What Is Better Than a Savings Account?

Traditional savings accounts offer easy access to your money. While these accounts are known for their safety and liquidity, they typically provide very low interest rates, often struggling to keep pace with inflation. Many individuals seek alternatives to help their money grow more effectively or to provide a better return on their accessible funds.

Enhanced Savings Accounts

Financial products exist that maintain many characteristics of traditional savings accounts while offering improved returns. These options provide a balance of accessibility and higher interest earnings for funds that need to remain relatively liquid.

High-yield savings accounts (HYSAs) function much like standard savings accounts but offer significantly higher annual percentage yields (APYs). These accounts are often found at online-only banks, providing more competitive rates due to lower operational overhead. HYSAs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per insured bank, providing a strong layer of security. Funds held in HYSAs remain highly liquid, allowing for regular deposits and withdrawals, though some accounts may have monthly withdrawal limits. Many high-yield accounts also feature no minimum deposit requirements or maintenance fees.

Money market accounts (MMAs) offer another alternative, blending features of both savings and checking accounts. These accounts typically allow for check-writing privileges or debit card access, providing more direct access to funds than a standard HYSA. While MMAs also offer competitive interest rates compared to traditional savings accounts, their rates may sometimes be slightly lower than those offered by HYSAs.

Money market accounts are insured by the FDIC or the National Credit Union Administration (NCUA) up to $250,000 per depositor, per insured institution. MMAs often have higher minimum balance requirements than HYSAs. They provide good liquidity for funds, although they may impose limits on the number of transactions per statement cycle.

Fixed-Term Deposit Vehicles

For those willing to commit their funds for a specific period, fixed-term deposit vehicles offer higher, predictable returns. These options involve a trade-off where liquidity is reduced in exchange for a fixed interest rate over the chosen term.

Certificates of Deposit (CDs) are a common example, representing a time deposit where money is held for a set duration, such as 3 months, 1 year, or 5 years. In return for this commitment, the financial institution pays a fixed interest rate for the entire term. While CDs offer higher interest rates than standard savings accounts, withdrawing funds before the maturity date usually incurs an early withdrawal penalty, often calculated as a forfeiture of interest. Like other bank deposits, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank.

Treasury securities, issued by the U.S. government, represent another category of fixed-term, low-risk options. These debt instruments are among the safest investments available, backed by the full faith and credit of the United States government. They include Treasury Bills (T-Bills), Treasury Notes (T-Notes), and Treasury Bonds (T-Bonds).

Treasury Bills (T-Bills)

T-Bills are short-term instruments maturing in one year or less. Unlike other Treasuries, they do not pay periodic interest. Instead, they are sold at a discount to their face value, with the investor’s return being the difference received at maturity.

Treasury Notes (T-Notes)

T-Notes have intermediate maturities, ranging from two to ten years, and pay interest every six months.

Treasury Bonds (T-Bonds)

T-Bonds mature in 20 or 30 years and also provide interest payments every six months.

Tax Implications of Treasury Securities

Interest earned on all Treasury securities is subject to federal income tax but is exempt from state and local income taxes, offering a potential tax advantage depending on your state of residence.

Diversified Investment Funds

Beyond accounts with fixed terms, diversified investment funds offer avenues for higher potential returns, though they introduce market-related risks. These vehicles are designed for growth over longer time horizons and are managed by financial professionals. They provide exposure to a wide array of assets, which can help in spreading investment risk.

Mutual funds gather money from numerous investors to create a diversified portfolio of stocks, bonds, or other securities. This pooling of capital allows investors to gain exposure to a broad range of assets. Mutual fund shares are typically priced once daily at the close of the market based on their Net Asset Value (NAV). Investors buy and sell shares through a brokerage.

Exchange-Traded Funds (ETFs) hold a basket of underlying assets and offer diversification. A key distinction is that ETFs trade on stock exchanges throughout the day, like individual stocks. This allows investors to buy and sell ETF shares at market prices that can fluctuate continuously, offering greater trading flexibility compared to mutual funds, which are priced once per day. ETFs often track specific market indexes and typically feature lower expense ratios than actively managed mutual funds.

With these investment products, higher returns come with a higher level of risk. Unlike savings accounts or Certificates of Deposit, mutual funds and ETFs are not insured by the Federal Deposit Insurance Corporation (FDIC). Their value can fluctuate with market conditions, and there is a possibility of losing the principal amount invested. Investors should consider their personal risk tolerance and financial goals before allocating funds to these types of diversified investment vehicles.