Look Beyond a Savings Account for Real Savings

If your idea of saving money is stashing some cash in a savings account at the bank, it’s time to reevaluate your strategy. Saving money – a recurring topic in this newsletter – is not rocket science. However, many people simply leave their money in savings accounts that can earn as little as 0.1% interest. Such a trivial rate doesn’t even come close to beating the rate of inflation. In essence, your “savings” is actually dwindling. 

Check out these easy alternatives, typically considered safe investments, that could help you save more money with minimal effort.  These alternatives are not designed to earn mega-returns. Rather, they are seen as good alternatives to the “plain vanilla” savings account. And remember: although this guide is meant to give you a general overview, you should always seek the guidance of an investment professional before making a decision.

Money Market Account

Money market accounts are investment vehicles offered by most banks. They work much like a savings account, but pay a higher rate of interest – often above 1%. While this rate isn’t anything spectacular, it’s a very safe investment with little drawback.

There are really only two catches. First, you may need to maintain a minimum balance of a couple thousand dollars. Second, you are limited in the number of transactions you can perform per month with the account.

Certificate of Deposit (CD)

CDs are a great investment tool if you don’t need immediate access to your money. CDs are offered by banks and give a higher rate of return than savings accounts. However, the rates for CDs have fallen in recent years, so make sure to shop around before committing.

While CDs are generally considered very safe and offer interest rates beyond what one would receive with a savings account, the drawback is that consumers cannot access their money for a set period of time. CDs come in all flavors; some are short term as 1 month, some as long term as 5 years. Generally speaking, the longer the term (and your inability to access your funds), the better the return.

You can also consider building a “CD ladder,” whereby you invest in a variety of CDs with different terms, so portions of your savings become available on a fairly regular basis.

High Yield Checking Account

Many banks are now offering high-yield checking accounts. These checking accounts can offer rates as high as 2% or 3%. There are some catches though: you may need to make a certain number of debit card transactions per month, or receive a certain number of direct deposits per month. Plus, having your money available in a checking account may make it “easier” to go on spending sprees.

Nevertheless, these high yield checking accounts can be excellent low risk alternatives to savings accounts if you have enough willpower to resist the temptation to spend.

Take Advantage of Your 401(k)

Although a 401(k) can’t be accessed without penalty until you near retirement, it can be a great investment vehicle for long term savings. The inherent risk is higher than with CDs or money market accounts, but that risk can generally be tailored. Speak with your 401(k) manager or the human resources department at your job to see how you can tailor your 401(k) to meet your goals.

Many employers also offer 401(k) matching programs, where they contribute to your 401(k) if you invest enough of your salary into it. These programs are great and are essentially “free” money. Make sure to find out if your employer offers such a program.