6 Alternatives to Savings Accounts for Higher Returns
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If you stash your money in one of the traditional savings accounts from banks, then you have to accept the fact the interest rates are quite low, and you barely see the returns on your investment.
According to CNN Money, the average inflation rate in the US is around 3%, and the sad fact is most of the banks in America only pay on your savings accounts with a low-interest rate of between 1%-2%. In other words, you are constantly losing your money value if keep pouring money into a traditional savings account.
For this reason, you should consider putting your money in other better alternatives to bank savings accounts, which can provide a higher yield in terms of income and return on investments.
In this article, the given 6 best alternatives to traditional savings accounts, which you give a better understanding of each one in more detail, as well as get familiar with the pros and cons, so you can make a better decision to suit your financial needs
- Online Savings Accounts- Higher Saving Account Interest
- Higher Investment Returns on -CDs ( Certificates of Deposit)
- Peer to Peer lending
- High Yield Money Market Accounts
- Real Estate Investment Trust- REIT
- Cash Management Accounts
- Unlike traditional bank savings accounts, investment with higher returns such as CD, P2P, and REITs gives you an additional source of income
- The inflation rate is around 2 to 3% per year, so keeping money in those saving accounts is a waste.
1. Online Savings Accounts
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The first best alternative to traditional savings accounts is high-yield online savings accounts, which offer a better investment return in terms of paying higher interest rates than traditional banks do.
In particular, you will increase your chance to reach your financial goals through the habit of setting up an automatic deposit into the online saving account, where the server fee of your online saving account is much lesser than putting your money in those traditional banks.
For example, traditional banks will charge a hefty fee if the customer does not meet the minimum deposit requirement, and your balance requirements at the end of the month are low.
On the other hand, with online saving banks, you will be receiving remote-friendly customer service to secure your saving with higher interest rates and some online banks might not require you to pay a minimum deposit in a month.
For a better overview of online savings accounts for higher investment returns, the following advantages, and disadvantages you should consider for making a better decision.
Online Savings Accounts Pros
- Higher investment returns in terms of offering a better saving account interest rate (higher- yield)
- Lesser fees for both maintaining and servicing fees.
- Those online banks have a 24/7 hotline, which helps to answer all the inquiries from your needs.
Online Savings Accounts Cons
- Since it is an online saving account, the customer needs to get familiar with technology, especially the need to get used to the online bank app.
The following online banks are examples that you can do further research for online saving accounts:
- Capital One Bank.
- Marcus Online Savings Account by Goldman Sach.
- Online Saving Account Wells Fargo.
- Online Saving Account Barclay.
- Ally Bank-Online Saving Account.
2. Higher Investment Returns on -CDs ( Certificates of Deposit)
A Certificate of deposit (CD) is the type of high-yield savings account, which offers a better higher return for savings compared with those traditional savings accounts in the bank. Provide further, customers who are interested in putting money in CDs, are required to deposit money for a fixed period of time with a fixed interest rate. For example, you have a range of options for choosing the period of CDs: 3 months, 6 months, one year, or even 5 years. In return, Banks will pay you the interest fees plus the initial investment back at the end of the fixed period.
Depending on market fluctuation and inflation, the interest rate may be varied from time to time for creating a certificate deposit. At the end of the CD period, you have a priority to withdraw or invest in another CD as depends on your situation and needs.
For this reason, certificates of deposit are one of the best and safest alternatives to bank savings accounts because they provide a better return and higher interest rates. From the investment perspective, the CD and bonds are considered defensive assets to help smooth out your investment portfolio when it comes to the highly volatile stock market.
Certificates of Deposit Pros
- Offer a higher interest rate for higher investment returns compared with other traditional bank savings accounts.
- One of the safest ways to create another passive income.
Certificates of Deposit Con
- Lock to the fixed period, which means a customer is not allowed to withdraw the money before the due date.
Popular financial institutions for higher investment returns
- Saving account Wells Fargo, Saving Account Barlay, saving account Chase (JP Morgan Chase)
Read next: Best Budget Apps to Save Money for 2023
3. Peer to Peer lending
Peer-to-peer lending (P2P) is the type of investment vehicle, where it allows individuals to use the system and lend money directly to other businesses, and individuals, in exchange, will receive a higher interest rate for higher investment returns at the end of the fixed lending period.
