Two Alternatives to High Yield Savings Accounts
Anybody with a high yield savings account knows that the rates on these accounts have been plummeting recently. Many of them, including ING Direct, now pay less than 2% interest.
While some, 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. You can compare CD rates at BankAround.com.
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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. Create a free lender account at Lending Club or read my Lending Club review.
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!
Related Posts
- Online Savings Accounts Provide Benefits Beyond Yield
- Online Savings Accounts 101
- Seven Steps to Short-Term Savings
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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!