Best Place To Put Money For Savings – With traditional passbook savings accounts now paying little more than next to nothing in interest, more and more people are looking for better paying alternatives. These include money market accounts, bank account alternatives, and peer-to-peer lending. Here’s what you need to know.
One of the simplest alternatives to depositing money in a traditional passbook savings account is to get a money market account. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) just like regular savings or checking accounts.
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In addition to paying higher interest rates than regular savings accounts, money market accounts offer the limited services of checking accounts. There is usually a relatively low maximum number of checks that a customer can write on their account per month – usually between five and 10. In return for complying with this restricted withdrawal activity, money market account holders receive a higher interest rate than those available for traditional savings accounts. A bank that only offers a 0.10% interest rate on regular savings accounts, for example, might offer a 0.25% interest rate on a money market account.
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With passbook savings accounts paying so little, try to find a better place to stash your emergency fund – just see if the money is still insured.
In addition to the monthly transaction limit, money market accounts also typically have other restrictions, such as a minimum initial deposit requirement or a minimum balance that must be maintained. If there is a minimum balance requirement and the account falls below the minimum, account holders may be paid the lower standard interest rate offered on ordinary savings accounts; however, some banks also charge a penalty fee. Before opening a money market or other alternative account, review the fine print of your agreement for any account restrictions, as well as any fees the account may incur.
For individuals who don’t expect to need access to their savings for at least a year or two, there are certificates of deposit (CDs). The longer the term customers are willing to commit their money to, the higher the interest rate available. One- and two-year CDs offer higher interest rates than are currently available on traditional savings accounts. But the catch is that your money will be locked up for the term of the CD – usually a few months to a few years. If you touch the money before then, you may be subject to fees and penalties.
According to Bankrate.com, the national average percentage return (APY) rate for a one-year CD (as of January 2021) was 0.21%; two year CDs were offered as high as 0.95%. However, Quontic Bank and Delta Community Credit Union were paying the highest rates, subject to a $500 to $1,000 minimum. With a little planning, individuals can spread their capital over CDs of different terms to provide themselves with more liquidity, in case they need to access some of their savings. Even better, CDs are FDIC insured. Since CD terms—including interest rates and early withdrawal penalties—vary widely between institutions, it’s important to shop around for CDs to maximize your results.
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A higher interest rate can often be obtained simply by transferring a savings account to another financial institution, one down the street or one accessible via the internet. Credit unions operate much the same as banks, although they usually offer fewer financial services. Credit union accounts are federally insured through the National Credit Union Share Insurance Fund (NCUSIF), which is the FDIC’s credit union equivalent.
Credit unions tend to offer much better interest rates on savings accounts than banks because credit unions are non-profit organizations. For example, one might be able to go from earning around 0.09% to 1.25% simply by opening a savings account at a credit union rather than a traditional bank.
Online banks, such as Ally Bank or American Express Bank, typically offer higher interest rates on savings accounts. They are able to do this because they avoid the brick and mortar overhead of maintaining physical branch offices. In addition, these banks usually offer attractive rates on CDs, higher than brick and mortar bank rates.
There are high-yield checking accounts that offer better interest rates than savings accounts. Some of these checking accounts offer annual percentage returns of up to 2%, in contrast to lower savings account rates.
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To get the higher interest rates, customers usually have to meet certain requirements, such as establishing a minimum balance, direct deposit or bill pay, or making a minimum number of monthly debit card transactions. If account holders fail to meet the requirements for the higher rates, there is usually no penalty. They are often provided at the bank’s lower standard rate for checking accounts.
In recent years peer-to-peer (P2P) lending services, usually operated through websites, have become increasingly popular. P2P lending provides a way for individuals looking to borrow money to get personal loans outside of going to the bank – and for individual borrower investors to earn great returns on investment by funding the loans with their loan account deposits. Through websites such as Prosper.com, individuals on the lending side provide loan capital to individuals on the lending side.
Loan accounts with even the best P2P lenders are not FDIC insured like a bank savings account and can lose money. Borrowers are screened by the service and usually have to meet certain requirements in order to receive loans.
The aspect of P2P lending that greatly reduces risk is the structure of the loans. The risk on any single loan is spread over a large number of borrowing investors. Individual lenders typically do not finance more than $25 to $50 for a single loan. A person seeking a $2,000 home improvement loan, for example, could have the loan financed by 40 different individual lenders, each providing $50 toward the total loan amount.
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The lending service evaluates borrowers and the purpose of the loan to determine credit risk and the interest rate charged on a loan. Individual borrowers can choose their level of risk to determine which types of loans their money will be used to finance. Even if individual loans default every now and then, lenders get some protection because the investment is spread over so many different loans. However, as of 2015, borrowing investors were able to earn an overall return of around 5% to 9%. According to the National Bureau of Economic Research, default rates for loans taken out through popular peer-to-peer lending platforms averaged around 5% at the time.
One of the advantages of putting money into a peer to peer loan account is that one can open a loan account with a very low minimum deposit, as little as $25, and have the option to add money to the account monthly as one does with a savings account.
Although this option is not an insured, government-insured income in the same way as a savings account, it can be a low-risk investment that offers much higher potential returns than a regular savings account. However, the regulatory environment for P2P lending is complex and can vary from state to state. Due diligence before investing – and carefully examining how payment is arranged for you as a lender – is particularly essential here.
It depends. Some options, such as peer-to-peer (P2P) lending, are not insured by the FDIC, so you could lose some or all of your money. For other options, such as high-yield checking accounts, you must follow rules such as minimum account balances and limited withdrawals.
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Although setting up a savings account at your bank is safe and convenient, there are some disadvantages. Individuals who store money in a savings account miss out on larger interest payments that a high-yield savings account or certificate of deposit (CD) might provide.
You won’t earn as much interest keeping your money in a savings account, but there are some benefits. Your money will be fully insured through FDIC member banks and there are usually no penalties for early withdrawals or minimum balances.
There are certainly alternatives to the traditional passbook savings account that allow you to earn higher interest rates on your money. They may not offer the liquidity of a savings account and come with requirements ranging from minimum balances and monthly transaction limits to a lack of federal insurance. But, depending on your financial situation, they could be attractive.
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The offers in this table are from partnerships from which compensation is received. This compensation may affect how and where listings arrive. not all offers available in the market are included. Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for bank accounts or the National Credit Union Administration (NCUA) for credit union accounts. Deposit insurance covers $250,000 per depositor, per