There is a wealth of alternatives to traditional savings accounts, among them high-yield checking accounts, CDs, and MMAs, each with its own pros and cons.
- Traditional savings accounts are a safe and low-risk option for saving money.
- Alternative options for a potentially higher return include money market accounts, certificates of deposit (CDs), Treasury securities and others
- It’s important to thoroughly research and consider these options before making a financial decision, considering your personal financial goals and risk tolerance.
Why Some People Might Be Looking For Alternatives To A Traditional Savings Account
While traditional savings accounts can be useful for saving money, they may not always be the best option for everyone. Here are a few reasons why some people might be looking for alternatives:
- Low-interest rates: Traditional savings accounts often have low interest rates, which means that the amount of money you earn in interest may be minimal.
- Limited access to funds: With a traditional savings account, you may have to pay fees or wait a certain amount of time to access your money.
- Investment goals: Depending on their financial goals, some people may want to invest their savings in assets that offer higher potential returns than a savings account, such as stocks, bonds, or real estate.
High-Yield Checking Accounts
Some financial institutions offer high-yield checking accounts that provide a slightly higher interest rate than traditional savings accounts, but there is usually a condition attached.
- Potentially higher interest rates
- Usually allows you to make unlimited transactions, including withdrawals and transfers
- May not charge any maintenance or transaction fees
- May have minimum balance requirements to earn more interest or avoid fees
- Only available at some banks and credit unions
You can open a high-yield checking account either online or in person. As with all bank accounts, you will need to provide your proof of identification, either passport or driver’s license, and personal information, such as name, address, and social security number.
Money Market Accounts (MMAs)
This is one of the more simple alternatives to a traditional savings account that also offers limited checking account services.
- Higher interest rates than traditional savings accounts
- More flexible withdrawal options
- Higher minimum balance requirements
- Interest rates may not be as high as other investment options
To open a money market account, you will need to visit a bank or credit union and complete an application.
Certificates Of Deposit (CDs)
A certificate of deposit (CD) is a type of time deposit offered by banks and credit unions. When you open a CD, you agree to leave your money in the account for a set period of time, known as the term. In exchange, you receive a fixed interest rate.
- Higher interest rates than traditional savings accounts
- Fixed interest rate
- Strict withdrawal terms—if you withdraw your money before the CD term is up, you may have to pay a penalty
- Limited access to funds
To open a CD, you will need to visit a bank or credit union and complete an application. You may also be required to provide proof of identification, such as a driver’s license or passport.
Treasury securities are debt instruments issued by the federal government. They include options such as Treasury bills, Treasury notes, and Treasury bonds. Treasury securities are considered a low-risk investment, as they are backed by the full faith and credit of the United States government.
- Low-risk investment
- Backed by the full faith and credit of the United States government
- Typically have lower returns than other types of investments, such as stocks or mutual funds
- Limited liquidity – it may take some time to sell your Treasury securities
To invest in Treasury securities, you must visit the U.S. Treasury’s website (www.treasurydirect.gov) and set up an account. You can then choose the type of security you want to invest in and the amount you wish to invest.
Peer-to-Peer (P2P) Lending
P2P lending involves borrowing and lending money directly to individuals or small businesses through an online platform. This can be a potentially higher-yield investment option, but also carries higher risk as it is not FDIC-insured like traditional bank accounts.
- Potential for higher returns than traditional savings accounts
- Can support small businesses and individuals in need of funding
- Not FDIC-insured, carrying higher risk
- Returns are not guaranteed
To get started with P2P lending, you must sign up for an account with a P2P lending platform, such as Lending Club or Prosper.
You will need to provide personal and financial information and may need to complete a credit check. Once your account is set up, you can browse and choose the loans you want to invest in.
Cash Management Accounts
Cash Management Accounts are a type of alternative banking option that combines features of traditional savings and investment accounts, and they are offered by non-bank financial service providers like brokerage firms or fintech startups.
- Can offer considerably higher interest rates than traditional banks
- Mostly operate online, thus offering a better customer service experience
- May have minimum balance requirements or fees associated with them
- Unlike traditional bank accounts, they may not offer the same level of FDIC insurance protection
Opening a cash management account is fairly straightforward, you only need to find a financial service provider that offers the account, gather the necessary documentation, and apply for the account either online or in person.
IRA Savings Accounts
An IRA savings account is a type of individual retirement account (IRA) that allows you to save for retirement while earning interest on your savings. These accounts are typically offered by banks and credit unions.
- Offer tax benefits that can help you save money on taxes now or in the future, depending on the type of account
- You can typically earn a fixed rate of interest on your savings
- Limited investment options; may not offer the same level of growth potential as IRAs invested in mutual funds
- You cannot withdraw money from an IRA savings account penalty-free until you reach age 59 ½
To open an IRA savings account, you’ll need to choose a bank or credit union that offers the account, gather your personal and financial information, and complete the application process, which can typically be done online or in person at a branch.
Tips For Choosing The Best Option For Your Specific Financial Needs
Determine your financial goals: Before you start considering different savings or investment options, it’s important to have a clear idea of what you’re saving for and how much money you’ll need to reach your goals. This will help you determine the best course of action for your specific needs.
- Consider your risk tolerance: Different savings and investment options come with varying levels of risk. It’s important to think about how much risk you’re comfortable taking on and choose options that align with your risk tolerance.
- Research and compare options: Don’t just go with the first savings or investment option you come across. Take the time to research and compare different options to find the one that is the best fit for you.
- Think long-term: While it can be tempting to go for the option with the highest short-term returns, it’s important to consider the long-term implications of your financial decisions. Make sure to choose an option that will still be beneficial in the long run.
Remember, these alternatives aren’t a replacement for a proper investment strategy. Experimenting with CDs, P2P lending, and the other options listed above should be a supplement to an already established, successful retirement savings plan.
Want to dig a little deeper? Have a look at our guide on how many savings accounts you should have.