Savings account interest rates have been plummeting. Here are five of the best alternatives to a savings account to make the most of your money.
Putting your money away in a high yield savings account is one of the smartest and safest moves you can make. The first $250,000 is insured per account holder and at 2% interest, the money will grow over time. The problem is that it’s been some time since online savings accounts yielded a rate north of 2%.
Here’s a sampling of current savings rates (as of September 1, 2017)
- EverBank Yield Pledge Money Market – 0.86% APY (1.31% first year introductory APY is available for first-time Yield Pledge Money Market account holders on balances up to $250,000.)
- Ally Bank Online Savings Account – 1.20% APY
- Barclays Bank Money Market Account – 1.20% APY
- CIT Bank Online Savings Account – 1.35% APY
While rates have improved quite a bit over the last six months, 1.30% is just not something to get excited about. 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 you don’t want to tie your money up indefinitely, your options are somewhat limited.
Let’s take a look at five alternatives to stashing money in a high yield savings account.
1. Look Toward Your Local Bank or Credit Union
Online banks typically offer significantly better rates than the average brick-and-mortar bank. You can, however, 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.
When I moved to Connecticut, I was 40 miles from the closest Chase, Citi, or Bank of America. I had no choice but to open a savings and checking account with Citizens Bank. In addition to the convenience of having a brick-and-mortar bank just down the street, I also learned about the wide variety of products they offer. I was able to take out a home equity line of credit with the bank at a fantastic rate (with no closing costs). I was also to open an 18-month CD at 1.75% APY, which I challenge you to find online.
2. Build a CD Ladder
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. With a CD ladder, a portion of your savings will be available to you on a monthly, quarterly, or annual basis.
CD ladders are a simple concept. Instead of plunking your money away all in one long-term CD, you spread it out over the course of several years. For example, I put $5,000 into a 5-year CD this year. I do the same next year and so on so that I have five CD’s totaling $25,000. Then, every year after that, a CD matures, and I can either reinvest that money into another 5-year CD, or use it if needed.
- Discover Bank currently has some of the best online CD rates. Featured are their 2-year CD rate at 1.50%, their 5-year CD rate at 2.25%, and their 10-year CD at 2.35%.
3. Purchase Series I 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 1.96%.
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. The current rate is good until the end of October, at which point a new rate will be generated.
Every year, you have the ability to purchase up to $10,000 in I Bonds, and you can make your purchase online to the penny. If you want a bond for $777.77, you go right ahead and do you. Keep in mind that I Bonds mature after 30 years.
4. 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.
Most US families carry a variety of debt, all of which is going to be higher than the 1.30% APY you can get by putting your money in a high yield savings account. For example:
- Home mortgage rates for even the most qualified of buyers is 3.25%
- Credit card interest rates average 15% and can be as high as 27% for those with average credit
- Auto loans can offer 0% for a short period of time, then increase to an average of 5%
- Student loans can cost you between 4% and 11 % depending on whether they’re federal or private
Why have money sitting in a non-interest bearing account when you can take a bite out of your much higher-interest debt?
5. Invest in Loans with Lending Club
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 and 8 percent historically. It is free to open an account, and you can get started with as little as $25.
Lending Club is a peer-to-peer network where you can invest in loans that are taking out by other users. Lending Club will rate the loans. The riskier the loan, the greater the return. They boast that 97% of all loans on their network yield positive returns, so choose your loans wisely.
Peer-to-peer lending is something that has taken off in recent years as banks have tightened their lending practices. For borrowers, places like Lending Club offer short-term notes for necessary cash flow. For investors, the opportunity to routinely clear 8-10% annually is a welcomed change to the savings account rates you see above.
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 spent 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.