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Alternatives to high-yield online savings accounts

Written by Nickel - 21 Comments

If you’ve got money in the bank, then you’re likely aware that savings account interest rates plummeted a long time ago. For example, in the month after we opened our DollarSavingsDirect account in February 2009, they slashed their interest rate by nearly 35 percent, and WT Direct cut rates twice within a week.

Here’s a sampling of current savings rates (as of July 31, 2016):

  • EverBank Yield Pledge Money Market – 0.61% APY (1.11% 1-year introductory APY is available for first-time Yield Pledge Money Market account holders on balances up to $150,000.)
  • Ally Bank Online Savings Account – 1.00% APY
  • Sallie Mae Money Market Account – 0.90% APY
  • FNBO Direct Online Savings Account – 0.95% APY

Unfortunately, things aren’t likely to get better anytime soon. This all begs the question of what you should do when your high-yield savings account no longer qualifies for the “high-yield” moniker. Assuming that you don’t want to tie your money up indefinitely, your options are somewhat limited.

Consider a local bank or credit union

While online banks typically offer significantly better rates than the average brick and mortar bank, you can find some great deals by looking locally. Consider both local banks and credit unions, and also look into high yield checking accounts. You might have to jump through some hoops, such as signing up for direct deposit and/or using your debit card a minimum number of times per month, but there are still deals to be had.

Consider certificates of deposit (CDs)

Another possibility would be to put your money in CDs. If you won’t need access to the full amount at the drop of a hat, you can build a CD ladder such that your a portion of your savings will be available to you on a monthly, quarterly, or yearly basis. Unfortunately, CD rates have fallen along with savings rates, so there’s not currently a lot room for improvement here.

Consider savings bonds

While rates on Treasury securities have fallen dramatically since the Great Recession ended in June 2009, savings bonds from the U.S. Treasury are still very secure. For example, Series I Savings Bonds are currently paying a composite rate of 0.26 percent.

(The rate is subject to change on a semi-annual basis because it is a composite rate that depends in part on the CPI-U, which is the value of the Consumer Price Index for urban consumers.)

According to TreasuryDirect.gov, you could buy “… $10,000 in electronic Series I bonds, and $5,000 in paper Series I bonds,” but the paper bonds can only be purchased with your tax refund. Other drawbacks of I-bonds are that you can’t redeem them for 12 months, and you forfeit 3 months’ interest if you redeem them in less than five years.

Consider paying off debt

While you always need to maintain a cash cushion, there’s no point in earning a pittance on excess savings if you’re carrying debt. Instead of settling for 1 to 2 percent interest, why not throw some extra cash at your outstanding debts? Note that this breaks the liquidity rule, but it’s still worthwhile if you can swing it.

Consider peer-to-peer lending

If you’re looking for a better return and don’t mind taking on a bit of risk, check out Lending Club. It’s not FDIC-insured, but returns have averaged between 5.25 percent to 8.57 percent historically. It is free to open an account, and you can get started with as little as $25.

Just deal with it

Last but not least, you could always just choose to suck it up and deal with the low rates. While low rates are frustrating, you have to consider how much you’re actually losing by sitting on your hands. If you don’t currently have a lot of money in savings, then you’re not missing out on much in terms of real dollars. Your time might be better spend figuring out other ways to earn extra money or otherwise improve your financial situation.

If you have any other suggestions, please share them in the comments.

Published on February 27th, 2009
Modified on August 1st, 2016 - 21 Comments
Filed under: Banking,Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

  1. So with the I-Bonds. So if you take them out after 3 months there is no risk to losing any of your initial principal? And if you take the money out after 1 month (just worst case scenario here) what happens?

    I guess what I’m asking is 5.6 is a great rate, is it still worth it to keep money in there for a year maybe two or so knowing your going to be incurring the 3 month penalty?

    Comment by Anonymous — Feb 27th 2009 @ 8:31 am
  2. You could also consider doing energy savings projects in your home (replacing windows, old furnace, boiler, adding insulation, roof – the list goes on). Many of these things not only will pay you back much better than a savings account, but now with the government incentives, it makes it even more attractive. I am an Energy Engineer for a major pharmaceutical company and have done some typical projects that have 3 year or better paybacks. That equates to over 25% return on your money. And that also does not take into consideration the escalation costs of natural gas or electric. You can start by having an energy audit done on your home for a couple of hundred dollars and follow the recommendations. While home projects may not have this great of return, just as long as you beat the rate of return that your currently getting, it makes sense. Remember to treat is as an investment.

