6 Alternatives to Bank Savings Accounts

Savings accounts are safe, easy to open and highly liquid, making them solid choices for emergency savings or accumulating funds for future purchases. However, they pay such low rates of interest that even modest inflation erodes the purchasing power of deposits over time. Fortunately, alternatives to bank savings accounts exist that can earn more interest without sacrificing too much safety and liquidity. Some also provide tax advantages that savings accounts lack. These are six alternatives to consider for your new bank savings account.

You can talk to a financial advisor about your options for a bank account before you decide where to park your savings.

Savings Account Basics

Savings accounts are basic low or no-fee deposit accounts offered by most banks and credit unions, as well as online-only banks. Savings accounts are insured against loss by the Federal Deposit insurance Corporation (FDIC), making them suitable for even the most risk-averse savers.

Savings accounts are highly liquid – savers can reliably access their money within a day or less. However, they typically do not come with check-writing privileges or debit cards, and many have limits on the number of monthly transactions.

The biggest limitation of savings accounts is the low interest rates they pay compared to investment alternatives. Even the highest-paying savings accounts pay interest rates that are just a fraction of the 10% annual average returned by the S&P 500 index of large-company stocks over the last century. Savings account interest does not even keep up with inflation, meaning money placed in a savings account will lose purchasing power over time.

How to Choose a Savings Account Alternative

When choosing a savings account alternative, start out by matching the option to your specific financial goal, timeline and risk tolerance. If you need easy access to your money within days, a money market account or a high-yield cash management account may be a suitable fit. These options offer more liquidity than CDs or Treasury securities while paying higher interest than traditional savings accounts.

For medium-term goals, such as saving for a car or a home down payment in the next few years, certificates of deposit and Treasury securities may offer more competitive rates in exchange for locking up funds. Laddering CDs or selecting shorter-term Treasuries can help preserve some access to your money without sacrificing yield.

If you are saving for long-term goals and are comfortable taking on more risk, peer-to-peer lending or bond ETFs can offer higher returns, although they come without FDIC insurance and may be more sensitive to market conditions. These are better suited for funds that you do not need to access quickly and can afford to invest over several years.

Before moving money out of a traditional savings account, evaluate your priorities, including safety, liquidity, returns and fees. Many savers find value in combining multiple vehicles to balance risk and reward, such as keeping emergency savings in liquid, insured accounts while using other tools to grow long-term funds.

Savings Account Alternatives

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A number of alternatives can give savers some of the features savings accounts lack, including better interest. However, the added benefits of the alternatives typically come with compromises on other features.

These are some savings account alternatives to consider.

Money Market Accounts

A money market account is a savings account with check writing privileges. It generally pays somewhat higher rates of interest than savings accounts and is also insured by the FDIC. However, it may require a higher minimum balance than a savings account and permits fewer transactions than a checking account.

Certificates of Deposit

Certificates of deposit (CDs) are fixed-rate time deposits. The rate is usually better than you can get with a savings account, and CDs are FDIC-insured for safety. The downside is that you must leave your money in the CD until it matures, which any take anywhere from days to years, and you will likely pay a penalty if you make an early CD withdrawal.

Cash Management Accounts

Cash management accounts are offered by non-bank financial institutions, such as brokerages. They combine features of savings, checking and investment accounts, and many are also FDIC-insured. They may pay more interest than a savings account and still can be used to pay bills just like a checking account. The downsides include more fees and higher minimum balances.

Peer-to-Peer (P2P) Loans

Peer-to-peer lending uses an online platform to connect you to borrowers. You can lend money at higher rates than savings accounts and, by spreading your money among borrowers, diversify to reduce risk. However, P2P loans are not FDIC-insured, and you will have to commit your money for up to three to five years.

Treasury Securities

The U.S. government funds some of its operations by selling investors Treasury bonds, bills and notes that may pay better interest than savings accounts while being equally low risk. Also, unlike savings accounts, interest on Treasury securities is free of state and local income tax. Treasury securities conveniently are sold online free of fees and commissions on its TreasuryDirect website. However, with maturities ranging from four weeks to 30 years, Treasury securities are not nearly as liquid as savings accounts.

Bonds

When you buy a bond, you are lending money to a corporation or government. There are several types of bonds. Corporate bonds may pay higher rates than savings accounts but are considerably riskier. Municipal bonds issued by states and cities are less risky, but typically pay less interest than corporate bonds. However, municipal bond interest is free of federal income tax and, in some cases, state tax. Both are less liquid than savings accounts, but bond exchange-traded funds can provide more liquidity and reduce risk through diversification.

Bottom Line

An investor reviews alternatives to savings accounts.

Both safety and liquidity make savings accounts good places to put emergency savings and funds for anticipated purchases. However, there are alternatives that can pay better interest and provide other advantages. Most involve trading more interest and easier access for less safety and higher fees or some other compromise. However, for savers who are not happy with their conventional bank savings accounts, there are viable alternatives that may be preferable.

A financial advisor can help you find the right solution for your banking needs based on your risk tolerance and future goals.

Savings Tips

A financial advisor can help you figure out how to manage your savings. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
All savings accounts are not created equal. In addition to having features that differentiate them from other savings vehicles, savings accounts also differ from each other. Here’s a look at the available savings accounts, taking into consideration yield, fees, minimum deposit and flexibility.