High Interest Alternatives to Savings Accounts

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Fat Roll of HundredsRight now, the best savings account rates aren’t even 2% APY. They’re so low that even those people who are earning nothing, 0%, have very little incentive to move their money! If Bank of America is paying you 0.10% in your savings account, and an online bank is offering 1.50%, do you know how much more money you’d earn if you moved $1,000 over? You wouldn’t even make fifteen bucks more. That’s it. How much is your time worth? Certainly more than $15!

The Federal Reserve is making it hard for savers to save because they’re keeping the target interest rate so low. Why would a bank pay you 1% when they can get it for less than 0.25% from the Fed? It’s a miracle the rate is as high as 1.50%! The problem with trying to find a safe alternative is that in order to get the rewards, you have to take some risks. Savings accounts have zero principal risk because they are FDIC insured, the only risk you face is inflation risk (you earn 1% but inflation goes up 3%, you’ve essentially lost purchasing power) and everyone deals with that.

So what are some “relatively” safe alternatives?

Reward Checking Accounts

A reward checking account really was an ingenious creation. You can earn a very high interest rate on your balance, up to a certain dollar amount, is you can satisfy certain requirements such as using your debit card 10-12 months, using online bill pay, and direct deposit. The actual requirements will change from bank to bank but that’s the general idea.

This is possible because the transaction fees the bank earns off your debit card use will pay for your higher interest rate. This is the only one on the list that’s 100% safe because it’s FDIC insured up to $250,000, though most will only pay the high interest rate up to a much smaller dollar amount (I see $25,000 as the limit at many banks).

Dividend Stocks

A dividend is a quarterly or semiannual cash payment that a company pays out to its shareholders based on the number of shares they own. The main benefits of dividend investing is that the dividend, if qualified, is taxed at the long term capital gains rate, which is often much lower than ordinary rates (which we refer to as the tax brackets).

You can use other strategies to amplify the rates of return on dividend stocks, such as investing in companies with a history of dividend increases, but ultimately the idea is that you take some risk to earn a little more reward. If you aren’t the risk taking type but still want to tap into slightly higher yields, you can invest in a high yield dividend fund, which would diversify your investments across many companies.

Junk Bonds

Junk bonds are bonds that have a low credit rating and high yields. The risk with junk bonds is that many novice investors think of bonds as “safe,” even when they aren’t. A Treasury Bond is safe, it’s backed by the United States Government. A bond from company XYZ is only as safe as company XYZ’s ability to pay the bond, which is reflected in the offering’s credit rating.

I put junk bonds on the list because it’s an alternative to savings accounts, offers a higher yield, but also because I wanted to add a little word of warning on bonds – these are often tied very closely to the performance of the company. So it’s a bond whose price moves a lot more than your typical bond, thus acting like a stock. If a company is doing well, the bond price will go up and people will pay a premium. If the company is doing poorly, the bond price will go down as people look to exit. Treasury Bonds have very little fluctuation in their price, junk bonds will have a lot more.

Those three alternatives are just a sampling of what’s out there right now if you want to squeeze a few more percentage points out of your savings. They run the spectrum of safe (reward checking) to not safe at all (stocks and bonds), but it should give you an idea of what you might want to research next if your savings need a better home. Just remember one thing, you won’t lose money in a savings account. 🙂

(Photo: amagill)

{ 32 comments, please add your thoughts now! }

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32 Responses to “High Interest Alternatives to Savings Accounts”

  1. DIY Investor says:

    As you point out it is difficult to find yield without taking on additional risk. A lot of people have gotten in trouble because they didn’t understand the risks.
    Some more alternatives are presented in this recent post:
    I put in exchange traded funds so that at least if people go into a particular investment type they are paying low fees and are well diversified. As always stay away from stocks and longer term bond funds if you need the money within 5 years. It doesn’t make sense to chase yield with your house down payment money.
    Also worth considering for those who can take the risk is LQD a shorter-term corporate bond exchange traded fund that is yielding 5.44%. The shorter term is important because it protects against rates going higher – which they eventually will.
    As always consult an advisor if you’re not sure of what you are doing in investments.

  2. cdiver says:

    A Reward Checking account still makes the most sense to me for now. There are plenty out there that are paying over 3%.

    • jsbrendog says:

      i just don’t see the point of having to jump through hoops and be sure to do what is required for an extra 1.5%. again it comes down to how much is your time worth and is that extra effort really better than using a credit card and gettign the cash rewards from that? and with only an extra 1.5% to be had i dno’t think it would balance out the credit card rewards when factoring in time to move the money, and the requirements to receive the extra interest.

      • cubiclegeoff says:

        I was skeptical at first, but it’s significantly more lucrative for me to have the rewards checking and use cash back credit cards once the 12 small transactions are done. It doesn’t take that much effort really, the auto transfer to meet the direct deposit requirement was set up in a few minutes, and I check my accounts often so knowing when to stop using the debit card is easy enough. If you only have a small amount of money for the account, it wouldn’t be worth it, but when you’re closer to the high-end, it makes a difference.

        • cdiver says:

          I agree. It takes very little to meet the qualifications on these accounts. I only run my small transactions on debit leaving the large dollar items for the credit rewards. Makes my emergency fund much more profitable than to sit around at a hair over 1%.

  3. I’ll second that. I currently have one making 4% per month, and plan to apply for another that earns 5%. It’s credited directly to my account at the end of the month, and is the best, safe investment you can get right now.

    BTW Jim, under the Rewards Checking, I think you meant to say 10 – 12 *times per* month, instead of 10 – 12 months.

