If you’re looking for a place to stash your short- to medium-term savings — like your emergency fund or a down payment for your future house — and want a good return on your cash, you may want to look beyond a traditional savings account at a brick-and-mortar bank. Such accounts tend to offer very low interest rates, with a national average of 0.06%. There are alternative accounts and banking products on the market that may win you a better return.
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To earn a higher interest rate on your money, consider these five alternatives to a traditional savings account.
1. Certificates of deposit (CDs)
The basics. A certificate of deposit is a type of savings account that accrues a fixed interest rate until a fixed withdrawal date. CDs are offered in varying lengths, from one month to five or more years. Your money is guaranteed to earn a specified interest rate for the duration of that term, after which you can withdraw your money or reinvest in another CD.
The pros. CDs have solid interest rates, most of which are higher than standard brick-and-mortar bank savings accounts. CDs can also help you fight the temptation to spend a chunk of money that you have set aside for a long-term savings goal.
The cons. There is usually a penalty for early withdrawal, which means your money is inaccessible until the fixed withdrawal date unless you’re willing to pay a fee.
Capital One 360 CD
Capital One 360 CD
2. Cash management accounts
The basics. Cash management accounts are offered by nonbank financial service providers, often brokerage firms or fintech startups. They combine the features of checking and savings accounts in a hybrid product that isn’t technically a bank account. However, CMA providers typically work behind the scenes with partner banks to sweep their customers’ money into accounts at those banks, giving the funds FDIC insurance.
The pros. Cash management accounts tend to have much higher annual percentage yields than traditional bank savings accounts and are a solid place to park savings. They are also typically offered by online-only providers, so their remote customer service and online experience are often user-friendly. And if you already have a brokerage account with the same firm, you get the added benefit of having all your accounts under one roof.
The cons. While some CMAs provide debit cards and ATM access, some are limited in the ways customers can fund their accounts.
Wealthfront Cash Account
3. High-yield money market accounts (MMAs)
The basics. Money market accounts are savings accounts that tend to come with high interest rates and offer checks or debit cards, unlike a traditional savings account.
The pros. MMAs often have decently high interest rates, usually better than traditional savings accounts at brick-and-mortar banks. You’ll also have easy access to your funds, unlike with a CD or peer-to-peer lending.
The cons. MMAs usually require large minimum deposits and balances, which puts them out of reach for many people.
4. Peer-to-peer lending
The basics. Peer-to-peer loans are personal loans funded by individual investors rather than banks. Online lenders — like Lending Club, Prosper or Kiva — provide the platform for investors and borrowers to connect and manage their individual loans. As an investor, you put up a certain amount of money, which is loaned to one or more borrowers who pay it back in regular installments with interest.
The pros. Peer-to-peer lending tends to be a win-win: Investors get a higher rate of return on their money than a lot of banking products offer, and borrowers get an interest rate on their loan that’s usually less than bank-offered loans and credit cards.
The cons. Peer-to-peer lending won’t give you quick access to your cash if you need liquidity. The terms of the loan usually state that the borrower has a certain amount of time to pay off the loan; you’ll typically receive monthly installments during that time. And there’s risk involved: If a borrower defaults on your loan, you may not get your money back.
5. Online bank savings accounts
The basics. Online-only banks provide most (if not all) of the services that traditional brick-and-mortar banks do, with the benefit of high APYs and remote-friendly customer service.
The pros. A big benefit of having a savings account with an online bank is that they usually come with a higher-yield APY. Though these interest rates are subject to fluctuation, they tend to be 10 or even 20 times higher than brick-and-mortar rates.
The cons. Being a customer of an online bank requires a bit more comfort with technology, since these banks don’t typically offer in-person customer service. Customers usually access their accounts on a smartphone app or computer, so these banks tend to prioritize ease of use and often have online chat or 24/7 phone hotlines.