A high-yield savings account can be beneficial for emergency funds, short-term savings, or saving up for significant purchases/expenses. With interest rates so low, one has to wonder what other options might be available. This list provides the top 5 alternatives to a high-yield savings account.
What is a High-Yield Savings Account?
A high-yield savings account is a specialized savings account that pays approximately 20 to 25 times the national average. I have an Ally savings account, which has one of the higher yields as well as no account minimums or maintenance fees. If you want to see their current rate, click here.
What Alternatives are available?
1st Alternative to a High-Yield Savings Account - T-Bills
Pros
- Full investment based on US government creditworthiness
- Exempt from having to pay local and state income taxes
- High Liquidity
Cons
- Risk of rising inflation
- Lower return on investment due to the perceived safety
- T-Bills are only available in $100 increments
The US Treasury department sells bills regularly at auctions. T-Bills, in particular, are available in a few different durations such as 4, 13, 26, and 52 weeks. You can purchase T-Bills at TreasuryDirect or through your brokerage accounts, such as Fidelity or Vanguard.
If you need to convert the investment rate into an annual percentage yield (APY) to compare to a high yield savings account, use the formula/example below:
APY = (1+ (Investment Rate / (# of periods in a year)) ^ ((# of periods in a year) – 1 )
Let’s calculate the four week APY for the example above.
APY = (1 + (.00101/ (52/4)) ^ ((52/4)-1)
APY = 1.0%
Laddering
Instead of explaining, let’s discuss how I would buy a $1,200 of T-Bills by laddering them. I would purchase four-week T-bills in the example below.
| Week 1 | Buy $300 |
| Week 2 | Buy $300 |
| Week 3 | Buy $300 |
| Week 4 | Buy $300 |
| Week 5 | Reinvest $300 |
| Week 6 | Reinvest $300 |
That is laddering them so that starting in week five onward, you will have money become available if needed. Additionally, it will help reduce the impact of rate changes on your portfolio of T-Bills.
Slightly less liquidity than a high yield savings account, but if laddered could provide the same or somewhat better yield than a high yield savings account. Also, if you are lucky enough to have over $250,000 buying T-Bills is an excellent way to protect your money as FDIC only covers $250,000 per account.
2nd Alternative to a High-Yield Savings Account - Certificate of Deposit
Pros
- A safe investment that is insured by FDIC up to $250,000
- Provide predictable returns for the specified period
- A wide selection of terms & institutions to select from
Cons
- Minimal liquidity can result in an early withdrawal penalty, which could result in reduced interest or event loss of principle.
- Risk of inflation. Rising interest rates would reduce the net return.
Commonly denoted as a CD, a Certificate of Deposit is a bank/credit union issued product that provides a premium interest rate in exchange for an investor agreeing to leave a sum of Cash for a predetermined period.
Shopping around for the best rate is essential, as it genuinely surprising the range of rates that different financial institutions will offer. Additionally, just like under T-Bills, you could ladder your CD investments to provide more regular returns and reduce some inflation risk.
With the creation of online high yield savings accounts, the yield difference between CDs and high-yield savings account are not that different. The advantage of the CDs are that they have fixed returns compared to the high yield savings account.
If you want to check out what current interest rates are for different terms, check out rates on Investopedia here.
3rd Alternative to a High-Yield Savings Account - MYGA (Multi Year Guaranteed Annuity)
Pros
- Relatively safe investment (backed by insurance companies)
- More attractive rates compared to CDs
- Most MYGAs allow withdrawing of interest or up to 10% of the premium to provide some liquidity.
- Ability to annuitize MYGA for reliable payout
Cons
- Limited liquidity, which could result in surrender charges if withdrawn before the commitment period.
- Not FDIC insured (only as secure as the finances of the insurance company)
- Usually require more extended periods of commitment
- It has required minimum investments that are larger than all the other options on this list.
A conversation about savings account alternatives would not be complete if I did not mention Multi-Year Guaranteed Annuities (MYGAs) after mentioning CDs. CDS and MYGAs function in a similar way. An insurance company takes the sum of Cash and promises a fixed return for a specified period.
Another significant difference is that since MYGAs are annuities, they are tax-deferred, which gives them an advantage since no taxes have to be paid until a withdrawal is made. I think an example might help show you the power of tax-deferred investments:
- The initial investment is $100,000, and the tax rate is 28%
| Years Invested | Taxed 7% return | Tax-Deferred Annuity 7 % Return |
| 10 | $163,511 | $196,715 |
| 15 | $209,084 | $275,903 |
| 20 | $267,359 | $386,968 |
Without having to pay taxes each year, the annuity can accumulate gains faster.
To get a feel for the rates offered on current MYGAs, check out this site.
4th Alternative to a High-Yield Savings Account - Money Market Account
Pros
- Ease of access to Cash (most allow debit cards)
- Higher interest rates. Since most money market accounts have tiered levels, it can allow higher rates with higher balances.
Cons
- Limited withdraws. The Fed rules limit withdraws to six times a month, but some banks and credit unions restrict it even further to as low as three times a month.
- Higher minimum account balances compared to other options.
Money Market accounts are similar to high yield savings accounts. If a savings account and a checking account had a child, it would be a money market account. It has the ease of access to a checking account plus the higher returns of a savings account.
If you want to review some rates for the money market account, click here. I do not need a debit card for savings and find a savings account superior with the lower account minimums.
5th Alternative to a High-Yield Savings Account - Bond ETF
Pros
- Significant opportunity to increase value through principle grow.
- Interest paid is much higher than interest from a savings account
- Funds are diversified to help reduce risk
Cons
- Possibility to lose invested principle
- Inflation risk which could reduce the return
- Corporate bonds are not insured and could default.
- Interest is not guaranteed.
Another option, instead of a high yield savings account, is to select a bond fund. The most accessible funds are ETFs that you can pick from to ensure a diversified portfolio of bonds. Most commonly, you will see funds made up of corporate, high yield, or municipal bonds.
A bond fund is not an excellent option for an emergency fund, but for anything over that would be a good option. The NY Times has written an article that bond funds have been trading similar to stocks, and if you want to read more, click here.
All in all, I see that my high yield savings account is probably best for emergency savings, but other options on this list may be more suitable to try to get slightly higher returns for short term savings.
Two additional options could be preferred stocks or dividend-paying stocks. Still, I decided not to include them as the risk profile for them is considerably different than a savings account. If you do want higher returns, they are a good option, but as bonds, I do not recommend them for your emergency fund.
