Having a lot of money in cash is usually a bad idea. That’s why savings accounts are one of the most popular ways to keep money. Many years ago, the interest rate of savings accounts was respectable, but now, it has fallen to nearly zero. Such accounts tend to offer very low interest rates, with a national average of 0.06%
If you’re searching for a location to save your short- to medium-term savings — such as an emergency fund or a down payment for a future home — and want a solid return on your money, the savings account is one of the worst options for that. You might need something that provides a higher interest rate or APY coin.
For funds you might need one day and you don’t want much fluctuation in its value, investing them in stock markets or gambling is not recommended. Don’t worry! We are here with 5 best alternatives to traditional savings accounts to help you with that. In this article, we’ll give you what is better than a savings account when it comes to parking your money on the side.
What Is A Savings Account?
Savings account is an interest-bearing deposit account with an unknown maturity date. This is the opposite of a term deposit. That is, the money in the account can be deposited or withdrawn at will. Most savings accounts charge interest from the date of deposit to the date of withdrawal.
5 Best Alternatives To Traditional Savings Account
Alternative accounts and banking products are available on the market that may provide a greater return. Here’s what you need to know.
1. Certificates of deposit (CDs)
The basics. A certificate of deposit is a short-term financial asset issued by a bank or a savings institution, certifying a certain amount of money deposited with the certificate issuer. It accrues a fixed interest rate until a fixed withdrawal date. Banks and thrifts issue certificates of deposit to raise capital to finance their businesses. The certificate of deposit has a specific maturity date, interest rate, and can be issued in any denomination. Your money is guaranteed to earn a certain interest rate throughout the length of the CD, after which you can withdraw it or reinvest it in another CD.
The pros. CDs provide competitive interest rates, with the majority of them outperforming traditional savings accounts. CDs can also assist you in resisting the urge to spend money that you have set aside for a long-term savings objective.
The cons. Normally, you have to pay a fee as a penalty for early withdrawal, which means your money has poor liquidity.
2. Cash management accounts
The basics. Nonbank financial service companies, such as brokerage firms or fintech startups, provide cash management accounts. They combine the characteristics of checking and savings accounts to create a hybrid product that is not officially a bank account. CMA providers, on the other hand, generally work behind the scenes with partner banks to sweep their clients’ money into accounts at such banks, providing FDIC protection for the cash.
The pros. Cash management accounts give substantially greater annual percentage rates than standard bank savings accounts and are a good place to keep your money. If you already have a brokerage account with the same business, you will have the extra convenience of having all of your accounts under one roof.
The cons. While some CMAs offer debit cards and ATM access, others restrict how clients may fill their accounts.
3. High-yield money market accounts (MMAs)
The basics. Money market accounts, like traditional savings and checking accounts, are regulated by the Federal Deposit Insurance Corporation (FDIC). Money market accounts, in addition to providing greater interest rates than regular savings accounts, provide limited checking account services.
The pros. MMAs frequently feature respectable interest rates, which are normally higher than regular savings accounts. In addition, unlike a CD or peer-to-peer lending, you will have simple access to your funds.
The cons. MMAs require the minimum balance that you need to maintain and have a ceiling in the number of withdrawals that you can make each month.
4. Peer-to-peer lending
The basics. Peer-to-peer loans are personal loans that are funded by individuals rather than banks. Individuals wishing to borrow money can get personal loans through peer-to-peer lending instead of going to a bank, and individual lender investors can make high returns on investment by funding the loans with their lending account deposits.
The pros. Peer-to-peer lending is a win-win transaction: Investors receive a better rate of return on their money while borrowers get an interest rate on their loan that is often lower than that of bank-offered loans and credit cards.
The cons. If you require liquidity, peer-to-peer lending will not provide you with immediate access to funds. Furthermore, if a borrower fails to return your loan, you may lose your money.
5. Online bank savings accounts
The basics. Most of the services offered by traditional brick-and-mortar banks are available online, with the added bonus of high APYs and remote-friendly customer support.
The pros. A significant advantage of opening a savings account with an online bank is that they often provide a higher-yielding APY. Though these interest rates fluctuate, they are often 10 to 20 times higher than basic savings account rates.
The cons. Being a customer of an online bank requires you to be good at technology, as these banks often do not provide in-person customer care. Customers often access their accounts via a smartphone app or computer.
Conclusion
There are clearly alternatives to the traditional savings account that provide better interest rates on your money. They may not have some constraints ranging from minimum balances and monthly transaction limits to the absence of government insurance. However, the right choice at the right time is always efficient.
We hope after reading this article, you can find out one method that best fits your financial condition. Thanks for reading.
