Despite a string of interest rate hikes from the Federal Reserve in 2018, returns on the average savings account continue to be meager at best.
In December, the Federal Reserve raised its benchmark interest rate a quarter-point to 2.5%, which was the fourth increase of 2018 and the ninth since the central bank began normalizing rates in December 2015.
Yet, interest rates on savings accounts, in many cases, have barely budged upward in response. The average national interest rate continues to hover around 0.09%, according to the FDIC.
In other words, traditional brick and mortar savings accounts are still not your best option when it comes to earning any sort of return on your money. However, finance industry experts say there are plenty of other equally stable ways to squirrel away cash, while keeping it liquid and still pocketing a bit more interest.
One of the first bits of advice Richard Sabo, owner of RPS Financial Solutions, gives his clients is to check out online savings accounts from the likes of American Express Bank, Ally Bank, or Discover Bank, Member FDIC.
“They all pay a much higher interest rate than local banks,” says Sabo.
Each of the options Sabo mentioned are FDIC-insured internet banks. Because they don’t have branch offices, they’re able to keep their overhead cost down and thus offer you a better interest rate on savings.
Discover Bank, Member FDIC, for example, is currently offering a savings account with no minimum deposit or balance, and no fees or maintenance costs.
It’s even possible to link these account to your checking account and transfer money back and forth, notes Sabo, meaning the cash remains liquid even though it’s not being held at your local bank.
Another no-risk alternative Sabo recommends are fixed annuity contracts.
“Everyone has heard the comments that annuities have fees and are too expensive, but a fixed annuity is nothing more than a CD issued by an insurance company instead of a bank,” explained Sabo. “There are no fees or costs, you put your money in and get a fixed rate of return for the fixed period of time and then your contract matures and you can either renew it or take it back out.”
Fixed annuities are sold with as little as a one-year maturity date all the way up to a 10-year maturity, Sabo continued. In addition, the fixed rates are often better than what the banks are paying on CDs.
“This can be an alternative for some of your savings account money being that there are no fees or costs to purchase an annuity and most allow you to take your interest out monthly if you want to live on it,” said Sabo.
However, it’s important to note that in most cases, annuities are insured only up to $100,000 (as opposed to the current bank FDIC insurance of $250,000). In other words, be cautious about how much you put into an annuity, said Sabo.
Short-Term Treasury Bills
Treasury bills also offer liquidity and higher interest rates than traditional savings accounts, says Riley Adams, a CPA and creator of the personal finance blog Young and the Invested.
Short-term Treasury bills can last from four weeks to as long as one year, and recently rates for a 52-week T-bill have risen to about 2.48%, according to the U.S. Department of the Treasury.
“Treasury bills are the most liquid investment in the world. The market uses these bills as a proxy for the risk-free rate of return because they’re virtually guaranteed to return your money plus interest,” explained Adams. “The U.S. federal government backs them with their full faith and credit. Were the government to be unable to repay their debts, they could either inflate the currency value (which diminishes fixed debt repayments), raise taxes to cover the debt obligation, or utilize a number of other policy tools to repay their debt.”
Online Bank CDs
Take the time to research the best online banks, and you’ll not only find savings accounts that pay higher rates, you’ll also come across CDs offering higher rates than those found at regular banks or credit unions, says Kurt Hemry, president of Ironwood Wealth Consultants.
While the national average for interest on CDs under $100,000 ranges from 0.06% to 1.25%, depending on the length of the CD, online banks such as PurePoint, Ally, and Capital One are offering CD rates between 2.7% and 2.8%.
A certificate of deposit locks up your money for a certain amount of time, such as six months or a year, and you’ll have to pay a (usually modest) early withdrawal penalty if you need to take out the money before then. That makes them less flexible and liquid than a high-interest savings account. But if you have some money you want to set aside for a near-term expense — such as next year’s big family vacation — a CD is a perfect place to stash it and earn a nice return.
“If you’re comfortable not having a brick and mortar building to visit, then these can be a good alternative,” said Hemry.
Money Market Accounts
Money market accounts are probably the lowest performers on this list, but they can still earn around 2% or more, on average.
According to the FDIC, the average national rate for money markets right now is about 0.18% for investments of less than $100,000. However, it’s possible to find much higher rates with such institutions as PNC Bank (2.35%), State Farm Bank (2.25%), Goldman Sachs (2.25%), and others.
“A money market is very similar to a savings account, but pays a better interest rate,” says Denise Nostrom, founder and owner of Diversified Financial Solutions. “They give you a higher interest with liquidity, and some even have check-writing privileges.”
You can find money market accounts at your bank, with mutual fund or brokerage companies, or with online banks.
These accounts are federally insured by the FDIC. What’s more, some institutions allow you to use a debit card at ATMs to access the money, says Jacob Dayan, CEO and co-founder of Finance Pal. On the downside however, you’re limited to only six withdrawals per month, by law, said Dayan.
One Last Note About Savings Accounts
It’s critical to understand that while all of these options are good alternatives for short-term savings, such accounts are never meant to be wealth-building accounts for long-term financial goals.
“Even in the best of times, most CDs and money market accounts will lose spending power because their yields are below inflation,” said Christensen. “Savings are for parking and safeguarding money the consumer will need in the near future for such things as car repairs or replacement, gift giving, appliances and furniture, and emergencies.”
Bottom line: It’s a good idea no matter which option you choose, to be sure you always have some money that’s easily accessible for emergencies.