You want to earn a return on your money but aren’t entirely sold on a savings account. There are many other safe options to choose from that can make your money work harder for you. This guide explores six viable alternatives to traditional savings accounts and what to consider to find the best fit for you.
What are Some Common Alternatives to Bank Savings Accounts?
You can park your hard-earned funds in a certificate of deposit (CD) or money market account and watch them grow. There’s also the option to purchase U.S. Treasury Securities, open an investment account, invest in real estate investment trusts (REITs), or purchase bonds or invest in bond funds. More details on each of these alternatives will be provided shortly.
1. Certificates of Deposit (CDs)
What Are CDs?
A CD is an account that banks and credit unions offer that lets you earn a guaranteed above-average return. The catch is you must leave your funds in the account for a preset period – typically a few months to a few years – to earn the maximum amount of interest. And you cannot make additional deposits once the CD is open. You’ll likely incur a penalty if you need to make an early withdrawal.
It’s an ideal option for those looking for a low-risk investment option that pays a higher return than traditional savings accounts. Plus, it beats investing in the stock market and not having control over how your money will grow.
Advantages of CDs
- Higher rates compared to standard savings accounts
- Predictable, above-average returns
- FDIC- or NCUA- backed
Disadvantages of CDs
- Early withdrawal penalties
- Rates may not keep up with inflation
Best Practices for Investing in CDs
CD ladders can help you grow your money even more, as it involves parking your funds into several CDs, each with different maturity dates. This strategy allows you to capitalize on higher interest rates on longer-term CDs while still having access to your hard-earned money through CDs with shorter terms. As each CD matures, you can continue to reinvest the funds to build the ladder or use the funds for some other purpose.
Also, pay attention to the CD terms and choose wisely to avoid early withdrawal penalties. If you anticipate needing to access your funds sooner rather than later, it’s best to choose a CD with a term that works for you, even if it doesn’t offer the best APY available through the financial institution.
2. Money Market Accounts
What Are Money Market Accounts?
Money market accounts combine the features of checking and savings accounts. Most come with check-writing and debit card privileges, and you’ll earn a more attractive annual percentage yield (APY) than you would with a traditional savings account.
A money market account could work for you if you want a more flexible, liquid option to earn a generous return on your money. It doesn’t require you to lock your funds away for an extended period, and you have access to it at any time, minus the hefty penalties that often come with early CD withdrawals.
Advantages of Money Market Accounts
- Competitive APYs
- More liquid than CDs
- FDIC- and NCUA-insured
Disadvantages of Money Market Accounts
- Higher minimum balance requirement
- Transaction limits
- Lower returns than stocks and bonds
3. U.S. Treasury Securities
What Are Treasury Securities?
Treasury securities are debt instruments issued by the U.S. government. When you buy one, you are essentially lending money to the government. In return, the government pays you interest until the security matures. These investments are considered very safe because they are backed by the U.S. government. They also offer different maturities, meaning you can choose how long you want to invest your money.
If you’re a relatively conservative investor seeking a low-risk investment vehicle, treasury securities can be an ideal way to diversify your portfolio and grow your money.
Types of Treasury Securities
There are three types of treasury securities to be aware of:
- Treasury Bills (T-Bills): These are short-term investments sold at a discount and mature in one year or less.
- Treasury Notes (T-Notes): These mature in two to 10 years and pay interest every six months during this period.
- Treasury Bonds (T-Bonds): These are long-term investments that also pay interest every six months and mature in 20 or 30 years.
Advantages of Treasury Securities
- Backed by the U.S. government
- Exempt from state and local taxes
Disadvantages of Treasury Securities
- Low returns compared to stocks and real estate
- Potential loss of purchasing power due to inflation
4. Investment Accounts
What Are Investment Accounts?
Investment accounts let you hold and trade financial assets. More specifically, you can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs) and other types of securities. Although they come with a higher earning potential, investment accounts are riskier.
The value of your portfolio and earning potential are both tied to the performance of the market. So, you’re not guaranteed to earn the return you may hope for. Still, investment accounts can be beneficial and help you meet your long-term financial goals if managed properly.
Types of Investment Accounts
The types of investment accounts to be aware of include brokerage accounts, individual retirement accounts (IRAs), 529 college savings plans and employer-sponsored retirement plans.
Advantages of Investment Accounts
- Higher growth potential
- Potential tax advantages
- Diversification of assets to minimize risk
Disadvantages of Investment Accounts
- Loss of value in the short term with market downturns
- Brokerage, fund management and advisory fees
- Potential taxation on dividends, interest and capital gains
5. Real Estate Investment Trusts (REITs)
What Are REITs?
REITs are companies that own, operate or finance income-generating real estate. They pool the capital of many investors to buy a portfolio of properties, such as offices, shopping malls, apartments and hotels. By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends, which is why they often offer high yields.
REITs can be publicly traded on major stock exchanges to facilitate the purchase and sale of shares. There are also non-traded REITs that are not traded on public exchanges but are subject to the same regulatory requirements.
Types of REITs
There are various types of REITs, each focusing on different property sectors, including:
- Equity REITs: These own and manage properties.
- Mortgage REITs: These lend money directly to real estate owners or invest in real estate-backed loans.
- Hybrid REITs: These combine both equity and mortgage assets.
Other specialized REITs include Healthcare REITs and Retail REITs.
Advantages of REITs
- High dividend yields
- Liquidity, unlike physical real estate
- Diversification of property investments
Disadvantages of REITs
- Taxed as regular income
- Market risks during economic downturns
- Management fees and property expenses
6. Bonds and Bond Funds
What Are Bonds?
Bonds are debt securities issued by governments, municipalities or corporations. When you buy a bond, you are lending money to the issuer in exchange for periodic interest payments and the return of the bond’s face value at maturity. They can have several terms, from short-term (under a year) to long-term (over 10 years). The risk and return can differ significantly depending on the issuer’s credit quality and the bond term.
What Are Bond Funds?
Bond funds are mutual funds or exchange-traded funds (ETFs) that pool money from many investors to buy a diversified portfolio of bonds. These funds can invest in different types of bonds, including government, corporate and municipal bonds.
Advantages of Bonds and Bond Funds
- Predictable income
- Diversification to spread risk across issuers and sectors
- Professional management and liquidity
Disadvantages of Bonds and Bond Funds
- No fixed maturity date on bond funds
- Interest rate changes impact bond prices
- Management fees can reduce your overall returns
Conclusion: Factors to Consider When Choosing an Alternative
When selecting a savings account alternative, be sure to think about interest rates. Higher rates can increase your earnings over time. Also, consider liquidity, as some options, like certificates of deposit (CDs), might lock your money for a set period. Decide if you need access to your funds quickly.
Be sure to evaluate the risk level of each alternative. Some investments carry more risk but could offer higher returns. Make sure you’re comfortable with the potential for loss. And don’t forget to look into fees and penalties. Some accounts charge maintenance fees or early withdrawal penalties, and these added costs can reduce your overall earnings.
Also, check the flexibility of the account and ensure it works for you and that you plan to use it. And most importantly, review account insurance. Most accounts held at banks and credit unions offer FDIC or NCUA insurance for up to $250,000 per account per depositor to protect your funds in the event of a bank failure.
