The stock market may be on a nine-year bull run, but few would argue that traditional bank account interest rates are deep in the basement. Most pay only a fraction of 1%. If you take inflation into account, you’re losing money keeping your funds in a traditional bank. For that reason, its become practically a necessity to find alternatives. Here are seven we recommend.
1. High-Yield Online Savings Accounts
Local banks pay close to nothing in interest on savings. You can get much higher rates from online banks. One that you may want to check out is CIT Bank. They pay rates on savings, and CDs that are well over 1%. In fact, CIT has an 11-month CD paying 2% with no early withdrawal penalties after only 6 days.
The disadvantage of online banks is that they don’t usually offer full banking services. For example, some don’t have checking accounts or ATM access. Others don’t offer loans.
Online high-yield savings accounts are best for pure savings. It will generally be necessary to keep the relationship you have with your local bank, but earn more money on your savings online.
Using CDs and CD Ladders with Online Savings Banks
CDs generally pay higher rates than savings accounts. But you might be hesitant to tie up your money in CDs. There is a way around that, using what is known as a CD ladder. That's a strategy where you use multiple CDs with varying maturities. It's a way of making sure some of your money is liquid, but still earning higher rates of return.
Let's use Ally Bank as an example. Their High Yield CDs are currently offering 2.75% APR for 12 month CDs. Now let's say you have $30,000 you want to invest. Rather than investing your entire savings in a single CD, you instead invest 1/12 of your savings each month. That's $2,500 per certificate.
Each month going forward, you invest $2,500 in a 12-month CD paying about 2.75%. After 12 months, your entire savings of $30,000 is invested in 12 different CDs.
This means one CD will be maturing every month, giving you a strong measure of liquidity. The maturing CD can even be rolled over into a new 12-month certificate. This strategy enables you to take advantage of rising rates in the future.
Still another variation is to invest in CDs of different maturities. For example, if you want to invest the entire $30,000 in savings today, you could put five equal shares into different CDs with maturities of one year, two years, three years, four years, and five years. You'd be tying up your money longer, but the return will be higher.
For a deeper look at CD ladders, check out our post How (and Why) to Create a CD Ladder.
2. US Treasury Securities
Most people are at least remotely aware that Treasury securities exist, but very few individuals invest in them. That’s unfortunate, because certain types of U.S. Treasury securities pay high rates of interest. What’s more, since they’re issued by the US government, they’re considered to be the safest of all investments, virtually impervious to default.
US treasury securities come in various terms. They can range from 30 days to 52 weeks for treasury bills, two years to 10 years for treasury notes, and 30 years for treasury bonds.
Treasury bills, being short-term, pay lower rates, but still much better than a traditional bank. But if you’re willing to invest for a longer-term, you can get higher returns on treasury notes.
They can be purchased in denominations of as little as $100, and pay interest every six months. Current rates are around 2.5% for two-year notes and about 2.8% for five-year notes. You’ll be tying your money up for longer than you would with a savings account, but the higher interest may be well worth it.
You can purchase, hold and sell US treasury securities through Treasury Direct.
3. High Dividend Stocks
Stocks are of course riskier than traditional savings. They’re not really suitable if your primary purpose is creating an emergency fund. But if you’re looking for a higher yield on your savings--as well as a chance at price appreciation--there are plenty of good high dividend stocks.
Many of these companies are well-established, and tend to be less volatile than the overall stock market. In fact, high dividend yields tend to offer a measure of protection during market declines.
There’s a bonus here, too. If the dividends paid by the company are considered qualified dividends, there may be no tax liability on them.
To get started buying dividend stocks (and any other kind of investing in financial markets) we recommend checking out Ally Invest, an online discount broker. They have low fees and no minimum deposit, so it will be simple and easy to get started.
4. Municipal Bonds
Morningstar reports that the average annual return on municipal bond funds is about 3.5% over the past five years. That’s a lot higher than yields on traditional bank accounts, and even many of the alternatives included in this article.
But the best part of all is that the interest paid on municipal bonds is exempt from federal income tax. And if your own state has an income tax, and the bonds are issued by an agency within your state, the interest will also be exempt from state income tax. This is referred to as double tax-exempt.
Since they’re tax-exempt, if you’re in a combined marginal tax rate of 25%, a bond yielding 3% will be the equivalent of a 4% return on a taxable investment.
For small investors, it’s usually best to invest in a municipal bond fund. That’s because the fund can diversify between various bonds issued. They may even be sorted by state, so you can take advantage of double tax-exempt status.
5. High-Yield Bonds
These are long-term securities issued by corporations. They can run in terms of 20 years or more, but they pay interest rates much higher than traditional banks. In fact, according to MorningStar, the average five-year return on high-yield bonds is around 3%.
Individual bonds usually sell in denominations of $1,000. Some may even require a minimum purchase of $10,000 (10 bonds), making it hard for small investors to diversify. A better alternative may be a high-yield bond fund. For example, the iShares 0-5 Year High Yield Corp Bd ETF has a one-year return of about 3.5%, and that fund is comprised of bonds with maturities of not more than five years, making it lower risk than long-term bonds.
Related: How to Build a Bond Ladder
6. Real Estate Investment Trusts
Not many people think of real estate when it comes to savings. But there’s a way you can use real estate as a form of high-yield savings. Real estate investment trusts, or REITs, are something like mutual funds that invest in real estate. Its primarily commercial real estate, like retail space, office buildings, warehouses, or large apartment complexes.
REITs pay dividends. In fact, they’re legally required to pay 90% of their revenues in dividends to their shareholders. Returns over the years have been generous, on the order of 10% annually.
REITs are also publicly traded funds, so you can buy and sell any time you want.
There is some risk of losing invested capital with REITs, so make sure you’re aware of this fact, and fully prepared to invest for the long term. But it’s a way of earning high dividend yields without being so dependent upon price fluctuations of the underlying investment.
7. Peer-to-Peer Lending
This is another form of investing that does involve some degree of risk. With P2P lending, you’re investing in personal loans issued to consumers. There is always the risk that a loan can default. However, when you invest in P2P lending, you’re only purchasing notes, not entire loans. The notes represent $25 slivers of individual loans. That means that you can invest in 40 different loans with an investment of $1,000. That will help to minimize your risk.
Using a Tiered Savings Strategy to Get High Yields with Low Risk
If you’re unhappy with the returns you’re getting on your savings, consider setting up a tiered savings plan that looks something like this:
- An emergency fund in a high-yield online bank account.
- Excess amounts invested in high-yield, low-risk investments, like US treasury notes, bond funds and high dividend stocks.
- A smaller amount invested in either REITs or P2P lending platforms, to increase your overall savings yield.
That kind of savings portfolio will keep your money relatively safe, and earn a lot more than a traditional bank account.