    Comment by Anonymous — Feb 27th 2009 @ 9:11 am
  3. I’m on the high-yield checking bandwagon. We can open 2 accounts for our household and each can make 5.01% on up to $20,000. There are several others in our area that make anywhere from 3.5% to 4.5% as well. The requirements aren’t that difficult to meet either. I’m done with all the online savings accounts with the exception of ING for some specific purposes.

    Comment by Anonymous — Feb 27th 2009 @ 11:21 am
  4. At CK:
    Something to keep in mind about I bonds, you cannot redeem them for at least 12 months (11 months +1 day if you buy at end of month). Then after 12 months to 5 years you loose 3 months interest if you cash in.

    http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iredeem.htm

    That being said, I still like them and the potential tax advantaged use for education expenses. It will be interesting to see what happens to them if the CPI goes way up due to all of the cash that will flood the market to pay for the “stimulus” spending.

    Comment by Anonymous — Feb 27th 2009 @ 12:39 pm
  5. Where do you see the 5.64% on I Savings bonds? I’m looking here but it might be the wrong place:

    http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

    It shows 0.70% fixed rate and 2.46% inflation rate for a total of 3.16%.

    Thanks for the link to checkingfinder – I see some nearby for 4-4.5%.

    Comment by Anonymous — Feb 27th 2009 @ 3:13 pm
  6. to FlatGreg:

    The rate you receive is not just the addition of the fixed and inflation rate. It is slightly more complicated:

    Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

    In the link you posted, scroll all the way down.

    Comment by Anonymous — Feb 27th 2009 @ 4:24 pm
  7. Ah, thanks. Didn’t see that the inflation rate was semiannual.

    Comment by Anonymous — Feb 27th 2009 @ 4:40 pm
  8. Thanks, g. Beat me to the punch. Yes, you have to calculate the “composite” rate (I edited the post to clarify what we’re talking about).

    Comment by Nickel — Feb 27th 2009 @ 4:50 pm
  9. I have been watching my HSBC Online account decline for about six months now. It’s pretty annoying. I am constantly struggling with your “Consider Paying Off Debt” point. I don’t have a lot of money in my emergency fund, but I am financially stable. I am considering borrowing half of it to put towards my debt, which will switch from a 0% interest rate to over 15% in June. Do you think it would be worth it to tap my funds and pay myself back, in the interest of getting rid of debt faster?

    Comment by Anonymous — Feb 27th 2009 @ 11:46 pm
  10. @CK – one thing to keep in mind about I bonds. The current rate is only valid until end of April. After April they will have new inflation numbers, so the inflation portion will be different. I.e. if you buy now, you’ll get same .7% fixed rate but different inflation portion. I don’t know what this will be – they look for inflation immediately preceding February of this year, and during these 6 months, the inflation was very low, we may have even had deflation. In which case the inflation portion will be negative, so the rate may even be 0.

    If you buy in May, you’ll get different fixed portion of the rate. We don’t know what it’ll be, it could be higher or lower.

    Regardless, keep in mind that given the current deflationary environment, the composite rates will be very low in the near future. If we get inflation in a couple of years as many believe, I bonds’ rate will be higher.

    Personally, I am waiting for May before I buy more I bonds. I managed to buy my 10K in March last year when I got 1.2% fixed rate. I don’t see much reason to lock in .7% fixed rate. But… If this goes down I might regret it.

    I

    Comment by Anonymous — Feb 28th 2009 @ 12:10 pm
  11. My credit union (forum) offers a 4.75% no fees no min, checking account with a direct deposit, and 10 signature based debit card purchases per month. Midwest America Credit Union (www.midwestreward.com) offers 5.31%. Charter Bank (www.turbochecking.com) offers 5.01% rewards checking and is open to anyone in the nation on balances up to $25k with a direct deposit + 13 debit card transactions.

