Most people know that they can save money by putting it into a traditional savings account. But there are many similar alternatives. Money market accounts, CDs, and even bonds can offer the FDIC protection of a savings account while earning a respectable interest rate. For those willing to trade a bit of security for an extra return on their savings, there are further alternatives, such as peer-to-peer lending services.
Many people worry about earning enough interest on their savings accounts to keep up with inflation. And although U.S. residents don’t have to worry — at least not yet — as much as those in countries like Argentina, where inflation can reach upwards of 100 percent, people are often concerned enough to look for alternatives to traditional savings accounts. Fortunately, you do have some options, each with varying levels of risk, where you can hold your money while earning some interest. Focusing on security as well as yield can help protect your savings from natural inflation, serve as an emergency fund, and act as a pathway to achieving your financial goals.
No-risk savings account alternatives
Every penny you earn in income is typically the result of hard work, something you can teach your kids with a traditional passbook savings account. For many of us, losing even a little bit of this hard-earned cash can leave us feeling disappointed. So if you want to earn interest with minimal risk, here are some alternatives to a savings account.
Money market accounts
Money market accounts offer the same protections of the Federal Deposit Insurance Corporation (FDIC) while providing a higher annual percentage yield than a traditional savings account. A money market account can actually act as a sort of hybrid between a checking account and a savings account, enabling the account holder to write checks.
Certificates of deposit (CDs)
Certificates of deposit, otherwise known as CDs, lock money up for a certain period of time and bear a set amount of interest. With CDs, there is a tradeoff between time and interest. A six-month or one-year CD will generally offer a lower interest rate than a two-year or five-year CD. CDs are protected under FDIC rules, so they are effectively risk-free. The type of CD you choose should be based on your investment goals over time and if you have a need for liquidity any time soon.
Looking for the best CD rates on offer? Peruse the options below to find the best deal for you.
You’re probably familiar with treasury bonds, globally known as the safest asset available. Treasury bonds are extremely liquid and offer a yield that is typically better than that of a traditional savings account. Many other countries offer government bonds as well, such as Gilt funds in the U.K. However, treasury bonds require a minimum deposit, and $5 won’t cut it. According to the U.S. government, $25 is the minimum needed to purchase a treasury bond.
High-yield savings or checking accounts
If you want to earn a little extra interest on your everyday accounts, then a high-yield checking or savings account might make sense. High-yield accounts offer higher interest rates than a normal savings or checking account, but they usually come with requirements. For example, one tradeoff might be a required number of direct deposits or a limit on how many withdrawals you can take each month. With high-yield checking accounts, many banks or credit unions will insist on a minimum balance and either a direct deposit or a bill pay linked to the account.
Cash management accounts
Cash management accounts are similar to high-yield checking accounts in that they let you move money with ease but are usually associated with non-bank financial institutions. These accounts often pay higher interest rates than checking accounts and allow you to write checks and use a debit card.
Best savings account alternatives with risk
For some savers, the rate of return takes precedence over all else, including risk. Here are a couple of alternatives to traditional savings accounts that are not protected by the government.
For those looking to earn interest and willing to lock up their money for a while, peer-to-peer loans can be a good solution. With peer-to-peer lending, you give money to a platform and they loan it out to people who need it, in most cases, with a very high interest rate. You pocket the difference between the loan interest and how much the P2P company makes. However, it’s incredibly important to make sure that the P2P services you use are legitimate and have a solid track record.
Online savings accounts (non-FDIC-insured)
Online savings accounts that come with FDIC protection typically have interest rates that are similar to traditional savings accounts, although they can be a bit higher. However, fintech companies now offer savings accounts that are not FDIC insured with interest rates well above the norm. Just like P2P loans, be careful, as the federal government doesn’t back non-FDIC-insured fintech online accounts.
Online savings accounts, whether FDIC-insured or not, are all the rage. Here are some options that you might want to consider.
If you are comfortable with the possibility of losing your money in exchange for the chance of higher returns, there are multiple investment accounts available, such as traditional brokerage accounts, mutual funds, 401(k)s, and IRAs. These accounts provide access to a wide range of investments, such as stocks, bonds, exchange-traded funds, and REITs.
Some online savings accounts, such as Save’s Market Savings provide a hybrid option where your savings are insured, typically through a partnership with an FDIC member, but the interest is variable based on market performance. This allows your savings to get exposure to the stock market without risking your savings. The trade-off is that your APY is not guaranteed and could be 0% if assets don’t perform.
Can savings accounts go negative?
Yes, they can. For example, you might have a savings account with a minimum balance; otherwise, you are charged a fee. If you spend all the money from your savings account and incur a fee, then the balance can be negative. Your account might offer overdraft protection to cover a negative balance, though.
Are savings accounts FDIC insured?
Most traditional retail banks are FDIC insured. But if you are not sure or if you sign up for an online savings account with a fintech company, you should ask whether or not they are FDIC insured. Most credit unions are insured through the National Credit Union Association (NCUA). Both FDIC and NCUA insurance provides the same type and amount of coverage. So the real question is whether you prefer a credit union or a bank.
Do savings accounts earn compound interest?
Yes, savings accounts use compound interest. You earn the interest on the balance of the account, which includes the interest you have already earned.
Are savings account interest rates monthly?
With most savings accounts, you earn interest every day. But the bank will only deposit the interest once a month.
When does a savings account become dormant?
It depends on the bank. Most banks will categorize a savings account as “dormant” if it has not been used for three years. However, some will not label it as dormant for up to 15 years.
When should you open your first savings account?
You should open your first savings account the minute you start earning income or receiving any sort of money. If you have the money, you might as well be earning interest on it. Parents can open savings accounts for their kids as well.
When can you take money out of a savings account?
As long as the savings account does not have a lock-up period, like a CD does, you can take it out whenever you want. However, be careful of maintaining your minimum balance, and if you have a high-yield savings account, you may be limited on the number of withdrawals per month.
- Traditional savings accounts are safe places to hold your money, but there are alternatives that offer both higher interest rates and FDIC protection.
- For those that prioritize security, FDIC-insured alternatives like money market accounts or CDs can offer protection with a higher yield than traditional savings accounts.
- Peer-to-peer and non-FDIC-insured online savings accounts can offer even higher interest rates but are riskier places to invest money.