Alternatives to savings accounts: where is the safest place to keep my money?

Certificate of deposit (CD)

A certificate of deposit is a bank account with a fixed interest rate and term, such as one month or a year. In exchange for agreeing to keep your funds with the bank for that period, you usually earn a higher interest rate than with other savings accounts. This rate is typically lower with shorter-term CDs and higher with longer-term CDs. 

Since CDs carry a fixed term, you usually face an early withdrawal penalty if you access your funds before the term ends. This fee varies depending on how much of the term remains but could range from as little as $25 to as much as 12 months’ interest.

Andrew Haehn, a commercial portfolio manager and senior credit analyst with Pinnacle Bank, said that CDs “are a great tool for individuals who have money that they know won’t need to be accessed for a set amount of time that wish to earn a higher rate of earnings compared to other traditional bank or credit union products, like a savings or checking account.”

If you want to access your funds on demand, such as in an emergency, a savings account is a better option. Also, you may be required to make a relatively large minimum deposit to open a CD, such as $500 to $2,500. Many savings accounts don’t require any opening amount.

Pros:

• CD rates are fixed, so your interest earnings are predictable.
• You’ll usually earn a higher APY (annual percentage yield) on a CD than on a traditional savings account.
• There is a wide range of available terms (typically from one month to five years).

Cons:

• Your funds are locked up for a fixed term, and an early withdrawal penalty may apply.
• You may need to meet a minimum deposit requirement.
• Your CD’s rate might be less than market rates during high inflation.

Money market account

A money market account operates similarly to a savings account in that you earn a variable interest rate on the funds you deposit. However, money market accounts allow you to access your funds in more ways. For example, many money market accounts include check-writing abilities, and you might be able to use a debit card to access your funds. 

If you need to access your savings regularly, a money market account can earn a higher interest rate than a traditional savings account. However, like savings accounts, some banks may restrict the monthly transactions you can conduct (e.g., six withdrawals).

Pros:

• A money market account offers a higher interest rate than traditional savings accounts.
• Many money market accounts include check-writing abilities and debit cards.
• Money market accounts are just as safe as other bank deposit accounts.

Cons:

• The number of transactions you can conduct each month might be limited.
• Your rate might be lower than other savings account alternatives, such as CDs.
• Interest earnings are unpredictable since the interest rate varies with the market.

Cash management account

A cash management account is usually managed by a nonbank entity, such as a brokerage firm. Cash management accounts earn interest at a variable rate often comparable to similar products, like money market and high-yield savings accounts. They also allow you to withdraw your funds on demand without penalty. You may be able to write checks and access your funds with a debit card, as with a money market account.

What’s nice about a cash management account is it makes it easy to transfer funds directly into your investment accounts (like an IRA). Depending on how your account is structured, it may or may not be covered by deposit insurance, such as FDIC insurance, or up to $1 million in deposits might be protected via bank partnerships.

Some cash management accounts may require you to maintain a high minimum balance (e.g., $25,000), while others have no deposit minimums.

Cash management accounts can be a good option if you want to easily transfer funds to other investments, like retirement accounts. If you’re worried about deposit minimums, a traditional bank account like a high-yield savings or money market account may be a better option for you.

Pros:

• A cash management account allows you to transfer funds to other investments easily.
• It may offer check-writing abilities and debit cards for easy access to funds.
• Deposit insurance can sometimes be as high as $1 million.

Cons:

• You may be required to maintain a high minimum balance.
• Cash management accounts aren’t as easily as accessible as other savings accounts, since they’re often offered by nonbank entities (e.g., brokerage firms) versus banks.
• FDIC insurance doesn’t always apply to this type of account.

High-yield checking account

A high-yield checking account is like a traditional checking account, except it earns a much higher interest rate. Depending on the bank and the account requirements, you might earn an interest rate anywhere from 1% to 3% or higher on a high-yield checking account.

Many high-yield checking accounts offering the highest rates require you to maintain a substantial balance to keep the account open or avoid fees. This minimum can be as high as $10,000 to $25,000.

A high-yield checking account can be a good alternative to a traditional savings account if you have a significant amount of money to deposit and need to access it as much as you want. Unlike money market accounts, high-yield checking accounts don’t have transaction limits. You can access your funds as often as needed without worrying about potential fees or penalties.

However, not all banks offer this type of account, so it’s not as readily available as other savings account alternatives.

Pros:

• You can access your funds as frequently as you want.
• You can write checks and use a debit card to access your funds.
• Interest rates are significantly higher than with traditional savings or checking accounts.

Cons:

• You may need to maintain a substantial balance to avoid fees or keep the account open.
• You might earn a higher interest rate on a money market account.
• Not all banks offer high-yield checking accounts.

Treasurys

Treasury marketable securities (“Treasurys”) are a low-risk investment, since they’re backed by the full faith and credit of the U.S. government. Similar to a CD, you earn a fixed rate on a Treasury for a specific term.

There are three common types of Treasurys:

• Treasury bills (also known as T-bills), which have short-term maturities of 52 weeks or less
• Treasury notes, which have medium-term maturities of two to 10 years
• Treasury bonds, which have long-term maturities of 20 or 30 years

While you can sell your Treasurys before the term matures, you’ll need to work with a bank, broker or dealer who will sell it on your behalf. This means accessing your funds isn’t as easy as with other savings account alternatives.

If you want to access your funds on demand, earn a relatively high rate of return and keep your funds in a safe savings account, a high-yield savings account is a better option than a Treasury marketable security.

Pros:

• Treasurys are backed by the full faith and credit of the U.S. government.
• A wide range of terms is available, from as short as four weeks to as long as 30 years.
• Since the returns you earn are fixed, they can provide a stable income stream.

Cons:

• Your funds are locked up for a set period.
• In a rising-rate environment, you might be locked into a below-market rate.
• You’ll need to work with a bank, dealer or broker to sell your Treasurys before maturity.

Bottom line

It’s important to analyze your financial goals before deciding which type of account to save money in.

If you need to readily access your funds, such as for an emergency fund, consider a money market account, cash management account or high-yield checking account. These all give you easy access to your funds and pay higher interest rates than a traditional savings account.

If you won’t need to use the funds anytime soon, you’ll earn a higher return by locking up your money for a fixed term with a CD or Treasury.