Against the backdrop of high inflation, traditional savings accounts have seen their rates rise. Yet they still have relatively low rates. While they remain an adequate place to park short-term money, there are some important alternatives.
Despite low yields, more than one-half (52.1%) of all households have a traditional savings account, according to data from the Fed’s 2019 Survey of Consumer Finances.
But to help you find a better place to park your money, we’re providing the best alternatives to traditional savings accounts. There are 10 alternatives, so you can choose the account type(s) that works best for you.
Best Alternatives to Traditional Savings Accounts
Online Savings Accounts
You can think of online savings accounts as the latest evolution of the traditional brick-and-mortar bank. They function much like traditional banks, except they operate entirely online. Though most traditional banks now offer online banking, online banks have taken things to a higher level, completely automating the process to create a simple banking experience.
Advantages Over a Traditional Savings Account: Most online banks pay much higher interest than traditional banks. For example, Ally Bank currently offers 3.60% APY on their Online Savings account.
Account Safety: Excellent. Online banks are part of the FDIC system, so you’ll enjoy the protection of up to $250,000 of funds on deposit with each bank.
Potential Drawbacks: The most obvious disadvantage is that the majority of online banks don’t offer local branches. You’ll need to be completely comfortable with operating entirely online. And since online banking is still evolving, many online banks offer more limited services. For example, an online bank may not offer business banking services.
You can see our full list of best online banks here.
Neobanks
Neobanks are fintech companies that offer banking services. Typically, these are limited to checking and savings accounts. But they offer financial tools, like budgeting apps, to enable customers to increase their savings. And though they aren’t banks, they generally offer debit cards with fee-free access to tens of thousands of ATMs through ATM networks.
Advantages Over a Traditional Savings Account: Neobanks often offer debit cards with rewards. Many will also allow you to open an account with no credit check.
But perhaps the biggest advantage is in the interest neobanks pay. At the higher end of the scale, Aspiration is paying up to 3.00% APY, while Upgrade Premier Savings offers up to 4.38% APY.
Account Safety: Many neobanks offer FDIC insurance through a banking partner. That information will be listed on the neobank website, and in its product descriptions.
Potential Drawbacks: Neobanks don’t offer local branches and they may have even more limited services than online banks. For example, while many online banks offer credit cards, auto loans, and mortgages, neobanks are unlikely to offer these services.
In addition, the high rates of interest may be limited. For example, Current limits interest paid to three “pod” balances of $2,000 each – $6,000 in total. Any amount held in a pod that exceeds that limit will receive no interest. Some neobanks also charge fees on interest-bearing accounts. Before choosing a bank account, always read the fine print to look for fees and account limits.
Read more: Traditional vs. Online Banks vs. Neobanks
Credit Unions
Credit unions operate in much the same way as banks. However, the main difference is that they are owned by their depositors, and not by shareholders. That’s also why credit unions tend to be smaller than banks.
Advantages Over a Traditional Savings Account: Since credit unions are owned by their depositors, they tend to be more user-friendly than banks. For example, it may be possible to get a quicker loan approval at a credit union than through a bank.
Some credit unions also offer enhanced savings account interest. For example, Massachusetts-based DCU – which accepts depositors nationwide – is currently paying 6.17% APY on the first $1,000 on deposit in a savings account (after which they pay 0.15% APY).
Account Safety: Accounts are protected by the NCUA, an agency of the U.S. Government, for up to $250,000 per depositor per credit union.
Potential Drawbacks: Many credit unions have specific criteria for membership. For example, many offer accounts only to people who live in a certain geographic region or who work for certain employers. Credit unions do not generally offer business banking services, as they are not commercial banks. Also, be aware that interest paid at credit unions is generally comparable to that of traditional banks.
Cash Management Accounts
Cash management accounts, or CMAs, are banking services offered by investment brokers. They provide investors with an option for uninvested cash in their brokerage accounts.
Advantages Over a Traditional Savings Account: You can move funds seamlessly between your investments and your CMA. One of the best examples of a CMA is Schwab Bank High Yield Investor Checking®. Not only does it come with 0.40% APY paid on account balances, but it also provides full checking account services, including a debit card with unlimited fee reimbursements.
Account Safety: Many CMAs are covered by FDIC insurance.
