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Alternatives to High-Yield Savings Accounts

This article was written by in Banking. 14 comments.


I am not surprised that my recent suggestion to start the decade off right by opening a high-yield savings account received a lukewarm reception. With rates between 1% and 2% APY right now, these savings are looking somewhat pathetic.

Savings accounts are not designed to be investments. They will not provide the growth potential that stocks provide over the long term, nor do they carry the risks that are associated with the stock market. Even if the bank holding your savings account fails, you will be able to withdraw your money. I’m sure there are many people who no longer produce an income through working, people who rely on their investments to sustain them, who were wishing their investments were insured by the FDIC, particularly right after the stock market crashed.

Money market accounts are not alternatives to savings accounts. There is no inherent difference between a money market account and a savings account. Some banks may allow you to write checks from your money market account, but you’re probably limited to three. Money market accounts are subject to the same federal limitations on withdrawals as savings accounts: only six per statement cycle. Money market accounts sometimes offer interest rates that are higher than savings account rates, but there are often other limitations like monthly fees, minimum balances, and a tiered interest rate system that benefits higher balances.

By law high-yield checking accounts can’t exist. But banks generally get around that law by creating Negotiable Order of Withdrawal (NOW) accounts, calling them checking accounts in their marketing materials. They function the same as as a proper no-interest checking account as you might expect, but banks are allowed pay interest on the deposits. You can likely find checking accounts offering interest rates even higher than high-yield savings accounts, but they usually come with limitations like a direct desposit requirement or other limitations like many money market accounts.

Money market funds are different than money market accounts. These are investments, mutual funds, and they carry slightly more risk than savings and money market accounts. You might find a slightly higher interest rate in a money market fund offered by your bank or brokerage. Money market funds often offer check-writing privileges as well.

Investments in peer-to-peer lending are not like savings accounts. If you pick the right investments, you could earn more than you would in a savings account. Lending Club makes this process easy. It’s important to note that you don’t have immediate access to your money when you invest through Lending Club. With a savings account, you can withdraw your money at any time, but that is not how peer-to-peer lending works.

With Lending Club, if you need to withdraw before your loans are paid back or your investment matures, you have to sell your investment on a secondary market. This could take a few days and you probably won’t be paid the full value of your investment. Additionally, these investments carry the risk that the borrowers will not repay the loans. It’s important to make these distinction when aggressive marketing campaigns gloss over the details.

Peer-to-peer lending services are providing good services by connecting borrowers and lenders directly rather than involving the banking industry. I want to highlight another alternative with a similar mission.

Savings accounts at community banks and credit unions are good options because they also offer FDIC or NCUA insured deposits and often provide interest rates as high as high-yield savings accounts with major online banking institutions. When any bank receives a deposit into your savings account, such as your paycheck, the bank can then lend part of that money out to borrowers. With community banks, your money is more likely to stay within the community in which you live, assisting small business owners and supporting economic development your town.

If you are concerned that by depositing your cash into Citi or Bank of America you are supporting companies that are “too big to fail” and require bailouts from taxpayers, yet still find ways to pay executives outrageous bonuses, then you may want to consider community banks. I found this video, produced for the campaign to Move Your Money (out of big national banks and into community banks), thanks to @ericalucci. The short film draws inspiration from and samples It’s a Wonderful Life.

Updated February 26, 2013 and originally published January 5, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 14 comments… read them below or add one }

avatar Craig

I have my savings in a money market account and the rates are the same, and no monthly fees at all. I barely touch it and have a separate general investment savings mutual fund so I look at this as more short term liquidity savings.

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avatar Nicole @ RainyDaySaver

I made the move back to a community bank last year, and the improved interest rate alone made it worthwhile. Sure, there are only a few branches of the bank, but they reimburse fees incurred at other ATMs, if we travel out of the area and need to make a withdrawal.

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avatar MoneyProgress

How about Series I Savings Bonds? I am currently in the process of “transferring” my emergency fund from online savings accounts to I Bonds. The current rate is about equivalent to online accounts right now. Here is a good post about the current rates.
http://www.mymoneyblog.com/archives/2009/11/savings-i-bonds-november-2009-fixed-rate-03.html

Because you have to hold them a year before you can sell them, I am buying a small amount each month. Eventually I’ll have enough in there that I could sell to be my emergency fund. If they rates get bad, I can sell them, otherwise they keep increasing in value and are not taxed until you sell ( and no state tax.)

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avatar Investor Junkie

I-Bonds are not a bad idea as they are tied to inflation.

Personally, I have the 4% rule to investing in any asset. Anything below 4% return becomes risky in other ways:

http://investorjunkie.com/the-4-percent-rule-to-investing

The thing to remember with ANY investment it contains risk, even in what people think as ‘safe’ investments.

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avatar Anthony Manganiello

What, if anything, are you doing about eliminating debt? I wholeheartedly agree that moving money away from the “big banks” is a step in the right direction (I also bank locally at small, regional banks). However, that alone won’t resolve the issue. To take a second step, you have to help the normal, blue-collar guy, understand how personal cash flow works.

While people like us are more savvy financially, the Potters’ of the world are building their empires on the backs of the everyday, average, working Joe (or Josephine). They need to understand that they’re generating a fairly significant amount of wealth as they forge ahead throughout their working life. Yet, they don’t accumulate any of the wealth they generate because they’ve already committed it to banks (national or regional).

It’s my personal, professional, position that we need to help as many people as possible understand that the key to succeeding financially, is directing their personal cash flow towards a destination where it winds up being deposited in an account in their name. Currently, the vast majority of folks are directing towards the Potters’ of the world, and they don’t even know it.

Thoughts?

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avatar Geoff

I have been looking at move some money into the high yeild muni fund at Vangaurd. It is paying around 4% and is federal tax free.

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avatar thriftygal

4% interest on a checking account? Sounds too good to be true! Where do you bank?

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avatar Andy Hough

Reward checking accounts are a good option. Mine pays 4% and the requirements are easy to meet and all of your money is easily accessible.

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avatar thriftygal

Sorry the above reply was for Andy Hough and not for Geoff.

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avatar savingeverything

Flexo, not sure where you live; but there are several local or regional banks in your state that have good interest rates (at least better than 0.05% or 0.10% at the common big monster banks). YOu may want to consider looking into that; and of course, as mentioned above, some of those reward checking accounts… even ones that are in you state! Some nowadays still pay interest for upto $25k at average 4.0%apy, as long as you complete on average 10 signature-based debit card transactions, 1 direct deposit or ach out, must accept e-statements, and some require must login each month. Not bad, and if the bank has several branches in your state or nearby, then that’s a bonus.

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avatar Andy Hough

thriftygal – my account is only available to residents of the KC metro area. You can find a reward checking account in your area at highyieldcheckingdeals.com or checkingfinder.com. These are usually small, community banks that offer the reward checking accounts.

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avatar thriftygal

Thanks for the info Andy!

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avatar Eric

yeah even I have jumped on the high yield checking accounts. it’s not as bad as it seems and i can get $40-50 bucks a month. not bad.

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avatar SB (One cent at a time)

I recently moved most of my money from no interest checking to capital one interest checking account, and I am at least able to keep my money at par with inflation. Yes, I do work and I do not prefer keeping money in checking account. Still for all practical purpose we all need to keep sufficient money in checking account always, a few extra bucks there really helps.

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