A savings account is a great place to store your money, but there are some savings account alternatives that might be better for you.
Saving money is a must when it comes to taking control of your money!
While you might not think there are any alternatives to a savings account, you will be surprised at the options you have.
Let’s get straight into five of the best savings account alternatives that you can use right now…
Are You Using A High Yield Savings Account?
Before getting into the savings account alternatives, ensure that you use a high-yield savings account.
If you aren’t, you are missing out!
A high-yield savings account is a specialized savings account that pays approximately 20 to 25 times the national average.
Banks like CIT Bank and Ally Bank are online banks that offer high-yield savings accounts to grow your money!
For example, Chase’s savings account only offers 0.01%, and the CIT Bank Savings Connect account offers 4.20%.
This means that CIT Bank offers over 400x in interest on their savings account than Chase, which means that you will earn more money!
So, if you are not using a high-yield savings account, then I highly recommend switching to one before looking for alternatives.
Call your current bank and ask them what your current interest rate is and the best rate they can offer.
Compare this with banks like CIT Bank and Ally Bank, and if they cannot match this rate or come close, then I recommend opening a high-yield savings account at another bank.
CIT Bank is great, and they are FDIC insured like many other banks, so your money is safe.
I highly recommend checking out CIT Bank to earn more interest on your savings!
Now, let’s get into these alternatives to a savings account…
T-Bills, or Treasury Bills, are short-term debt from the US government that the Federal Reserve backs.
Essentially, you are loaning money to the government so they can fund public projects, and in return, they will give you back your money with interest.
The US Treasury Department sells bills regularly at auctions. T-Bills, mainly, are available in a few different durations, such as 4, 13, 26, and 52 weeks.
You can purchase T-Bills at TreasuryDirect or through your brokerage accounts, such as Fidelity or Vanguard.
It’s one of the best savings account alternatives, but you won’t make much with T-Bills. The earnings are pretty slim, but it’s one of the safest options.
If you need to convert the investment rate into an annual percentage yield (APY) to compare to a high-yield savings account, use the formula/example below:
APY = (1+ (Investment Rate / (# of periods in a year)) ^ ((# of periods in a year) – 1 )
Let’s calculate the four-week APY for the example above.
APY = (1 + (.00101/ (52/4)) ^ ((52/4)-1)
APY = 1.0%
Instead of explaining, let’s discuss how I would buy $1,200 of T-Bills by laddering them. I would purchase four-week T-bills in the example below.
|Week 1||Buy $300|
|Week 2||Buy $300|
|Week 3||Buy $300|
|Week 4||Buy $300|
|Week 5||Reinvest $300|
|Week 6||Reinvest $300|
That is laddering them so that starting in week five onward, you will have money available if needed.
Additionally, it will help reduce the impact of rate changes on your portfolio of T-Bills.
- Total investment based on US government creditworthiness
- Exempt from having to pay local and state income taxes
- High Liquidity
- Risk of rising inflation
- Lower return on investment due to the perceived safety
- T-Bills are only available in $100 increments; because of this, an investor cannot reinvest interest gained, thus reducing the benefit of compound interest when laddering the bills.
Slightly less liquidity than a high-yield savings account, but if laddered, it could provide the same or somewhat better yield than a high-yield savings account.
Also, if you are lucky enough to have over $250,000, buying T-Bills is an excellent way to protect your money, as FDIC only covers $250,000 per account.
Certificate of Deposit
Commonly denoted as a CD, a Certificate of Deposit is a bank/credit union-issued product that provides a premium interest rate in exchange for an investor agreeing to leave a sum of cash for a predetermined period.
Shopping around for the best rate is essential, as it is genuinely surprising the range of rates that different financial institutions will offer.
Additionally, just like under T-Bills, you could ladder your CD investments to provide more regular returns and reduce some inflation risk.
- A safe investment that FDIC insures up to $250,000
- Provide predictable returns for the specified period.
- A wide selection of terms & institutions to select from
- Minimal liquidity can result in an early withdrawal penalty, which could result in reduced interest or event loss of principle.
- Risk of inflation. Low rates are excellent for those borrowing but not so for savers. Rising interest rates would reduce the net return.
With the creation of online high-yield savings accounts, the yield difference between CDs and high-yield savings account are not that different.
The advantage of the CDs is that they have fixed returns compared to the high-yield savings account.
Your money is locked away for a set time, so it’s not as liquid as a savings account, but you can get some decent returns on your money, making it a great savings account alternative.
If you want to check out the current interest rates for different terms, check out rates on Investopedia here.
A conversation about savings account alternatives would not be complete if I did not mention Multi-Year Guaranteed Annuities (MYGAs) after mentioning CDs.
CDS and MYGAs function in a similar way. An insurance company takes the sum of cash and promises a fixed return for a specified period.
Another significant difference is that since MYGAs are annuities, they are tax-deferred, which gives them an advantage since no taxes have to be paid until a withdrawal is made.
I think an example might help show you the power of tax-deferred investments:
The initial investment is $100,000, and the tax rate is 28%
|Years Invested||Taxed 7% return||Tax-Deferred Annuity 7 % Return|
Without you paying yearly taxes on the MYGA, the annuity can accumulate gains faster.
- Relatively safe investment (backed by insurance companies)
- More attractive rates compared to CDs
- Most MYGAs allow the withdrawal of interest or up to 10% of the premium to provide some liquidity.
- Ability to annuitize MYGA for reliable payout
- Limited liquidity could result in surrender charges if withdrawn before the commitment period.
- Not FDIC insured (only as secure as the finances of the insurance company)
- Usually require more extended periods of commitment
- It has required minimum investments larger than all the other options on this list.
To get a feel for the rates offered on current MYGAs, check out this site.
Money Market Account
Another alternative to a savings account is a Money Market account, similar to high-yield savings accounts.
If a savings account and a checking account had a child, it would be a money market account.
It has the ease of access to a checking account plus the higher returns of a savings account.
- Ease of access to cash (most allow debit cards)
- Higher interest rates. Since most money market accounts have tiered levels, it can allow for higher rates with higher balances.
- Limited withdraws. The Fed rules limit withdraws to six times a month, but some banks and credit unions restrict it even further to as low as three times a month.
- Higher minimum account balances compared to other options.
If you want to review some rates for the money market account, click here.
Another option, instead of a high-yield savings account, is to select a bond fund.
The most accessible funds are ETFs that you can pick from to ensure a diversified portfolio of bonds.
You will most commonly see funds from corporate, high-yield, or municipal bonds.
- Significant opportunity to increase value through principle growth.
- Interest paid is much higher than interest from a savings account
- Funds are diversified to help reduce risk
- Possibility to lose invested principle
- Inflation risk, which could reduce the return
- Corporate bonds are not insured and could default.
- Interest is not guaranteed.
A bond fund is not a great option for an emergency fund, but for anything over that would be a good option.
You now have five savings account alternatives that provide a means for storing your money.
Some options might result in better yield depending on your risk tolerance on liquidity needs.
As mentioned earlier, I highly recommend transferring that balance to a high-yield savings account with a bank such as CIT Bank if you have a standard savings account.
All in all, I see a high-yield savings account is probably best for emergency savings and for cash that is needed immediately.
Still, other options on this list may be more suitable to try to get slightly higher returns for short-term savings.
What are some other savings account alternatives that you’d like to add? Which option is your favorite? Let me know in the comments below!