High yield savings accounts have been a popular choice for many savers over the years. Offering higher interest rates than traditional savings accounts, high yield savings accounts are an attractive option for people who want to grow their savings while keeping their money liquid.
However, with the current interest rate environment, yields on high yield savings accounts have become less competitive. People looking to grow their financial wealth are now looking for alternatives that can offer more benefits. Read on to learn about seven alternatives to high yield savings accounts that you might want to consider.
1. Certificate of Deposit (CD)
Certificates of deposit are one alternative to a high yield savings account. Generally, CDs offer higher interest rates than traditional savings accounts and are a great option for people who don’t need immediate access to their funds.
They come with fixed terms, ranging from a few months to several years, making them an excellent option if you have long-term goals. The interest rate is fixed and most times, higher interest rates will come with CDs that have longer terms. The one downside to CDs is you can't withdraw your money before the maturity date without paying a penalty. Some financial institutions have no-penalty CDs as an option.
2. Municipal Bonds
Municipal bonds are issued by local governments and offer tax-free income. They are debt securities that are often used to fund schools, hospitals, and the construction of roads. Municipal bonds come with fixed terms, ranging from a few years to several decades, and offer higher yields than many savings accounts.
However, since they are not FDIC-insured, they come with some risks, such as the possibility of default. Municipal bonds are an excellent option for high-income earners who want to invest in a tax-efficient manner.
3. High Yield Checking Accounts
Some banks offer high yield checking accounts with higher interest rates than traditional checking accounts. Another benefit of high yield checking accounts is that some of these accounts come with no monthly fees. Some also offer ATM fee reimbursements, mobile deposit, and other online banking features. High yield checking accounts are an excellent option for people who want to keep their money liquid but earn more interest.
On the flip side, high yield checking accounts may require certain criteria to be met, such as a minimum balance in the account or a certain number of transactions per month. It’s important to be aware of any fees that may be associated with these accounts.
4. Peer-to-Peer Lending
Peer-to-peer lending is a newer type of investment where you lend money directly to individuals or small businesses, cutting out the traditional financial institutions. These platforms offer higher yields than many savings accounts, but they also come with higher risks. P2P lending has gained popularity in recent years, but it’s important to understand the risk involved as borrowers may default on their loans.
5. Money Market Accounts
Money market accounts offer higher rates than traditional savings accounts and are typically more flexible than CDs. These accounts have check-writing privileges, which make them an ideal option for people who want immediate access to their funds.
However, money market accounts may have more restrictions on withdrawals, such as a maximum limit per month. Also, you may be required to maintain a minimum balance in your account. Be sure to compare the interest rates and any fees associated with these accounts before choosing one.
6. Treasury Bonds
Similar to a municipal bond, treasury bonds are government debt securities but instead of local governments, they are backed by the U.S federal government. Most treasury bonds have a maturity period ranging from 10 to 30 years and will earn you interest over this period of time. Interest rates on these bonds can reach around 4% and are both state and local income tax free. Treasury bonds are for those who are investing long term and are a great alternative to high yield savings accounts.
7. Investment Accounts
Investment funds such as mutual funds, index funds, and exchange-traded funds (ETFs) can be a good option for those willing to take on more risk for potentially higher returns. These types of funds invest in a diversified portfolio of stocks, bonds, or other types of assets.
One risk involved with investing is that there is no guarantee of returns, and the money you put in can go up and down in value. Some even think that investing is too risky but that’s just one of the common misconceptions about money. While it is true that your investment can go down, you can manage that risk by spreading your investments over different accounts.
Being Comfortable With Your Investments
While high yield savings accounts can be a good option for short-term savings, they may not be the best option for everyone. There are a variety of alternative investment options available that may offer higher returns, but they also come with different risks and restrictions. Knowing what your finance situation looks like is key when you plan on investing. An app like Hiatus allows you to link your different bank accounts and keep track of your finances. Be sure to do your research and compare different options before making any investment decisions. Every investment comes with some level of risk and it's up to you to determine what you're comfortable with.