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.
Talk to a financial advisor 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, 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.
Savings accounts’ biggest limitation 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 doesn’t even keep up with inflation, meaning money placed in a savings account will lose purchasing power over time.
Best Savings Account Alternatives
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.
Here are the top savings account alternatives:
Money Market Accounts
This is a savings account with check writing. Money market accounts generally pay somewhat higher rates of interest than savings accounts and are also insured by the FDIC. However, they may require a higher minimum balance than a savings account and permit fewer transactions than a checking account.
Certificates of Deposit
Certificates of deposit 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 commit to leaving your money in the CD until it matures in from 28 days to 10 years, and will pay a penalty if you withdraw it earlier.
Cash Management Accounts
These are offered by non-bank financial institutions such as brokerages. Cash management accounts combine features of savings, checking and investment accounts. They may pay more interest than a savings account and still be used to pay bills just like a checking account. Many are also FDIC-insured. Downsides can 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’ll have to commit your money for up to three to five years.
The U.S. government borrows money 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 at gov. With maturities ranging from four weeks to 30 years, Treasury securities are not nearly as liquid as savings accounts.
When you buy a bond you are lending money to a corporation or government. Corporate bonds may pay higher rates than savings accounts but are considerably riskier. Municipal bonds issued by states and cities are less risky, but interest is free of federal income tax and in some cases of state tax, too. Both are less liquid than savings accounts, but bond exchange-traded funds can provide more liquidity and reduce risk through diversification.
The Bottom Line
Savings accounts’ combination of safety and liquidity make them good places to put emergency savings and funds for anticipated purchases. However, alternatives 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 aren’t happy with their conventional bank savings accounts, there are viable alternatives that may be preferable.
- 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 best savings accounts, taking into consideration yield, fees, minimum deposit and flexibility.
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