Alternatives To Traditional Savings Accounts

by Ron Haynes


choices Saving and investing are definitely two distinct activities but that doesn’t mean you shouldn’t look for ways to maximize your savings plans. You don’t always have to open a traditional savings account for the security and liquidity you need for your emergency fund or for short term savings goals.

Savings accounts aren’t always what you think

In addition to savings accounts, there are at least three other major places to park your cash: CDs, money market funds, and money market deposit accounts.

CDs

Certificates of deposit (CDs) are bank-issued savings certificates that pay a certain fixed yield over a set period of time, called a term. CDs can be issued in any amount and are FDIC-insured for up to $250,000. In general, the longer the term, the higher the CD’s yield. For example, if you put $1,000 of your savings into a five-year CD with a 5% yield, you’ll receive 5% of your balance in interest each year for five years, guaranteed. CDs do have one major drawback—you can’t withdraw from the CD during the term without incurring a substantial penalty (usually about 10% of the withdrawal amount).

  • Security: High, usually FDIC insured.
  • Liquidity: Variable, but you can withdraw your money with a penalty. You can also set up 30 day CD’s if you think you’ll need money in a hurry.

Money Market Deposit Accounts

Money market deposit accounts are a more restrictive type of savings account. Generally they allow few withdrawals and require a high minimum balance in order to avoid fees. In exchange, they tend to offer slightly higher yields than money market funds, CDs, or traditional savings accounts. They’re also FDIC-insured up to $100,000 per account.

  • Security: High, money market deposit accounts are usually FDIC insured.
  • Liquidity: Variable, but you can withdraw your money with relative ease. These are not considered “transaction accounts,” so the bank or financial institution may limit the number of withdrawals you can take each month before incurring a penalty (usually three).

Money Market Funds

Money market funds are a type of mutual fund offered by investment companies and some banks. Money market funds have yields that tend to be somewhat higher than those of savings accounts, but they are not FDIC-insured. Nonetheless, it’s highly unlikely that you’d ever lose money in a money market fund. If you do use money market funds, it’s best to do so at a well-established national bank or investment company. These funds do not invest in stocks but in short-term debt instruments purchased on what’s known as the “money market.”

The “money market” is not a particular place, but rather how the US government, banks, corporations, and other large institutions manage their short-term cash needs (yes, through borrowing).

  • Security: High. Though NOT insured by the FDIC, money market investments generally have a high credit quality, which means that there is little risk that their issuers will not be able to repay their debt. Because of this high quality, they are considered low-risk investments..
  • Liquidity: Medium high, only because it may take a few days to get your cash should you need it. Money markets do not require you to invest your money for set amounts of time like a CD. You can typically withdraw your money whenever you need it, without paying a penalty.

Photo by beingparents

Note: This article was included in the 241st Carnival of Personal Finance at My Journey to Millions. Check it out!

About the author

Ron Haynes has written 1001 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 4 comments }

Hassan Nicholas

Also, another alternative to traditional savings accounts are IDAs (Individual Development Accounts) and other accelerated-savings programs offered through nonprofit community organizations. Obviously, these resources are geared towards a specific demographic (limited by regional income guidelines), but are still an option for those who qualify. Our agency and many others offer IDAs which are matched-savings grant programs. Most have a 1 to 1 match ($1 dollar matched by the org for every $1 participant saves). We used to offer a 4:1. We also offer Ramp-Up Accounts, which offer an accelerated interest rate of 22% APY for 18 months. No catch. No penalties for early withdrawal. No fees. The only drawback is are the income and residency qualifications. But, it wouldn’t hurt for others to research programs like these at their neighborhood nonprofit org in their own city.

Credit Girl

Thanks for this quick to the point summary. I’ve been looking for other ways to invest my money after reading several financial blogs because the traditional savings account that I have at my bank just isn’t cutting it. I was looking into investing in CD’s but now that you mention the money market-I’ll definitely check that out as well.

If you had to choose either one to invest, say around $5000, and you wouldn’t need to pull out that money for 5 years, which one would you recommend?

Kris @ Debt Tips

I know it is controversial, but I’ve been using a Bank on Yourself plan. It’s more of a financing strategy than a savings strategy, but I’ve been happy with the results so far. Still a little worried that in 20 years I won’t be as happy, but it’s not like my traditional investments have done anything positive in the last year or so.

Ron

I read the book and was contacted by Pam Yellen but felt there was something just not right. Couldn’t put my finger on it. I may be wrong about her system and would love to be proven wrong, but I just don’t know about it.

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