What Is Better Than a High-Yield Savings Account?

High-yield savings accounts (HYSAs) are a popular, low-risk option for saving money. They offer easy access to funds and are typically insured, making them a secure choice for short-term financial goals. While HYSAs are well-suited for purposes like building an emergency fund, many individuals seek alternatives that may offer higher returns for other objectives, acknowledging differences in risk and liquidity.

Understanding High-Yield Savings Accounts

A high-yield savings account is a deposit account offering a higher interest rate than traditional savings accounts. HYSAs provide high liquidity, meaning funds are readily accessible for withdrawals or transfers. Many HYSAs feature no minimum balance requirements, though some institutions may have initial deposit stipulations or offer higher rates for larger balances. Deposits are protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank, for each account ownership category. While HYSAs offer superior interest rates compared to standard savings accounts, their returns are modest when compared to other investment avenues, especially considering the impact of inflation.

Low-Risk Alternatives

For those seeking returns greater than HYSAs while maintaining a low-risk profile, several financial instruments offer attractive features. These options often benefit from government backing or similar deposit insurance, though sometimes with trade-offs in liquidity.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs) are time deposits that hold money for a fixed period, from a few months to several years, in exchange for a fixed interest rate. Longer CD terms generally correspond to higher interest rates. Funds are FDIC-insured up to $250,000. However, withdrawing money before maturity typically incurs an early withdrawal penalty, often forfeiting a portion of the interest earned. To address liquidity concerns, investors can employ a “CD laddering” strategy, investing in multiple CDs with staggered maturity dates for periodic access to funds.

Money Market Accounts (MMAs)

Money Market Accounts (MMAs) are bank deposit products that often provide slightly higher interest rates than HYSAs, sometimes requiring higher minimum balances. MMAs typically offer check-writing privileges and debit card access, blending features of savings and checking accounts. Like HYSAs, MMAs are FDIC-insured up to $250,000. It is important to distinguish MMAs from money market funds, which are investment products and carry different characteristics.

Treasury Bills (T-Bills)

Treasury Bills (T-Bills) are short-term debt instruments issued by the U.S. Treasury, backed by the U.S. government and considered virtually risk-free from default. T-Bills are sold at a discount and mature at face value, with the difference constituting the interest earned. Maturities range from a few weeks to a year. Interest earned on T-Bills is subject to federal income tax but is exempt from state and local income taxes. While typically held to maturity, they can be sold on the secondary market if liquidity is needed.

Moderate-Risk Alternatives

Beyond deposit accounts, several investment vehicles offer higher potential returns than HYSAs and low-risk alternatives. These introduce a moderate level of market risk, where principal value can fluctuate, and are generally not FDIC-insured.

Money Market Funds (MMFs)

Money Market Funds (MMFs) are mutual funds that invest in highly liquid, short-term debt instruments. Unlike Money Market Accounts, MMFs are investment products offered by brokerage firms and are not FDIC-insured. While MMFs aim to maintain a stable net asset value (NAV) of $1 per share, this is not guaranteed, and principal loss is possible. MMFs typically offer daily liquidity and can provide slightly higher yields than HYSAs or MMAs.

Short-Term Bond Funds

Short-Term Bond Funds are mutual funds or exchange-traded funds (ETFs) that primarily invest in a diversified portfolio of bonds with shorter maturities, generally one to five years. These funds offer professional management and diversification. While less volatile than stocks, bond funds are subject to interest rate risk (value decreases when rates rise) and credit risk (issuer failing to make payments). Short-term bond funds are less sensitive to interest rate changes than longer-term funds due to their shorter maturities. Investors typically have daily liquidity.

Short-Term Treasury Funds

Short-Term Treasury Funds invest exclusively in U.S. Treasury securities with short maturities. These funds carry minimal credit risk, backed by the U.S. government. They are subject to interest rate risk, though generally less volatile than broader short-term bond funds. Their advantage is high credit quality combined with daily liquidity, offering a balance between safety and access to funds.

Higher-Risk Investment Options

For investors willing to accept greater risk and volatility for higher potential returns, certain investment options move beyond cash equivalents into true investment products. These vehicles are not designed for capital preservation like HYSAs or low-risk alternatives.

Dividend-Paying Stocks and Exchange-Traded Funds (ETFs)

Dividend-Paying Stocks and Exchange-Traded Funds (ETFs) involve direct investment in companies that regularly distribute a portion of their earnings to shareholders. While dividends can provide a consistent income stream, the principal value can fluctuate significantly based on market conditions and company performance. Returns include dividends and any capital appreciation or depreciation. Investing in dividend ETFs offers diversification, which can help mitigate individual stock risk. However, capital loss is inherent, as stock prices can decline.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate across various sectors. REITs allow individuals to invest in large-scale real estate portfolios without direct property ownership or management. REITs must distribute at least 90% of their taxable income to shareholders annually, making them attractive to income-focused investors. REITs trade like stocks, so their values are subject to stock market volatility and real estate market risks. While REITs provide income, their share prices can fluctuate, and distributions are typically taxed as ordinary income.