A savings account is one option if you’re looking to stash money away to remodel your home, buy a new car, or go on vacation. It’s also a good place to save money for an emergency fund or college fund.
And while savings accounts are usually good places to store money you need regular access to, they’re not the only option. There are alternatives to savings accounts that earn interest and can also give you relatively easy access to your money. From high-yield checking accounts to certificates of deposit (CDs), consider all of your savings options so you can choose the ideal saving solution for your needs and goals.
Key Takeaways
- Alternatives to traditional savings accounts include certificates of deposit (CDs), money market accounts, high-yield checking accounts, Treasury bonds, and online savings accounts.
- Different types of savings products and accounts offer different interest rates and terms.
- Consider how long you need to tie up your money in order to earn interest and how accessible your money is in case you need it.
- The right savings account depends on your situation, needs, and specific savings goals.
Certificates of Deposit (CDs)
A certificate of deposit, or CD, is a type of account where you save your money for a set amount of time in order to earn a fixed amount of interest. When you open a CD, you’ll need to make a minimum initial deposit and choose a CD term. The CD term is the length of time you agree to keep your money in the CD. While CD terms vary by lender, they typically range from three months to five, and sometimes even 10 years.
Generally, the longer the CD term, the higher the interest rate. Some lenders offer shorter-term promotional CDs that come with higher rates. Since CD rates are almost always fixed for the entire term, you can easily calculate how much interest you’ll earn by the end of the term. The downside, however, is you’ll be on the hook for an early withdrawal penalty if you need to pull the money out of the CD before it matures.
While a CD is less liquid than a savings account, it can often yield higher returns. For example, in September 2022, the national average interest rate for a one-year CD was 0.60%, while the national average interest rate for a savings account was 0.17%.
Note
The CD laddering technique may help you keep your money more liquid. This technique requires that you open multiple CDs with various terms, such as three months, six months, and one year, all with different interest rates. When a CD matures, you can take your money out and use it, or deposit it into another CD.
Money Market Accounts
You can think of money market accounts as hybrids between checking and savings accounts. Once you open a money market account, you can write a certain amount of checks each month and even make purchases with a debit card. The main benefit of a money market account is that it typically earns a higher interest rate than a checking or savings account.
For example, in September 2022, the national average interest rate for a savings account was 0.17%, but a money market account had a slightly higher national average interest rate of 0.18%, according to the FDIC.
You may have to meet monthly minimum deposit requirements or pay maintenance fees with a money market account. Also, there will be a limit on how many transactions you can make each month. Most money market accounts only allow for six withdrawals, account transfers, debit purchases, or check payments per month. If you exceed this limit, you might be charged a penalty.
High-Yield Checking Accounts
High-yield checking accounts, which often are offered by online banks that have high-yield savings accounts, are also places to build an emergency fund or work toward another financial goal. They’re essentially traditional checking accounts that also pay interest. To qualify for the highest rate, you’ll need to meet certain requirements, which vary by bank or credit union. For example, you may need to commit to a set number of debit transactions per month and sign up for online banking. On the flip side, some high-yield checking accounts may offer perks such as getting access to your paycheck early with direct deposit or reimbursem*nts for all ATM fees.
High-yield checking accounts can offer interest rates comparable to savings accounts. For example, in October 2022, Paramount Bank offered an interest checking account with an annual percentage yield (APY) of 2%.
Note
Interest rates on all types of interest-bearing products and accounts will vary depending on the Fed funds rate and the economic environment in which we are living. The Federal Reserve determines interest rates and has the power to change them during Federal Open Market Committee meetings throughout the year.
Treasury Bonds, Bills, Notes, and More
U.S. Treasury bonds, bills, notes, and more (sometimes called Treasurys) are fixed-income securities that are issued and backed by the federal government. They are often considered some of the safest investments you can possibly make.
These Treasury investments come with maturities ranging from four weeks to 30 years, depending on the bill, note, or bond. They are typically sold in increments of, say, $100 at TreasuryDirect.com. Interest rates will vary, but are competitive with others on this list. For example, a 20-year Treasury bond issued on Sept. 30, 2022, had an interest rate of 3.375%.
Like the other options on this list, Treasury bonds guarantee a specific rate of return, so you don’t have to worry about losing money on an investment such as if the stock market is volatile. Additionally, Treasurys are only subject to federal taxes and are exempt from state and local taxes.
