Grow your money faster: 5 alternatives to a savings account

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Keeping all your money in a regular savings account? You may be missing out.

The average savings account interest rate was 0.57%, as of April 2024. Many large banks have savings accounts with interest as low as 0.01%. Stashing your money in an account earning low interest limits your savings growth potential.

Luckily, you have other options, including high-yield savings accounts, money market accounts, and certificates of deposit (CDs).

Your best choice depends on your specific goals and when you need to access the funds. Here are five different places to move your savings.

1. High-yield savings accounts

Many online banks offer high-yield savings accounts that boast higher interest rates. These accounts function like regular savings accounts but can offer rates over ten times higher. Some of the top high-yield accounts offer between 4%-5% interest.

You can earn much more on your savings with a higher interest rate.

Let’s say you invest $1,000 into a savings account, earning the average rate of 0.58%. After one year, you’d earn only $5.80 in interest. If you put that money in a high-yield account earning 5%, you’d earn $50 in interest.

Compounding interest can increase your earnings even more. As time passes, interest will accumulate, leading to a snowball effect that can boost your savings over the long term.

There are some drawbacks to high-yield savings accounts. Because high-yield accounts are only offered online, you may have to open an account at a new bank, which can be a hassle. It also means waiting a few days to move money into and out of the account.

Banks can also change the interest rates on high-yield savings accounts anytime. There's the possibility that high rates may decrease in the future, which could impact the overall returns on your savings.

2. Certificate of deposit

A certificate of deposit (CD) offers a higher interest rate in exchange for less flexibility. When you open a CD, you choose a specific term, ranging from a couple of months to a few years.

You agree not to withdraw your money from the CD during this time. Once the term ends, the CD matures, and you can withdraw the money or roll it over into a new CD. You’ll have to pay a penalty if you withdraw your money before the term expires.

CDs offer different interest rates based on the length of the term. Generally, the longer the term, the higher the interest rate. The average one-year CD has an interest rate of 1.72%. Some banks offer CDs with rates of over 5%.

Many high-yield savings accounts offer higher interest rates than CDs. But the real advantage to CDs is that once you lock an interest rate, it will stay fixed throughout the term.

A CD can be a good fit if you have a specific goal on the horizon, like a vacation in three years. You could open a 3-year CD, which lets you earn interest and reduce the temptation to spend your savings.

To choose the right CD, compare both terms and interest rates. Try to match the term length with when you think you'll need the money.

If you need to access your money before the CD matures, opting for a shorter-term CD or a high-yield savings account is best.

3. Money market accounts

A money market account combines features of both savings and checking accounts. Like a savings account, money market accounts offer a secure place to store money while earning interest. Like a checking account, these accounts have check-writing abilities and come with a debit card for easy access to funds.

If you have a bigger chunk of change, money market accounts may be for you. They often require a high minimum balance, although some accounts may have low or no minimum balance requirements. Failing to meet the account's requirements may result in fees.

Money market accounts usually have lower rates than high-yield savings accounts. But, if you're looking for an account like a checking that earns interest, it may be a good option. Money market accounts are best for those who want easy access to their money and the ability to withdraw cash.

4. Retirement accounts

These accounts make it easier to catch up on retirement savings. Plus, they often come with higher returns and tax advantages that traditional savings accounts don’t have.

Two popular retirement savings options are the 401(k) and individual retirement account (IRA).

A 401(k) is an employer-sponsored retirement plan. You can contribute pre-tax income, which reduces your annual taxable income, saving you money. Many employers also offer a matching contribution, adding money to your account based on your contributions, effectively giving you free money.

You can open an IRA on your own without an employer. There are two main types: traditional IRAs and Roth IRAs.

With a traditional IRA, you contribute pre-tax income, like a 401(k). Your contributions are also tax-deductible, reducing your taxable income. Withdrawals in retirement from both 401(k)s and traditional IRAs are taxed.

A Roth IRA requires contributions with after-tax income, meaning you don't get an immediate tax deduction. But, the withdrawals are tax-free during retirement.

You can decide where to invest your retirement savings. Target-date funds are a popular option, providing an easy way to invest in a well-diversified portfolio.

To maximize your retirement savings:

• Take full advantage of any employer match in your 401(k).
• Aim to contribute the maximum to your retirement accounts. This allows you to take full advantage of the tax benefits and boost your savings.
• If you cannot contribute the maximum, increase your contributions gradually over time.
• Review your investment allocations to align with your risk tolerance and long-term goals.

Depending on the account, there may be contribution limits and other restrictions. Most retirement accounts also limit your ability to access funds before retirement age. In most cases, withdrawing money before age 59 ½ may result in taxes and penalties.

5. Stocks and bonds

Investing in the stock market has the potential to generate some of the highest returns over the long term.

When you invest in stocks, you're investing in a piece of a company. As the company grows and becomes more profitable, the value of your investment can increase. When you invest in a bond, you're lending money to a government or corporation in exchange for regular interest payments.

Historically, the stock market has provided an average annual return of around 10%. Over time, your investment has the potential to grow significantly.

It’s important to understand that investing in the market also carries risk. Stocks tend to offer higher potential returns but come with higher risk. Bonds offer lower returns in exchange for lower risk.

Stock prices can be volatile, and there’s a possibility of losing money, especially in the short term. Market fluctuations, economic conditions, and company performance can impact the value of your investments.

To manage risk, it is crucial to diversify your portfolio by investing in a mix of different stocks and bonds. Diversification spreads risk across various assets and industries, reducing the impact of a single investment's poor performance.

You should also take a long-term view when investing in the market. This allows you to ride out market volatility and benefit from the market's growth.

The bottom line

If you have short-term financial needs and can’t afford to handle market fluctuations, investing in stocks is likely not a good idea. If you’re saving for a retirement that’s decades away, keeping all your cash in a regular savings account means missing out on the potential returns.

To make the most of your savings, consider your goals, risk tolerance, and financial situation. Consider organizing your savings into different accounts, or “buckets”, each for a specific goal. This approach ensures that each bucket focuses on a specific goal, such as short-term needs or long-term retirement savings.

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