Savings accounts are widely used as a reliable place to park cash. With a traditional savings account, your money can earn interest but be available to withdraw as soon as you need it. They are good for keeping your emergency fund, short-term investments, or for keeping money for a down payment for a house.
However, if you want a savings platform with a high annual percentage yield, you should look beyond traditional savings accounts at brick-and-mortar banks. Such accounts pay lower interest rates, with a national average of 0.09%.
In this article, we bring you alternatives to traditional bank savings accounts. But first, let’s take a closer look at the pros and cons of these account types. We’ll also look at some higher-yield alternatives to savings accounts that may better fit your needs.
Benefits of Traditional 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.
Traditional savings account are simple to open and offered by almost every banking institution, from national banks, online banks to a local credit union. Savings account are simple to open and offered by almost every banking institution, from national banks, online banks, to a local credit union. When you need money from your savings account, you can withdraw it at any time from an ATM or connect it to your checking accounts to serve as protection against overdrafts.
Your money also isn’t locked into any single traditional passbook savings account. If you switch banks, it’s easy to transfer your savings over to a new account.
In addition, regular savings accounts can be opened even if you don’t have much money to stash away just yet. Most banks require a minimum balance of $25, but some let you open a new savings account with as little as $1.
Another benefit to regular 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 a Traditional Savings Account
The biggest disadvantage to savings accounts is that while you earn interest, the interest rates are typically very low. Right now, savings accounts return on average just 0.09% per year. With inflation targeting around 2%, that means that your money is actually losing value the longer it sits in a regular 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. This is because many banks only compound your savings once a month or even once a year. So if you’re making regular 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 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 a slightly higher interest rate 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 balance of $10,000 or more if you want to get the top advertised interest rates. The main advantage of a money market account 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 years in exchange for a relatively high-interest rate. So 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. You have to pay tax on your interest every year with CDs, 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. However, 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 is that the stock market offers potentially much higher returns than any interest-paying investments. In addition, Robo-advisors vary in the minimum amount of money they require you to invest.
While you won’t want to use your investment account as a piggy bank, you typically do have a lot of flexibility in withdrawing money whenever you need it. In addition, Robo-advisors usually charge fees 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 more flexibility to build a portfolio, invest in individual stocks, or invest in municipal bonds. However, 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 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 plan 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.
Usually operated through websites, peer lending has become increasingly common. It offers benefits to two classes of people. First, it is a way for individuals to borrow money and obtain personal loans without resorting to financial institutions.
Secondly, it allows individual lenders to get an excellent interest rate on investment by funding loans with their lending account deposits. The downside is the risk involved as it is not FDIC insured like a bank savings account. So, you might lose money.
However, it is not without its advantages. For example, a peer-to-peer lending account is operable with a minimum deposit of $25. In addition, you can add money to the account, just as you would a regular savings account. And let’s not forget the high-interest rate.
Online Savings Account
Previously, having an account with an online bank seemed like a risky thing to do. But things are different today. Having an account with online-only banks offers you more interest than a traditional bank.
The preceding is mostly because they have only an online presence. As a result, online banks do not have branches all over the country, and they have less overhead costs and payrolls than brick-and-mortar banks. A note of caution, though. Carry out extensive research before moving your money to any online financial institution.
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.
Suppose you don’t need to access your money. In that case, 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. Lastly, online banking and peer-to-peer lending offer high-interest rates, so consider them too.