Savings accounts of a traditional passbook used to earn as much as 6% annual interest in the 80s. That is no longer the case. Today, similar accounts have a negligible rate of 0.06%. That figure is an annual return of $0.60 on every $1,000 lying in your savings account. That is quite discouraging. We need alternatives to traditional savings accounts, and they are revealed here.
Even though there are low-interest rates across diverse traditional savings accounts, there are multiple alternatives that can help to improve your savings returns.
So, if you are considering a place where you can stash your savings to attain future goals with considerable returns on your deposits. You may have to look outside of the brick-and-mortar financial institutions’ savings provision.
The alternative to traditional savings accounts and banking products would provide you higher interest rates on your money.
Here Are Alternatives To Traditional Savings Account
1. Peer-to-Peer Lending
Peer-to-peer lending systems are personal loan privileges provided by individual investors, unlike traditional banks. The Lending Club, Kiva, and Prosper are examples of online lenders that fall in this category. They offer money lenders and investors to work together to provide loan opportunities to loan applicants.
When you provide a certain amount of money for the lenders on the platforms, they pay back in certain installments with interest. These interests are far much more than the annual interests you receive on your savings accounts with traditional banks.
It is a win-win system that provides investors with higher returns on their money and also offers borrowers with reduced interest rates on their loans compared to traditional banks.
But you need to bear in mind that this system will not offer you speedy access to your money if you need liquidity. Oftentimes, the terms of the loan state that the person borrowing has a duration of time to pay back the loan. Hence, you are likely to get your funds back through monthly installments for that period. And what if a borrower defaults on your loan? Your money may be gone.
Somehow, these risks are lessened through careful examination of prospective borrowers and also that you’ll only have to offer a portion of any individual loan. So, if a borrower is taking out a $4,000 loan, your own stake in it may not be more than $50. And the remaining parts of your investments in the system are circulated across multiple loans.
Hence, you may not be affected even if a borrower or two defaults. The returns you get here can be huge.
2. Certificates of Deposits (CDs)
This is a type of savings account that builds a specific interest rate until a particular withdrawal date. The length of time offered for CDs varies. They can range from one month to over five years. Your money will continue to generate fixed interests for the specified duration of that term. After the duration ends, you’ll be able to withdraw your money or reinvest it into another CD.
One huge benefit of this method of saving is that you’ll receive solid interest rates that are far better than the interests from the traditional savings accounts. They will also help you to easily achieve your long-term savings goal.
But then, since your money is not meant to be accessible until the specified withdrawal date when you withdraw early, it attracts a penalty or a fee, which may be huge.
3. High-Yield Money Market Accounts (MMAs)
Money market accounts are savings accounts that are accompanied by high-interest rates and offer debit cards or checks, unlike the traditional savings account.
You’ll earn more through this method and also have access to your funds when you need them, unlike peer-to-peer lending or CD. However, you’ll be required to deposit a large amount of money which makes it difficult for lots of people to participate.
4. Online Bank Savings Accounts
Online banks are known to provide virtually all services provided by traditional banks and with APYs and top-notch customer service.
Harnessing online banks will provide you with high returns on your savings. They are often as high as 10 to 20 times more than the traditional system. However, unlike the physical settings, these banks offer their services through virtual systems. You’ll only have access to your accounts through computers and smartphones, and receive customer service through chats and phone hotlines.
5. Money Market Funds
This is kind of the same as a traditional savings account, apart from some additional limitations that might be which include a maximum number of withdrawals and a minimum balance that can be done every month. But it assures a little higher interest rates on your money, unlike traditional savings accounts.
They are short-term investments in fairly low-risk securities such as U.S Treasury bills. These are largely sold through brokerage companies and are not insured by the FDIC. You’ll receive a monthly dividend which generally exceeds the average savings rate.
This alternative to traditional savings accounts is often sold by the US Treasury. The interest rate is often determined by inflation and is recalculated two times every year. And it works just like CDs where you’ll not be able to withdraw your money until the bond has attained the mature stage.
As a benefit, I-bonds can fetch you interests of up to 30 years and are often exempted of tax. But then, your returns will be low when the inflation rate is low. You may also be subject to a penalty fee if you withdraw in less than five years.
Stocks mean that you buy shares in a company. How your stock performs is dependent on the company’s performance. Your stock becomes highly valuable if the companies do, and otherwise too if not.
Stock guarantees very high returns but the risks are quite high too. Your best bet is to find a stockbroker with a good track record that you trust and get acquainted with the market before making considerable investments into stocks.
7. Roth IRA
As a retirement savings system, an Individual Retirement Account (IRA) will not be available to you until you turn (maybe) 60. It will yield very considerable returns for you as a long-term investment. Interest rates are often above 8% every year. You’ll be able to access the funds after attaining their withdrawal date.
8. Cash Management Accounts
These are offered by nonbank financial service providers which are often fintech startups or brokerage firms. The providers work behind the scenes with partner banks to insure customers’ funds into accounts in banks, giving the funds FDIC insurance.
They tend to produce higher annual percentage yields, unlike traditional bank savings accounts which are a solid place to park savings. But then, even though some CMAs offer debit cards and ATM access to customers, they somehow have limits in the ways customers can choose to fund their accounts.