    Comment by Anonymous — Feb 28th 2009 @ 2:32 pm
  12. Paying off debt is great advice. Since rates are really low and your debt is probably much higher (talking interest here) you will save in the long run. Just make sure you keep some cash handy and don’t drain the emergency fund just yet.

    Comment by Anonymous — Mar 1st 2009 @ 1:45 am
  13. I’m still uncomfortable about paying off the small second mortgage on my house, even though the money is in the bank to do it. I just feel TOOOOO antsy about the economy to face the future without a serious emergency fund…and the amount I’ve saved to pay that $169/month debt would support me for almost two years in the event of a layoff. Since at my age I’m unlikely ever to get another decently paying job, the emergency fund will have to carry me through to full Social Security & Medicare.

    Instead, I’ve been developing as many strategies as I can think of to cut day-to-day expenditures and save money out of cash flow while I still have a cash flow. If and when the economy improves, then I’ll pay off the loan. But until then, I’m clinging to every penny and keeping it in relatively safe investments (money market, credit union).

    Comment by Anonymous — Mar 1st 2009 @ 9:09 am
  14. I doubt I-bonds will go to zero any time soon, but yes I expect the rate on current bonds to drop in May. But even if we experience deflation, I doubt the actual government numbers will reflect it. People fear deflation, I think they’ll do what they can to hide it.

    Comment by Anonymous — Mar 1st 2009 @ 12:24 pm
  15. You have to really understand i-bonds to decide if you want to buy them or not and I am afraid the comments and the posting here does not cover it in depth. I am a big believer in i-bonds. Here is a summary of what you need to know:

    1. yes, they are paying 5.64% and that will be for the first 6 months you own it. After that, my guess is there is a 99% chance it will pay 0% for the next 6 months. The fixed rate will get wiped out by the deflation/inflation portion and I doubt they will move the fixed rate to the 5% or so they would have to to make it pay out.

    2. However, that is not all that bad. If you buy them at the end of a month (like March) that counts as 1 month even though you only had them for like 1 day. Then, sell them at the beginning of the final month and that counts as a full month. In essence you get an 11 month CD, tax deferred, government insured for about 3% interest. Not a bad deal.

    Comment by Anonymous — Mar 1st 2009 @ 12:50 pm
  16. Good post! Solid suggestions!

    Comment by Anonymous — Mar 2nd 2009 @ 12:00 pm
  17. I was just having this debate with my husband last night. We have a rather large emergency fund – large enough we decide to give up some liquidity for a better return. Since CD rates are abysmal, and I bonds aren’t much better right now, we bought into municipal bonds (found some for re-sale in our state with a 2010 maturity).

    Comment by Anonymous — Mar 3rd 2009 @ 11:10 am
  18. Great minds think alike?

    I hadn’t considered a high interest checking or bonds. It turns out that there aren’t any places that have a good rate near me for the checking, and I’d rather stick with my local credit union anyway. Bonds just aren’t liquid enough for my tastes, at least not for my emergency fund.

    I just moved my eFund from ING back to my credit union where I’ll be doing a cd ladder. The early withdrawal penalty is such that I’ll never lose my principle unless I pull the money out in the first 7 days. In other words, perfect for an eFund. If I don’t use it, I make money, if I do need it, it’s all there. The rates aren’t super fantastic right now, but even a 6 month cd beats ING’s current rates.

    Comment by Anonymous — Mar 3rd 2009 @ 11:57 am
  19. Here’s a novel idea. Go back to school and prop up your resume. Maybe then you can get a higher paying job.

    Comment by Anonymous — Mar 3rd 2009 @ 9:36 pm
  20. I am weary of municipal bonds. I can’t imagine that a lot of communities are not going to go bankrupt in the near future.

    Comment by Anonymous — Mar 3rd 2009 @ 10:00 pm
  21. While online banks typically offer significantly better rates than the average brick and mortar bank, you can find some great deals by looking locally. Consider both local banks and credit unions, and also look into high yield checking accounts. You might have to jump through some hoops, such as signing up for direct deposit and/or using your debit card a minimum number of times per month, but there are still deals to be had.

    Comment by Anonymous — May 5th 2011 @ 6:58 am

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