Best Alternatives to replace your savings account

Higher-Yield Money Market Accounts

One of the easiest alternatives to traditional savings accounts is to open a money market account. This type of account pays higher interest rates than regular savings accounts. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC), just like traditional savings and checking accounts. Money market accounts tend to offer limited checking services. Generally, the maximum number of checks that you can write on your money market account per month is relatively low. Usually, this number is between five to ten. In return for demanding such a restricted withdrawal activity, money market accounts offer a higher interest rate than standard savings accounts. For example, a bank that offers an interest rate of 0.10% in a regular savings account, may offer a 0.25% interest rate on a money market account.

Besides the limited withdrawals, money market accounts also often have other restrictions. One of them is a minimum open deposit, which is often higher than traditional savings accounts. Many money market accounts also have a minimum balance that must be kept. If the money market account does require a minimum balance and the account falls below this minimum, there can be a few consequences. In some cases, account holders may receive the standard interest rate, as if it was a traditional savings account, thus a lower percentage. Some banks, however, might charge you a penalty fee if you drop below the minimum balance. Because of that, before you open a money market account, pay attention to the fine print of your agreement and check the restrictions of the account.

Certificates of Deposit

If you are not in a rush to access your money, a certificate of deposits (CDs) can be a good option for you. In this type of saving, the longer you are willing to leave your money locked, the higher the interest rate you can get. One-year and two-year certificates of deposits, for example, offer higher returns than traditional savings accounts. The average of a one-year CD’s interest rate is 0.21%, while a two-year CD’s rate can go as high as 0.95%.

However, if you have a problem with your money being locked for the fixed duration of the CD, which can go from a few months to a few years, this is not the option for you. That is because if you touch this money in the CD before the agreed term, you may be subject to fees and even penalties. If you do choose this option, a way to create more liquidity is to spread your money through CDs with a variety of term lengths. Terms of certificates of deposits vary a lot between each other. Interest rates and early withdrawal penalties can be extremely different from one CD to another. Therefore, it is interesting to shop around and check all the available information before you choose the CD that better fits your needs.

High-Yield Checking Account

Surprisingly, there are high-yield checking accounts that offer higher interest rates than traditional savings accounts. Some can offer up to a 2% annual percentage yield. However, to have access to this type of return, consumers will almost always have to meet some restricted requirements. One of the rules to have access to high-yield checking accounts’ returns is to keep a minimum balance. Some banks may require you to establish direct deposit or bill pay. Another common condition is that you conduct a minimum number of monthly debit card transactions. If you don’t meet these requirements, rarely a bank will penalize you. However, you will probably not receive the higher interest rate, but instead the lower rate of a regular savings account.

Credit Unions

Simply moving your money to a different financial institution can be a clever way to have access to higher interest rates. Credit unions, for instance, can be one of these alternatives. They operate in a very similar way to banks and are insured by the National Credit Union Share Insurance Fund (NCUSIF), the credit union equivalent of the FDIC. A small difference from banks is that credit unions offer fewer financial services.

When it comes to the interest rate of your savings account, credit unions can offer way better returns than traditional banks. While standard banks offer average rates of 0.9% for your savings account, credit unions can offer interest rates of up to 1.29%. That is because credit unions are nonprofit organizations.

Peer-to-Peer Lending Services

This type of service has become increasingly popular in recent years. Peer-to-peer lending services usually operate through websites. These platforms offer individuals looking to borrow money a way to have access to loans outside traditional banks. At the same time, these lending services allow individual lender investors to earn great returns on investment by funding the loans. So individuals on the lending side offer loans to the individuals on the borrowing side. This scenario is one of the best alternatives to a savings account because of the higher interest rate, so long as you can manage the risk.

More often than not, this type of service screens borrowers, who have requirements to meet before they can obtain loans. Before lending any amount, the service also evaluates the purpose in order to determine the credit risk. As a lender, you are usually able to choose the level of risk you agree to have your money involved in, therefore determining which type of loans you are open to being part of. The structure of peer-to-peer lending services also aims to keep your money safer. The risk of an individual loan is spread to a large number of lender investors. This means that the whole amount you give to the company won’t be funding one full loan. Instead, it will be funding small parts of many different loans. Individual lenders typically fund no more than $25 to $50 off any loan, while an individual borrowing $2,000 will usually have his loan funded by 40 different individual lender investors. Therefore, the risk is spread out the structure.

The most appealing part of this type of investment is that the return rate of being a lender investor is around 5% to 9%. On top of that, their minimum required deposit to start at a peer-to-peer lending service is usually low, as little as $25.

However, if this option seems tempting to you, it is important to know a few things. Peer-to-peer lending services are not FDIC-insured like some of the other options in this list. Thus, there is some risk involved and it is possible to lose money. It can be a great relatively low-risk alternative to regular savings accounts, but you should make your research. Peer-to-peer lending services have a complicated regulatory environment that can differ a lot from state to state. Due diligence and careful examination of the organization of payments to lenders is extra necessary for this type of service, so do yours before investing.

Online Savings Accounts

A great and easier-to-use alternative to a regular savings account is an online savings account. This type of account is very similar to standard savings accounts, with the obvious difference that it only operates online. The other very attractive difference in an online savings account is the higher interest rates it can offer you. In a traditional brick-and-mortar bank, the interest rate you can earn with your savings account will be around 1% to 1.25% annually. In comparison, a digital savings account can offer rates from 1.80% to 2.25%, which is, on average, 10x higher. On top of that, many online savings accounts offer even higher interest rates than that. Some of these online platforms provide up to 10% of interest rates. Before you become suspicious, digital savings accounts can offer much higher interest rates because they don't have all expenses that come with a physical location and its employees.

The lower expenses of online savings accounts also allow them to charge you low to no fees, regardless of your account balance. In addition, many digital savings accounts have no minimum amount to open your account. Besides the financial advantages, online savings accounts offer easy access through your phone, tablet, or computer with user-friendly platforms. All these factors make online savings accounts a great alternative to regular savings accounts. Unless, of course, in-person customer service and physical branches are a must for you.

Should I Choose One of the Alternatives to a Savings Account?

As with every financial decision, there is no one-size-fits-all solution. To make this decision you should take into consideration your needs and study which option fits them better. However, if you wish to increase your savings earnings, traditional savings accounts will keep you from that. With so many low-risk and high-earning alternatives, it is worth, at least, taking a look at your local options. The bottom line is: if you are looking for higher interest rates, yes, you should consider leaving your standard savings account and joining one of these alternatives.