5 Smart Alternatives to Bank Savings Accounts
When you open your first bank account an adviser would often propose you to get checking (otherwise known as current) and savings accounts. The first one, without any interest for your day-to-day transactions and the second one with a very small interest. Later you might get a credit card to replace your current account as a credit card would build up your credit history and give you some cash back, but some people forget that you can and should improve your savings strategy as well. There are better ways to park your cash than a standard banking savings account.
Today we’ll explore 5 easy and safe alternatives to the classic savings account with modest interest.
It can be a little bit confusing for some people to learn that their savings account is not the same thing as a deposit account. A savings account gives you the ability to transfer money from it to the current account without fees and it plays the role of a virtual piggy bank. You can withdraw or deposit money on your savings account at any moment and unlike your current account, this one has some interest, but this is actually not a proper long-term investment product.
You would be lucky to find a savings account with 1% annual interest or a bit higher, many of them offer very low symbolic interest rates with almost no income. Many savings accounts won’t even beat the inflation rate, thus they don’t even save your money.
1 - Certificate of Deposit
The first thing you may consider as an alternative to a savings account is a deposit (Certificate of Deposit in the US and Guaranteed Investment Certificate in Canada). This tool gives a higher interest rate to its holders, somewhere around 1-2% per year, which is almost always better than the rate on a savings account. The majority of deposits in any developed country are designed to cover the inflation.
The only difference with the savings account is that you have to hold your capital on a deposit for a long period of time and you can’t withdraw money from it during this period. Usually, the period of deposit would be 3-5 years but there are products with longer and shorter durations. Often, a longer period of deposit has a higher interest rate attached to it as it’s better for the bank to know that your money will definitely stay in the bank during that period.
2 - High-Interest Savings Account
This might sound silly, but many banks have “high-interest savings accounts” as well as regular savings accounts. When a regular one might give you something like 0.1% annual interest, a high-income savings account would have 1%+ interest rate.
It’s a little bit silly because there is often no downside of having a high-interest savings account, except that in some cases the capital which can be placed there might be a bit limited (for example $5000 per year). Such an account with better returns is not always mentioned by bank tellers and bank workers, but these accounts exist and you would have to do small online research to find them. You can check your online banking interface and discover a savings account with a much higher return and then you can easily transfer a portion of your savings there.
Also, there are some special bank products for youth and elderly people like retirement accounts which function in a similar way to high-interest savings accounts and offer some tax benefits.
3 - Bonds
In this article we are looking at smart alternatives to the classic savings account, therefore we want to offer something as safe as the savings account, but with a higher return. Something too risky wouldn’t be a relevant alternative in our case.
Bonds are a great alternative to the savings account as they are quite conservative and safe too, but they can offer much better returns.
The US treasury bond has yields of 1-2% (the yield depends on the bond’s term to maturity), which is comparable to a high-interest savings account or a deposit account. Bonds like that are as safe as any other low-income bank product.
A more risky bond issued by a developing country, troubled state, or a corporation can offer much better returns - up to 5% and more, but, as returns go higher, risks are increasing as well.
It’s quite easy to buy bonds and those deals can be offered by the same bank where you keep your savings.
4 - Stocks With Decent Dividends
Stocks, in general, can hardly be a reasonable alternative to a savings account as they are usually much more risky and they require a lot of effort to understand their nature and behavior in the market.
A stock with high stable dividends can be considered as an alternative to a savings account.
You can check our article about dividend yield to learn more about such an investment. To put it simply, it’s quite possible to purchase a safe stock with a long history which would have 3-5% annual dividend yield.
Based on the data provided by websites like dividend.com you could classify companies by dividend yields as follows:
- 1-3% Old and reputable corporations
- 4-6% Somewhat trusted companies and famous brands
- 7-9% Questionable firms
- 10%+ You might want to avoid most of those organizations
This is the Easy Portfolio’s point of view on companies regarding their dividend yields.
So, as a conservative investor, you can pick any company with a long (at least 10+ years) history, stable net income and buy its stock.
In addition to dividend income, you would also get an opportunity to make money on capital gains if the price of stocks you purchased is going to grow.
5 - Real Estate
Recently we published an article with our opinion on real estate investing. There we shared a rather skeptical point of view on it, but it’s still an option for those who have substantial capital on their savings accounts.
People with limited savings can consider investing in REIT - real estate investment trust.
As a matter of fact, even those first 4 options we mentioned often would have a better long-term return than many real estate investments, however, purchasing property might be the way to diversify your capital away from a bank.
There are more alternatives to low-interest savings accounts but those 5 we’ve listed here are quite easy to acquire and they can provide better returns with comparable minor risks.
High-income accounts, deposits, bonds, dividends and, to some extent, real estate are great alternatives to the savings account. Some of those tools may require you to learn a little bit about them and to do some research but higher return don’t come for free.
Luckily, in this case, the price is just a little bit of your personal time.
The main reason why so many people still keep a huge share of their savings in low-interest accounts is, in our view, just a lack of knowledge of other safe alternatives. It’s also profitable for banks to not advertise their products with higher interest rates (yet those products are technically offered and exist), so it’s their customers’ responsibility to think and to make wise decisions about their capital allocation.
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