Five Alternatives to the Savings Account

Brick and mortar banks offer very low yield savings accounts. To name a few, these well known banks offer only 0.01-0.02% APY – WellsFargo, PNC, and TD Bank. If you want a high yield savings account offering 0.3% to 0.6% APY, you will have to go with an online savings account like Ally Bank, Discover, Citi Bank, Capital One, AMEX, or little known small online banks like Vio and One. As with most savings accounts, you are limited by fees and withdrawal limits. There are plenty of other ways to save your money while earning more interest. Here are five different alternatives to the Savings Account.

1. Money Market

Many banks and credit unions offer a money market account. These are FDIC insured accounts that typically offer a higher annual percentage yield while offering checking account features. Some of these accounts come with checkbooks and a debit card. With most money market accounts, you can earn anywhere from 0.05% APY to 0.15% APY. The downside of a money market account is its higher minimum and daily balance requirements. For example, TD Bank requires a minimum daily balance of $50,000 and still limits the number of withdrawals you can make each month.

PROS

It is easy to access funds with the available checks and debit cards that typically come with a money market account.
FDIC insured, keeping your money safe.

CONS

Some accounts require high minimum balances.
These accounts typically have fees.
In many cases, online savings accounts offer better rates.

2. Certificate of Deposit

A Certificate of Deposit, or CD, is a product offered by many banks and credit unions where you agree to leave a lump sum of money untouched for a fixed period of time in return of a premium interest rate. The length of the terms offered by most financial institutions are 3 month, 6 month, 12 month, 18 months, 24 months, and even 60 months. Rates vary widely from 0.01 to 0.99. The longer the term, the better the rate.

PROS

Your interest earned is guaranteed. This is less risky than investing in stocks or bonds.
CD’s offer higher interest than money market and savings accounts in most cases.

CONS

Access to your money is limited. You can exit the CD early, but may incur a penalty.
Your rate is fixed, meaning you will lose out on the opportunity to earn more if interest rates rise.

3. Cash Reserve

Betterment offers what they call a Cash Reserve account. This account earns 0.40% APY, but it is not a savings account or a checking account. It does not come with a routing number, checkbook, or debit card. It is simply a place to store your money while you earn high yield interest. This account has no fees, no minimums, and no withdrawal limitations. Your FDIC insured money is held through Betterment’s program banks. If you would like to read a full review of Betterment, click here. If you would like to open an account with Betterment, use my referral link here.

PROS

The Annual Percentage Yield is higher than what most savings accounts, money market accounts, and CD’s offer.
No minimums, daily balance requirements, or fees.
No limitations on number of withdrawals.
Transfers take 2 business days.

CONS

No routing number. You can’t transfer money to your Cash Reserve from an external source. You need to log into Betterment to transfer money in or out of your Cash Reserve.
You can only link 3 external accounts to your Cash Reserve.
No check or direct deposits.

4. Cash Accounts

Cash Accounts act as high interest checking accounts that are typically offered by brokerages. These accounts have no fees (No ATM fees, no minimum balance fees, etc). Unlike checking accounts, Cash Accounts don’t offer check books, but they do have routing and checking numbers allowing you to setup direct deposit or automatically play bills. Wealthfront’s “Cash Account” offers 0.35% APY with a debit card and a $1 million FDIC insurance limit. M1 Finance offers a 1.00% APY, 1.00% cash-back account with an annual subscription of M1 Plus. They call this account “M1 Spend”. Similarly, Robinhood offers a “Cash Management” account earning 0.30% interest.

PROS

Versatility of a checking account.
Benefits of a high yield savings account.
No ATM fees in most ATM’s.
No minimum balance fees.
No limits on number of transactions or withdrawals.

CONS

No checkbooks.
No check deposits.

5. Investment Accounts

A higher risk, higher reward alternative is to the Savings Account is an Investment account. There are many different types of investment accounts you can use to save your money. Here are a few examples:

Individual Brokerage Account – Open an Account with M1 Finance, Betterment, Wealthfront, Webull, Robinhood, CashApp, or another brokerage to start investing in stocks and ETF’s.
Safety Net or Goal Accounts – These are automated low risk investment accounts offered by Betterment and Wealthfront. You can set goal-oriented investment savings accounts specifically for emergencies, education, renovations, down payment for a new house, or a new car.
Health Savings Account – If you have a high deductible health insurance plan, you can qualify for an HSA. Contributions to your HSA are tax-deductible. HSA growth is tax free if you withdraw your HSA money to pay for qualified health and medical expenses. You can open an HSA with Betterment, Optum Bank, Fulton Bank, or HSA Bank.
Roth IRA – A Roth IRA is a retirement account that invests after tax dollars. Since your contributions are after-tax, you can withdraw your contributions at any time with no fees or additional taxes. Your contributions should only be withdrawn in case of an emergency. Remember you are stealing money from your own retirement.
529 Account – A 529 is an education savings investment account that you can open for yourself or your children. Your contributions are tax deductible and your withdrawals are tax free as long as you spend the money on qualified educational expenses such as on-campus housing, books, school supplies, software, and college or private school tuition (5+ years old). Every U.S. State offers a 529 account that also provides you with college tuition discounts.
Custodial Account – This is an investment account for your children. Put money away for them each month and watch the invested money grow. M1 Finance and Acorns are two platforms that offer these accounts.

PROS

Higher earning potential. Imagine what will happen if you buy a few shares of Square, then Elon Musk tweets “#Square”. You will make more money in a day than a savings account would earn you in a few years.
These investment accounts have tax advantages (except individual brokerage account)
You are setting yourself up for success in retirement if you regularly invest in these accounts.

CONS

Your money is not FDIC insured.
You can lose money as the economy goes down.
Access to your money is limited.

Disclaimer: The rates in this post are up to date as of February 2021. Rates are variable and can often go up and down. For example, most of the banks and brokerages mentioned in this post offered much higher rates early last year, prior to COVID. Do your research on the best rates and account features before opening a new account.

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