Almost everyone needs a savings account. That doesn’t mean you should keep all your money in one. As your financial life gets more complicated you’re likely to need one or more of these alternatives to savings accounts.
If you’re simply looking for someplace to stash your short and medium-term savings, like your emergency fund, a savings account may be all you need. Your money will be safe and you can get it when you need it. If your savings needs are more complex or you simply want to earn a higher interest rate, there are alternatives to a savings account that could serve you better.
1. High-Yield Money Market Accounts
Money market accounts are much like savings accounts but offer higher interest rates. They also provide checks and debit cards, unlike conventional savings accounts.
Money market accounts often have reasonably high interest rates, generally higher than conventional bank savings accounts. You will also have easy access to your funds, unlike a CD or other accounts with restricted withdrawals.
Market money accounts typically require significant minimum deposits and balances, putting them out of reach for many people. Also, they are not insured by the FDIC, meaning that you technically could lose money. You would not be reimbursed. In practice, this rarely happens.
👉 Tip: Check to see if there is a fee for your money market account. This could affect your net earnings.
2. Certificates of Deposit (CDs)
A Certificate of Deposit accumulates a fixed interest rate until a specified withdrawal date. CDs are available in different durations, from 1 month to 5 years or more. Your money is guaranteed to earn a determined interest rate for the term, after which you may withdraw your money or reinvest it in a different CD.
A CD is one of the best alternatives to a savings account if you’re saving for an event that happens at a specific, predictable time, like a wedding or a tuition payment.
Certificates of Deposits have higher interest rates than ordinary bank savings accounts. CDs can also help you overcome the temptation to spend money you have set aside for a long-term savings goal.
There is usually a penalty for withdrawing your money earlier than the fixed date, which means your money is unavailable until the withdrawal date unless you are willing to pay a fee.
Waiting until the term is up could mean you miss out on better rates banks may offer as interest rates rise.
3. Online Bank Savings Accounts
Online banks provide most of the services that conventional banks offer, with the advantage of higher annual percentage yields. Online banks don’t have many of the overhead expenses that physical banks do, so they can offer higher interest rates. The best online banks offer high-yield savings accounts with rates that rival those of money market accounts.
Interest rates can be 10 to 20 times higher than brick-and-mortar bank rates. Also, you can make online transactions day and night without waiting for a bank to open.
To be a customer of an online bank, you need to be technologically savvy. These banks generally don’t provide customer service in person. Customers typically access their accounts through an app or smartphone, so these banks prioritize online chat or 24/7 helplines.
4. Cash Management Accounts
Cash management accounts are available through Robo-advisors, online investment brokerages, and mobile trading apps. These accounts allow you to transfer your cash to investments when you are ready. Your cash management and investment accounts are in the same company, and you can easily move funds back and forth. These features make cash management accounts one of the most versatile alternatives to savings accounts.
Cash management accounts tend to have significantly higher yearly percentage returns than conventional bank savings accounts and are an excellent place to put money aside. They may also offer direct deposit–an automatic deposit of your paycheck into the account. You can pay your bills from this account and withdraw through ATMs.
Rates are lower than those for high-yield savings accounts at online banks, and these accounts may have minimum balance requirements. You may have to save up to get the minimum amount needed to open an account.
5. IRA Savings Account
You can put short-term money into an individual retirement account (IRA) and leave it in cash instead of investing it. It will still take a day or two to get your money out, but the transfer to your bank will be done electronically, so you may find that is a reasonable time frame.
You will earn a better rate than a savings account. For a traditional IRA, you don’t pay tax on the money you deposit, but you will pay tax upon withdrawal. For a Roth IRA, you pay tax on the deposit money, but you don’t pay tax when you withdraw it.
Keeping your IRA in cash means you miss out on growth you might have had from investing it. The interest rate you earn from IRA savings is much lower than the amount you could make through stocks, bonds, and other IRA investments.
6. Investment Accounts
For many people, saving even a small amount of money seems an impossible goal. As you save more, your goals will expand. If you have set aside an adequate emergency fund and you have enough savings to cover your needs, it’s time to consider putting money into an investment account.
If you’ve decided to invest, you may choose to put your money into a brokerage account with a discount broker or into a tax-advantaged account like an IRA. Investing may seem intimidating at first, but the earlier you start, the longer your money has to grow!
A well-diversified investment account has proven over many generations to be the most effective way to grow money over time.
Investment involves risk, and investments can go up and down. There’s no guarantee that you won’t lose money, especially in the short term or if you fall victim to the temptation to trade aggressively.
Which Account is Best for You?
None of these accounts is best for everyone. Each has a place and each will appeal to different people. You’ll have to assess your needs and situation. Consider the following:
- How much money are you saving?
- How long are you willing to willing to commit money for?
- Is it possible that you’ll need to withdraw money earlier than expected?
- What specific goals are you saving for?
Compare your answers to the features of the accounts listed here and you’ll find the alternatives to a savings account that best suit your needs.