Potential Drawbacks: You generally must have a brokerage account established to open a CMA. And in many cases, the interest paid may not be substantially higher than that offered by banks.
Money Market Accounts
Money market accounts are offered by banks and credit unions and work much the same way as savings accounts. They’re interest-bearing, and usually have a low minimum deposit requirement. But where they depart from savings accounts is that they often come with debit card access, and even checking access.
Advantages Over a Traditional Savings Account: Though money market accounts are very similar to savings accounts, they often pay higher interest. There are a number of banks currently offering high-yield money market accounts, with yields of over 4.00% APY and with low minimum deposits.
Account Safety: Accounts are fully protected by either FDIC or NCUA insurance coverage.
Potential Drawbacks: Money market accounts are often indistinguishable from savings accounts issued by the same banks, other than the fact that they may offer checking and debit card access.
Read more: Money Market Account vs. Savings Account
Money Market Funds
Despite the similarity in names, money market funds are completely different from money market accounts. While money market accounts are issued by banks and credit unions, money market funds are mutual funds.
Advantages Over a Traditional Savings Account: Money market funds typically pay higher interest than traditional savings accounts. For example, the Fidelity Money Market Fund has a seven-day yield of 3.70% (as of Decemer 22, 2022).
Account Safety: As mutual funds, money market funds are not covered by FDIC insurance. However, since they are issued by brokers, they generally come under SIPC insurance. That protects your account against broker default, for up to $500,000 in cash and securities, including up to $250,000 in cash.
Potential Drawbacks: No FDIC coverage, limited liquidity, and high fees, like expense ratios in excess of 0.40%. In addition, money market funds must be purchased through investment brokers.
Certificates of Deposit (CDs)
Certificates of deposit are contracts you take with a bank to pay you a certain interest rate on a fixed amount of money for a predetermined term. They come in terms ranging from three months to as long as 10 years, though most banks max out at five years.
Advantages Over a Traditional Savings Account: CDs at certain banks, typically online banks, pay much higher interest than traditional savings accounts. For example, Sallie Mae offers their 14-month no penalty CD, currently paying 4.40% APY, with a minimum deposit of just $1.
Account Safety: As long as they are issued by banks or credit unions – and they almost always are – you’ll be covered by FDIC or NCUA insurance.
Potential Drawbacks: Lack of liquidity. Unless you choose a no-penalty CD, your funds are tied up for the duration of the term. If you access funds before the maturity date of the certificate, early withdrawal penalties can severely reduce your interest income. Be sure to read the terms of the CD to find out the early withdrawal penalty.
Check out our list of Best CD Rates here.
U.S. Treasury Bills, Notes and Bonds
U.S. Treasury securities are debt instruments issued by the U.S. government to fund the national debt. They are available in terms ranging from four weeks to as long as 30 years.
A special class of U.S. Treasury securities is called Treasury Inflation-Protected Securities (TIPS). Though these securities pay very low interest, they make annual principal additions based on increases in the Consumer Price Index. They’re widely considered to be excellent inflation hedges.
Advantages Over a Traditional Savings Account: Securities currently pay interest ranging from 4.31% on a one-month bill, to 3.53% on a 30 year bond. In addition, interest paid on Treasury securities is generally exempt from state income tax.
Of special note are I-Bonds. They’re available in denominations from $25 to as much as $10,000 (which is the maximum you can purchase in any single year). The bonds are issued in terms of 30 years. Currently, I-Bonds are paying 6.89% (as of December 22, 2022).
Account Safety: Principal and interest are guaranteed by the United States Treasury.
Potential Drawbacks: Principal additions on TIPS are taxable in the year issued, though the principal isn’t paid until maturity. I-Bond interest rates apply only for the first six months after purchase. They adjust based on prevailing interest rates thereafter. You should also be aware that you cannot cash in your I-Bonds before one year. And after one year, you’ll be subject to a penalty of three months interest if you redeem the bond within the first five years.
Brokered CDs
As the name implies, brokered CDs are available through investment brokers. In virtually all other respects, they work like CDs issued by banks. This is because the CDs offered by brokers are generally issued by banks.
Advantages Over a Traditional Savings Account: Unlike banks and credit unions, which only offer their CDs, brokers can offer CDs from hundreds of institutions. For example, Fidelity offers CDs with more than 75,000 new and secondary market CD issues. That breadth of offerings means you’re likely to earn a higher interest rate than with a local bank or credit union.
