until after you retire and your tax rate drops.
A robo-advisor is an automated investing platform that helps you create a diversified portfolio. Typically, robo-advisors invest your money in a mix of stocks and bonds. In contrast to the other alternatives we’ve highlighted, you’re not guaranteed a specific rate of return with a robo-advisor and there is a chance you could lose money. The advantage to a robo-advisor, though, is that the stock market offers potentially much higher returns compared to any interest-paying investments.
Robo-advisors vary in the minimum amount of money they require you to invest. While you won’t want to use your investment account like a piggy bank, you typically do have a lot of flexibility in withdrawing money whenever you need it. Robo-advisors usually charge fees that are based on how much money is in your account, so expect to pay around 0.25% to 0.75% per year.
A robo-advisor can be a good idea if your primary goal is to invest your savings rather than to keep them accessible. While this type of investment involves more risk, robo-advisors are still a relatively safe way to invest in the market.
With a brokerage account, you have a lot more flexibility to build a portfolio, invest in individual stocks, or invest in bonds. Investing your savings through a brokerage account is a fair amount of work, since you need to think about what individual assets to invest in and how to diversify your holdings. Consider investing in an ETF or mutual fund as a way to build a portfolio when you’re just starting out.
Investing your savings with a brokerage account, such as Robinhood or an alternative, can be lower-cost than using a robo-advisor, but it also entails more risk. Compared to a savings account, your potential returns are much higher but so is the risk that you could lose money. However, if you are planning to invest your money for a long time and don’t need access to it, relatively low-risk ETFs and mutual funds may provide the best bang for your buck.
Conclusion: Saving Money Without A Savings Account
Keeping your money in a savings account is a safe way to keep your money accessible as cash, but it doesn’t provide much of a return on your investment. Alternatives like high yield savings accounts and money market accounts are similar to savings accounts but offer more favorable interest rates. If you don’t need to access your money, you may be able to get a better return on investment by turning to CDs or annuities, or by investing in the stock market through a Robo-advisor or brokerage account.