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Alternatives to High Yield Savings Accounts

Anybody with a high yield savings account knows that the rates on these accounts are pretty dismal these days. Although some banks, including top-rated FNBO Direct, continue to pay competitive rates (as high as the market will allow), you can’t expect your cash to grow substantially in these accounts. Although I still highly recommend FNBO or a similar online savings account for short-term savings (such as your emergency fund or surplus checking funds), if you are going to be saving money for a few years, it may be time to look beyond the savings account.

Alternative #1: Certificates of Deposit (CDs)

Typically, I don’t recommend CDs for our age group. That’s because CDs require you to lock in your money for a set term to get the advertised interest rate, and many have high minimum deposits. In our twenties, most of us don’t have large piles of cash to meet CD minimums and, if we do, we want to have access to that cash for 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. Some CDs currently offer 3.x% interest rates; a few pay more. Check out Ally Bank for some of the best going CD rates.

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!

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Ricardo says:

    I am doing the social lending thing. Per your advice, I did open up a savings acoung at FNBO for my emergency funds (based off of your spread sheet but also my own personal financial calculatoins). After that though, I do have much money left over and I figured I could use Lending Club to save for the big things such as a house, pay off major debt or whatever. My plan is to deposit 10% of my income each month into lending club. Afterwards I diversify the risk by putting 3/4 of my balance in “A” and then the other 1/4 in a more risker credit rating; picking a more risker rating each go round. For example I would put $150 in A, then 50 in B. Next month $150 in A, $50 in C and so on and so on. So constantly gaining interest while building savings would hopefully build a nice nest egg in something that is **Hopefully*** more stable than the stock market.

    I appreciate the ideas you have given me!

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