Normally, both lenders and borrowers come together by choosing the same P2P platform- peer-to-peer networks, where the borrowers have the priority to select the appropriate lenders based on their credit rating.
In addition, borrowers are required to pay back the money plus the interest fee to the lender at the end of the arranged deal period. This action normally is done by the peer-to-peer platform because they have the authority to match the lenders and borrowers together.
Even though P2P is one of the high-yield investment returns compared to a savings account, it contains a high risk of losing all your money due to the fact that most of the loans in P2P lending are not safe and secured.
Peer to-Peer Lending Pros
- Investment for higher returns compared to a bank savings account. In other words, it provides a better return on your investment than saving money in the bank.
- Easy accessible to lend or borrow money from the peer-to-peer networks due to the fact the platform only assists both parties to seal a deal, in which they will receive commissions
Peer to-Peer Lending Cons
- High credit risk for default- peer-to-peer (P2P) platforms may not provide enough information about borrowers’ information as it leaves lenders exposed to the high risk of losing money.
- There is no government protection, if lenders got scammed due to fraud or platform errors, lenders will have no other option to claim compensation.
- There is no insurance protection in case lenders are having an issue with borrowers in terms of payment and interest fees. You have no option to make compensation or seek protection from insurance.
Related reading: Peer to Peer (P2P) Lending: The Advantages and Disadvantages
4. High Yield Money Market Accounts
- the first one is A Money market deposit account (MMDA)
- And Money market account (MMA) is the second main one.
Those main types of high-yield money market accounts often offer better interest rates compared with a savings account and include checks and debit cards.
The following advantages and disadvantages of this type of investment with returns.
- Offer a much better interest rate for higher investment returns compared with traditional savings accounts.
- Banks or Credit Unions normally offer insurance protection as it gives you peace of mind to save money there.
- Unlike peer-to-peer lending and CD, you will have the flexibility to access the fund in case of emergency.
- There is a monthly fee if your account does not meet the minimum balance requirement.
- You might need a large amount of money of deposit or balance to create a high-yield money market account.
5. Real Estate Investment Trusts
Real estate investment trusts provide an additional income for investors due to the fact that Reit has a cross range of income real estate assets such as shipping centers, office buildings, hotels, apartments warehouses, and self-storage facilities.
Normally Real estate investment trusts operate on a large scale by using investors’ money to continue finding income assets, which can aim for a stable and regular return on the investment.
The main difference with traditional real estate developers is that Reit does not develop real estate assets in order to sell them in the market. Instead, the Real estate investment trust’s main aim is to buy and develop properties to build a steady income based on its operation.
The Pros and Cons of Investing in Real Estate Investment Trusts are:
- Unlike traditional real estate, investors do not need to go out and purchase commercial real estate. In other words, they only need to invest in REITs and the fund will take care of the rest by searching and analyzing the possible peace of income properties.
- Some other REITs offer higher dividend investment returns.
- Lack of Liquidity for nontrade REITs, in most cases you can not sell your shares in REITs immediately in order to get cash quickly.
6. Cash Management Accounts
Cash management accounts are the type of high-yield investment vehicle, where fintech startups and brokerage firms normally offer high-interest rates returns for creating cash management accounts with them. Most people purposely open a cash management account to manage cash, make payments, and receive a high-interest rate.
In addition, a cash saving account is a combination of investment, savings accounts, and checking, which are not operated directly by the banks or credit unions. As mentioned, it is held through brokerage firms, where those fintech startups and financial institutions normally work with banks as a partner to keep your fund.
The Pros and Cons of Cash Management Accounts
- Cash management accounts offer higher investment interest rates than those traditional bank savings accounts.
- Most cash management accounts often provide better customer service satisfaction due to the fact that it is an online accounts, whereas those brokerage firms might have a 24/7 hotline to satisfy your concerns and requirements.
- Some cash management accounts offer different ways to fund your accounts such as debit cards, credit cards, and ATMs, but some brokerage firms may just only accept funding via debit cards, which is not convenient from the customer’s point of view.
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By Jiro Nguyen.
The content is only based on the author’s personal opinion and experience. It is for informational and entertainment purposes only and does not rely on as a comprehensive or substitute for professional advice.