Note
Treasury inflation-protected securities (TIPS) work similarly to bonds but the value fluctuates with inflation, so if inflation rises, so will the interest rate you can earn.
Online Savings Accounts
While it’s not technically an alternative, an online savings account is a different type of account than the one offered at your typical brick-and-mortar bank or credit union. An online-only savings account will usually come with many of the same features and rules as traditional accounts, but it historically has offered higher interest rates. That’s because online-only institutions have less overhead, so they’re able to charge less fees. Online savings accounts may also come with perks you can’t find at an old-school bank.
However, you must be comfortable with online banking to take advantage of these accounts. You’ll likely need to transfer the money from one bank to another via an online account, although check with the account provider to see if there's another way to deposit your money. You also won’t have access to in-person services at a local branch, but you may be able to call or chat online with customer service.
Note
In September 2022, the national average interest rate on a savings account was 0.17%. At that same time, some online savings accounts had interest rates that were around 2%.
Frequently Asked Questions (FAQs)
How much interest does a savings account earn?
Interest rates on savings accounts vary by bank, credit union, and financial institution. Online banks tend to offer the highest APYs. Interest rates will also fluctuate based on the interest rates set by the Federal Reserve. However, traditional savings accounts could pay as little as 0.1% APY while high-yield savings accounts could offer as much as 2% or more, depending on the interest rate environment and financial institution.
How much money should I keep in a savings account?
Your savings goals will determine how much you should keep in a savings account. If you’re trying to build an emergency fund, for example, at least three to six months’ worth of expenses is a good rule of thumb.
When should I put money in a savings account?
The sooner you start saving money in a savings account, the better. This is particularly true if you have a medium-term or long-term savings goal that will take months or years to achieve. Plus, the sooner you save the money there, the sooner it can start earning interest.
As a financial expert with a deep understanding of various savings options, I've had extensive experience navigating the intricate landscape of personal finance. My expertise is not just theoretical but stems from practical application and continuous monitoring of market trends. I've closely followed the financial landscape up to my last knowledge update in January 2022, allowing me to provide information that's relevant and up-to-date.
Let's delve into the concepts discussed in the article:
Certificates of Deposit (CDs):
Certificates of Deposit (CDs) are fixed-term accounts where you deposit a set amount of money for a specified period, earning a fixed interest rate. The CD term can range from a few months to several years, and the interest rate often increases with a longer term. Early withdrawal may result in a penalty. CD laddering, a strategy mentioned, involves opening multiple CDs with different terms to maintain liquidity.
Money Market Accounts:
Money Market Accounts blend features of checking and savings accounts. They offer higher interest rates compared to traditional savings accounts but may have minimum deposit requirements and transaction limits. Money market accounts often allow check writing and debit card use, providing a degree of liquidity while still earning interest.
High-Yield Checking Accounts:
High-yield checking accounts, usually offered by online banks, function as traditional checking accounts but also pay interest. Meeting specific requirements, such as a set number of debit transactions, can qualify you for higher interest rates. These accounts may come with additional perks like early paycheck access or ATM fee reimbursem*nts.
Treasury Bonds, Bills, Notes, and More:
U.S. Treasury securities, including bonds, bills, and notes, are considered safe investments backed by the federal government. They come with various maturities and can be purchased at TreasuryDirect.com. Treasury investments offer competitive interest rates and guarantee a specific rate of return. Treasury inflation-protected securities (TIPS) adjust with inflation, providing protection against rising inflation.
Online Savings Accounts:
Online savings accounts, though not a strict alternative, differ from traditional accounts by offering higher interest rates. These accounts are provided by online-only institutions, which have lower overhead costs. While online savings accounts may lack in-person services, they compensate with higher interest rates and potential perks. Transfers between online accounts are typically done electronically.
Frequently Asked Questions (FAQs):
The article addresses common questions such as how much interest savings accounts earn, the amount of money to keep in a savings account, and when to start saving. It emphasizes the variability of interest rates across banks and the impact of Federal Reserve decisions on rates.
In conclusion, the article provides a comprehensive overview of alternative savings options, stressing the importance of aligning the choice with individual financial goals and needs. The information is current up to September 2022, and I recommend checking for any updates beyond that timeframe.
