Alternative #1: Certificates of Deposit (CDs)
CDs require you to lock in your money for a set term to get the advertised interest rate. In our twenties, most of us want to have access to any savings we have in case of an emergency.
When high yield savings accounts paid 6.x%, 5.x%, even 4.x% interest rates, I told everybody to steer clear of CDs. Now, if you have more than a couple thousand dollars in savings and you know you won’t be touching it for a year or longer, look to a CD to at least get a bit more risk-free return while saving for a mid-term goal. Some CDs currently offer 2.x% interest rates; a few pay more.
Alternative #2: Social Lending
CDs and high yield savings accounts are FDIC insured (i.e., risk-free). I wouldn’t recommend anybody put short-term or emergency cash into the stock market (especially now), but if you are saving for three years or longer, check out social lending.
If you’re not familiar with the concept, you essentially loan money directly to other people with good credit histories at interest rates of about 7% and higher (the higher the rate; the riskier the borrower). By diversifying across many loans (say $50 here, $50 there), you can earn an attractive return approaching 10% even if one or two borrowers default. I have used both LendingClub and Prosper, and been happy with both.
Alternative #3: Stocks and Mutual Funds
When interest rates are low and the stock market is moving up, it’s a good time to consider investing in stocks mutual funds with any unused cash. Again, don’t put your vital emergency savings in an account that’s not FDIC-insured and may be hard to liquidate, but you may consider investing any other money if you can stomach the risk. Online discount stock brokers make it easy to get started investing in just minutes with any amount.
What About You?
Are you moving away from high yield savings to an alternative or are you keeping your money where it is? Let me know!