By leaving your money in a traditional savings account, your cash is devaluing by an average of 2% every year due to inflation. The small amount of interest you get from storing your cash with banks doesn’t come close to making up for this loss of value.
Conventional wisdom states that you should invest this cash in the stock market. However, you likely need cash on hand for emergencies, bills and times of uncertainty. When the news is constantly talking about high unemployment rates and the stock market’s volatility, it might be hard to convince yourself to invest.
Although it’s understandable to want to stay on the safe side, it’s best to look at all the options when it comes to storing cash. Here are the five best alternatives to a traditional savings account that minimize risk while still growing your money.
1. Online Bank Accounts
Aside from the well-known brick-and-mortar banks, a lot of online banks offer accounts that are FDIC insured up to $250,000 — just as much as your most trusted bank. These banks can afford to pay higher interest rates because they cut out the overhead of maintaining fully staffed physical locations. Many offer high-yield savings accounts with interest rates that are at least 10 times those of traditional banks.
If you aren’t sure you can rely on the smaller online banks, you can always go with a trusted big-name company that has an online banking service you might not know about. You can compare the rates of some of them below, but make sure to check the fine print to avoid any unnecessary fees.
| Bank | Interest Rate (Annual Percentage Yield) |
|---|---|
| Discover | 3.60% |
| Capital One | 3.40% |
| CIT Bank | 4.20% |
| Axos Bank | 0.61% |
| Marcus by Goldman Sachs | 3.75% |
| American Express National Bank, Member FDIC | 3.75% |
| Ally Bank | 3.40% |
2. Money Market Accounts
Most major banks offer money market accounts. You could likely have one alongside your regular savings account at your bank, so it’s a natural alternative to a savings account. These accounts pay higher interest rates because the bank uses the money in the accounts to make short-term, low-risk investments.
When compared to high-yield savings accounts, money market accounts tend to pay similar rates and are typically also FDIC insured. However, their rates increase quite a lot in years when there are higher interest rates overall. Currently, rates on money market accounts that offer higher yields are anywhere from 0.35% to 0.60% APY.
3. Low-Risk Investments
While investing in potentially volatile stocks might not be an option you’re considering for your cash right now, there are other safe and stable asset classes to consider. Two of the safest investments that can serve as an alternative to a savings account are bonds and U.S. Treasury securities.
US Treasury Securities
While the previously popular Treasury bills have had extremely low yields in recent years due to low interest rates, the Series I bond issued by the U.S. Treasury is specifically made to protect your cash from inflation.
Since I bonds are based on the rate of inflation, their yield is fairly low, but it’s still higher than you’d get with many other types of cash-storing accounts and investments during years with low interest rates. The current yield of an I bond is 1.68%.
I bonds are generally long-term investments, but they can be cashed out anytime after one year.
Bonds
Although bonds have a lower return than stocks, they also have much lower volatility and tend to be one of the few assets that tick up while the stock market falls. Bonds typically generate a return of 1% to 6%, although the rate can be higher or lower.
Municipal bonds, which are issued by municipalities and states, are also a safe bet. Although these pay lower interest rates than corporate bonds, the interest earned is tax-free at the federal level. State taxes will also be waived if the bond is issued in your state of residence.
4. Dividend Aristocrats
Investing in dividend stocks is still risky in that they can still fall in value, particularly during an overall stock market crash. However, dividend aristocrats are a special class of high-yielding dividend stocks — ones that have increased their dividend yield for at least 25 consecutive years.
In the 2008 recession, when the S&P 500 declined 38%, the dividend aristocrats index declined only 22%. Because of their consistent yield and long history of reliability, these are some of the safest stocks on the market. Yet the returns are still great. The typical dividend aristocrat stock will earn you anywhere from 1% to 7% per share in dividends while also increasing in value over the long term.
If you want to diversify your portfolio while still earning high-dividend yields, you can buy shares of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which will still earn you 2.57% per share.
5. Stablecoin on Cryptocurrency Platforms
While many people have heard of bank lending and peer-to-peer lending, there is now a new category of lending — through cryptocurrency.
In peer-to-peer lending, or social lending, you lend money directly to individuals for a high interest rate on the loan. Unfortunately, it’s a risky investment in that the borrower could default on their loan, and it’s inconvenient because your money is locked up for as long as the borrower has not paid back the loan.
Earn High Interest Without Losing Access
The cryptocurrency world has its own platforms for peer-to-peer lending like KuCoin that have even higher interest rates. Whereas fiat currency peer-to-peer lending averages a 5% return, most annualized interest rates on loans of the USDT stablecoin are 30% to 60%.
However, storing cash in the form of stablecoin on cryptocurrency lending platforms and cryptocurrency wallets is entirely different. Stablecoins are a form of cryptocurrency that’s backed by the U.S. dollar. One stablecoin is approximately equal to US$1 with minor fluctuations.
Many companies offer interest rates of 6% to 12% just for keeping stablecoin on their platform. This is a return on investment approaching that of the U.S. stock market 10-year average.
These platforms can afford these interest rates because they lend the currency to borrowers with high interest rates behind the scenes. However, your own stablecoin remains very liquid and can be withdrawn as USD at any time for no fee on most platforms.
| Platform | USDT Interest Rate | GUSD Interest Rate | USDC Interest Rate |
|---|---|---|---|
| BlockFi | 9.3% | 8.6% | 8.6% |
| Celsius | 10.51% | 10.51% | 10.51% |
| Nexo | 10% | 10% | 10% |
| YouHodler | 12.7% | 12% | 12% |
| Binance | 6% | N/A | 5.05% |
As with all investments and savings platforms, there is associated risk. Though the risk is very low, the possibility of the platform collapsing, the lack of insurance and the potential for hacking attempts could affect your stablecoins.
Advice
With so many alternatives to a savings account to consider, you can easily balance safety and liquidity with higher returns. Regardless of what you choose to store your money on or invest in, make sure to do your research, read the fine print, and consult a financial advisor if you need more guidance.
Rates are subject to change; unless otherwise noted, rates are updated periodically. All other data is accurate as of March 25, 2021, and is subject to change.
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