Alternatives to Traditional Savings Accounts

Several saving vehicles compare to traditional saving accounts, but with more favorable interest rates.

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Whether you earned a bonus at work or want to stash money away to save for a downpayment on a new home, deciding where to store your money is half the battle. Traditional savings accounts are a solid option if accessibility is your main priority. Still, some alternatives offer a more impressive return on your investment with higher interest rates and relatively easy access to your money.

High-yield savings account

A high-yield savings account is a deposit account that offers a higher interest rate than a traditional savings account, allowing you to earn more back on your savings each month. The higher the annual percentage yield, or APY, the faster your money grows. The APY associated with a high-yield savings account is a variable rate, so that it will fluctuate based on the benchmark interest rate set by the Federal Reserve. The money you put in a high-yield savings account should earn a competitive yield to maximize growth. The best high-yield savings accounts have APYs of at least 2.15%, which is 10 times higher than the national savings account average of 0.21%. 

Certificate of Deposit 

Certificates of deposit, or CDs, are savings instruments that generally offer higher interest rates than regular savings accounts -- but they come with a catch. You have to put money in a CD and agree not to withdraw it for a certain period (referred to as a term), which could be anywhere from a few months to 10 years. You'll incur a penalty if you take money out of a CD before it reaches maturity or the end of its term. 

When you open a CD, the bank agrees to leave your money on deposit for a set term at a fixed rate. If you're saving for a specific goal with a set timeline, don't commit to a CD that extends past when you need to withdraw. On the flip side, select a longer term if you are looking for a means to earn a higher interest rate and can afford to tie your money up for an extended period. 

Money market account

A money market account, or MMA, is a savings account that earns interest based on how much is in the account. These accounts have higher savings rates than standard savings accounts, but they tend to require a minimum balance to earn interest -- sometimes upward of $500. MMAs provide account holders with flexible access to funds through a debit card and checks like a checking account. MMAs earn a variable interest rate, meaning it fluctuates based on market conditions. 

Short-term bonds

Short-term bonds have a maturity time of one to four years. Upon maturity, the issuer must pay back the bond's face value, as well as any interest that has accumulated. You won't necessarily lose money on a bond, but there's also a chance you will only see gains or losses depending on market conditions and the movement of interest rates. The rate of return on a bond is typically fixed or floating – meaning the issuer agrees to pay a specific amount of interest, or the interest adjusts in response to the prevailing interest rate. Short-term bonds provide a safe and secure investment with a moderate return and are usually FDIC-insured. 

When should I put money in a savings account?

Different types of savings accounts are better for different savings goals. For example, a high-yield savings account is low-risk and liquid.

Alternative savings account options have the potential to earn more than a traditional savings account, but there are associated risks to consider. When selecting an alternative savings account, consider the APY, term length, interest rate, funding options and early withdrawal fees. 

The bottom line

Before you decide where to put your money, take time to determine your goals. Do you need easy access to your money? Do you have a specific time frame to save for? How much risk are you willing to take? Once you've determined your goals and what is most important, you can find the right savings vehicle.