5 Best Alternatives to Traditional Savings Accounts

1. High-Yield Savings Account

A traditional savings account is a deposit account at a bank or credit union that earns interest, typically at a variable rate. High-yield savings accounts work the same way, but usually boast a much higher annual percentage yield (APY), earning more interest. Many high-yield savings accounts are from online-only banks.

Pros of High-Yield Savings Accounts

• Higher interest: Traditional savings accounts earned an average APY of 0.42% as of July 2023, according to the Federal Deposit Insurance Corp. (FDIC); currently, some high-yield savings accounts have APYs over 5%.
• Minimal fees and requirements: Some high-yield savings accounts have no or minimal fees and don't require minimum deposits or balances.
• Federally insured: High-yield savings accounts at banks insured by the (FDIC) or credit unions insured by the National Credit Union Administration (NCUA) are guaranteed up to $250,000 per account holder.
• Conveniently accessible: You can get money out of your high-yield savings account whenever you need it. In addition, many online-only banks partner with large ATM networks of ATMs or reimburse you for ATM fees.

Cons of High-Yield Savings Accounts

• Variable interest rates: APYs on high-yield savings accounts rise and fall with the Federal Reserve's benchmark interest rates. If interest rates fall, your savings earn less.
• Withdrawal restrictions: As with traditional savings accounts, some institutions limit the number of withdrawals you can make per month before being charged a fee.
• Limited access: Online-only banks may not offer checking accounts. Transferring money to a checking account at a different bank could take up to five days, delaying access to your money.
• No physical branch: Online banks often offer the best APYs for high-yield savings accounts; if you want a brick-and-mortar branch, this may not be for you.

2. Certificate of Deposit

A certificate of deposit (CD) is a savings account that earns interest for a specified term—most commonly three months to five years. You deposit money in a CD and leave it there until the term ends and the CD matures. Then you withdraw your initial deposit plus interest or roll it into a new CD. Although you can take money out of a CD before maturity, you'll pay a penalty—usually a set amount of your interest.

Pros of CDs

• Higher interest rates: In exchange for restricting access to your money, CDs typically offer higher APYs than standard savings accounts. The average APY for a 12-month CD was 1.72% in July 2023; some high-yield 12-month CDs currently boast APYs above 5%.
• Guaranteed interest rates: CDs usually have fixed interest rates, so earnings are guaranteed.
• Federally insured: CDs at FDIC-insured banks or NCUA-insured credit unions are guaranteed up to $250,000 per account owner.

Cons of CDs

• Early withdrawal penalty: Withdrawing money before maturity usually incurs a penalty (typically a certain amount of interest), potentially costing a significant chunk of your earnings.
• May need a minimum deposit: Some CDs require minimum initial deposits, generally $500 to $2,500.

3. Money Market Account

A cross between a checking account and a savings account, money market accounts generally boast higher interest rates than traditional savings accounts. You can write checks on the account, may get a debit card and can withdraw money whenever you like without penalty. Available from many banks and credit unions, money market accounts may charge maintenance fees and have minimum balance and initial deposit requirements.

Pros of Money Market Accounts

• Higher interest: Interest-bearing checking accounts earned an average 0.07% interest as of July 2023. The average APY on a money market account was 0.63%, and some accounts currently have APYs over 5%.
• Federally insured: Savings are protected up to $250,000 per account holder for money market accounts with an FDIC-insured bank or NCUA-insured credit union.
• Convenience: You can write checks to quickly access your money without transferring funds out of a savings account.

Cons of Money Market Accounts

• Transaction limits: Institutions may limit money market accounts to six free transactions per month.
• Minimum balance requirements or fees: You may need a certain minimum balance to avoid bank fees.
• Minimum opening deposit requirements: Some money market accounts require a minimum initial deposit. If you're just starting to save, you may not have enough money to open an account.

4. Employer-Sponsored Emergency Savings Account

Emergency savings accounts (ESAs) are special accounts some employers offer as employee benefits. Money is withdrawn from your paycheck post-tax for an emergency fund, which may be part of your retirement fund or an account at a separate financial institution. Some employers match employee contributions. You keep the funds in your ESA when you leave your job.

Pros of Employer-Sponsored ESAs

• Federally insured: Your emergency fund is guaranteed up to $250,000 if it's kept at an FDIC-insured bank.
• Employer matching: Employer matching contributions can build your savings faster.
• Automated savings: Saving is easier when you don't have to think about it. ESA funds come out of your paycheck automatically, helping you stick to your savings plan.
• Easy access: Unless your ESA is part of your retirement account, accessing funds is simple, and you can withdraw money at any time.

Cons of Employer-Sponsored ESAs

• Not available to everyone: Not all employers offer ESAs.
• Limited contributions: Some ESAs cap contribution amounts, which could make it difficult to build an adequate emergency fund.
• Possible tax implications: ESAs linked to retirement plans may impose taxes and penalties on earnings withdrawn before age 59½.

5. Cash Management Account

Want savings, checking, earning interest and investing all in one account? A cash management account could be for you. Available from brokerages and other non-bank financial institutions, these accounts hold your money at partner banks, so it's usually FDIC-insured. You can write checks on your account and easily move money to investments. Features of cash management accounts vary widely; do your homework to choose the right account.

Pros of Cash Management Accounts

• Higher interest: Interest rates for cash management accounts are generally much higher than APYs for traditional savings accounts or interest-bearing checking accounts. You can currently find cash management accounts with APYs from 2% to 4% and up.
• Convenience: Cash management accounts let you manage checking, savings and investing all in one place.
• Greater FDIC protection: Your cash management account may be held at several banks, which multiplies your $250,000 per account holder, per institution FDIC guarantee. If you have over $250,000 in savings, this could provide protection for all of it.

Cons of Cash Management Accounts

• May be online-only: The highest interest rates for cash management accounts are typically at online-only institutions, which means less personalized service.
• Gaps in FDIC insurance: Your money may be vulnerable when it's held by the investment firm before being swept into partner bank accounts. Although brokerages typically move money into bank accounts within a day, clarify any protections for your funds during gaps.
• Minimum balance or deposit requirements: Cash management accounts often have minimum initial deposit or monthly balance requirements to avoid fees.
• Mingles checking and saving accounts: Combining checking and savings in one account makes it harder to keep track of your cash. You might accidentally spend money you meant to save.

The Bottom Line

Whether you're saving up to take a big vacation, buy a home or build an emergency fund, making saving a regular habit can boost your financial health. With a solid savings account to rely on, you won't have to use credit cards when an unexpected expense arises.

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