  4. We have a reward checking account at a credit union that pays 4% on the first $25,000.

    The requirements are:
    – Make 12 “debit as credit” transactions per month with an average of at least $5 per transaction.

    – Use direct deposit

    – Sign up for electronic statements

    We use the card for 12-15 low dollar value transactions (Taco Bell, etc.) each month and put the rest through a different credit card that gives us cash back.

    We make one small deposit each month. Our employers allow us to split payroll deposits between accounts, and this account gets a couple hundred dollars per month (in order to keep the balance right near 25k).

    Electronic statements are no problem at all. Why do we need more paper in the mailbox?

  5. cubiclegeoff says:

    I’ve also started using a rewards checking account. Since I have less than $25k in savings, it works well. Plus, the 12 required debit card uses are relatively easy to do (then we use cash back credit cards beyond that), we transfer a small amount every month automatically (which counts as direct deposit, which is great), and the paper deposits and logging in once per month are no problem. At around 4%, it’s well worth it, and I’m glad I finally did it. It does take me a little bit more for money management, but not enough that it’d make it a hassle.

    I also use dividend stocks, but that’s for money I make through surveys and the like, so I don’t count that in our budget anyway.

  6. billsnider says:

    Lets face it. It all adds up to practically zilch (that is a technical financial term).

    Bill Snider

  7. Courtney says:

    What exactly makes a dividend “qualified”? We have several different dividend-paying ETFs and mutual funds in non-retirement accounts, and our dividends have always been taxed as ordinary income.

  8. zapeta says:

    I use a rewards checking account and it is an easy way to make extra money over a savings account.

  9. HuBu says:

    Can you list some banks that are giving 3% or higher?

    I am currently with BCU and it started with 3.5% and now its holding @ 2.5%. You can even have more than $25k.

  10. Right at the moment, I’d say high quality corporate and high quality muni short-term bonds are a good bet. If you want to go a little more exotic, you can look at preferred stocks or a preferred stock ETF like PFF, or REITs or REIT ETFs like VNQ, or if you think the dollar is going to be a weak currency you could consider Australian dollar money markets yielding around 4% or a basket of emerging market currencies yields something similar.

  11. Don’t forget that as a junk bond holder, you’re entitled to get paid before the stockholders should the company go into bankruptcy. (Unless the company is GM or Chrysler, in which case the creditors get paid in whichever order pleases our president.)

  12. I was thinking reward checking accounts. If you normally meet the requirements, why not earn some money on your money that would normally sit there earning no interest.

  13. NateUVM says:

    I use a short-term bond fund. Made it a high-quality variety, as opposed to the junk bonds that Jim refers to in the article, and I reduce my risk a little while still making a decent return. Over the past year, between dividends and market gains, I’m yielding a little under 6%.

    Now, I realize that when rates rise, I’m exposed to the risk of the value of the fund decreasing, but by keeping it in a short-term fund (as opposed to bonds of longer durations), I will start to benefit from the rising rates sooner than I would otherwise.

  14. Ah yes, interest is very low now, I remember back to the good old days of 5% interest in savings accounts. Now I go with CDs

    • moljacks says:

      I truly long for those days! I wish I could put money into cds now but I need some liquidity. I am considering some very short term ones though.

  15. FredMertz says:

    Jim — you misunderstand the role of the Fed and what Fed Funds are. The Fed does not lend to banks to invest, so the fact that the Fed target rate is 0.25% does not mean banks can borrow money at that rate for general purposes. Fed Funds are typically overnight loans between two banks.

  16. I invested a small about of capital in ginnie mae investments. They are treasury-backed mortgage securities that pay about 3%. They have what is called “Extension risk” where if interest rates climb too quickly, ginnie can hold on to your money longer (each bond let is a little different, so you have to research it). But, as long as you are willing to ride out the investment, your principal and interest are guaranteed by the feds.

  17. and what about the Bonds which are issued by issuers from countries outside the US…

    I heard that when Indian Company acquired Jaquar, they offered a very high rate of Interest and the issue was fully subscribed within minutes…

  18. Scott says:

    I have 3 rewards accounts giving me 2.5, 3.0 & 3.5% for 25k, 35k & 50k. I don’t have a problem with the hoops to make an extra couple hundred a month.

    I also have 4 cd’s giving me 2.7-3.1% (4-5 yr).

    I’ll have a list of company stock paying higher dividends tomorrow…

    • Scott says:

      Here are some companies I personally would not have a problem owning…

      Company Share price Dividend % payout / yr
      Microsoft $24.50 2.12%
      Walgreens $28.22 2.48%
      Campbell Soup $36.88 2.98%
      Exxon Mobil $58.97 2.98%
      Coke $55.88 3.15%
      General Mills $35.38 3.17%
      Kellogg $50.93 3.18%
      Proctor & Gamble $59.80 3.23%
      Intel $19.47 3.24%
      ConAgra $21.81 3.67%
      Chevron $77.64 3.71%
      J & Johnson $58.01 3.72%
      Kraft $29.45 3.94%
      Heinz $45.63 3.94%
      Conoco Phillips $54.93 4.01%
      Unilever $27.10 4.06%
      Pfizer $16.08 4.48%
      Southern Company $35.87 4.99%
      AT & T $26.60 6.32%
      Verizon $29.99 6.34%
      Royal Dutch Shell $52.94 6.35%
      Reynolds $56.44 6.38%
      Pitney Bowes $19.46 7.50%
      Century Telecom $36.19 8.01%
      Apollo Investment $9.32 12.02%
      Annaly $17.35 15.68%

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