Account Safety: Since brokered CDs are issued by banks and credit unions, each comes with FDIC or NCUA insurance coverage of up to $250,000 per depositor. With a broker, you can theoretically purchase $2.5 million worth of CDs in 10 different banks and enjoy 100% insurance coverage. And since brokers buy large blocks of CDs, prepayment penalties usually don’t apply.
Potential Drawbacks: Though there are no prepayment penalties with brokered CDs, there are market risks. For example, if you want to liquidate your CD early, you may get less than the amount you invested. That’s because the secondary market for CDs is very limited. This will be especially true in a rising rate environment, where you’re trying to unload a CD at a lower rate than the current one.
Prepaid Debit Cards
This is a seemingly unlikely place to earn higher interest rates than traditional savings accounts, but it is possible. Prepaid debit cards are debit cards in which your spending limit is determined by how much money you fund the card with. From there, it provides you with all the advantages of a debit card. This includes the ability to make purchases at point-of-sale and online.
Advantages Over a Traditional Savings Account: Because they’re prepaid, these cards typically don’t require you to pass a credit check to qualify. Some prepaid debit cards come with high interest savings accounts. One example is Netspend. They’re currently paying 5.00% APY on balances up to $1,000, and 0.50% on higher balances.
Another example is Mango Money. They pay up to 6.00% APY on balances up to $2,500 then the rate drops to 0.10% on higher balances (rates current as of December 22, 2022). To qualify, you must make a minimum deposit of $25, and make at least $1,500 in debit transactions each month with the card.
Account Safety: Funds held on deposit may or may not be FDIC insured. Always check the fine print on these cards.
Potential Drawbacks: Prepaid debit cards are fee-intensive. You’ll usually pay either a monthly fee or a per-transaction fee.
Read more: Best Prepaid Debit Cards
What Is a Traditional Savings Account?
A traditional savings account is a deposit account held with a bank. That includes everything from single-branch banks to national banking giants, like J.P. Morgan Chase and Citi.
Traditional savings accounts are usually interest-bearing. However, even within the universe of interest-bearing accounts, savings accounts typically provide returns on the lower end of the scale.
But what they lack in interest-rate return, they make up for in safety and convenience. You can open an account at a local branch, giving you easy physical access to your money. And since the funds are covered by FDIC insurance for up to $250,000 per depositor, per bank, your money is safe.
Traditional savings accounts sometimes have one limitation regarding liquidity. Under federal Regulation D, there's a limit of no more than six withdrawals per bank period (usually 30 days). Though Regulation D was revised in 2020 to allow unlimited withdrawals and transfers, banks may still have rules about how many withdrawals you can make.
If you exceed the withdrawal limit, you may be charged a fee for each event. Some banks will even convert your account to a checking account – which offers unlimited withdrawals – if you exceed a certain number of excess withdrawals.
What Is the Average Interest Rate of a Traditional Savings Account?
A persistent limitation with savings accounts, at least since the last recession, has been historically low interest rates. In fact, according to the FDIC’s National Rates and Rate Caps (issued monthly) the average interest rate of a traditional savings account is just 0.30% as of December 2022.
Why Consider Alternatives for Traditional Savings Accounts?
The primary reason to consider alternatives to traditional savings accounts is the interest-rate return. Several account types pay higher interest than traditional banks. Some now pay more than 13 times the traditional bank savings account average.
If you’re holding a large amount of cash with no specific purpose, you may also want to consider a longer-term investment with a higher return. This might be the case if you are willing to trade immediate liquidity for a higher rate.
In other cases, you may prefer an alternative place to park your idle cash that’s more convenient to your overall financial picture. An excellent example is when you have an investment account with a broker that also offers high-yield savings. Not only will you get the benefit of a higher yield, but you’ll also be able to transfer funds between your investment account and savings.
Final Thoughts
Traditional savings accounts can still make sense if you have a small amount of money, or if you have immediate plans to spend it. It is also worth having if you want to use it as an overdraft backup for your checking account or if having access to a branch bank is important to you. But for any funds that don’t meet the above criteria, consider alternatives for higher returns and other benefits.