The 3 Best Alternative to Bank Savings Accounts

With traditional passbook savings accounts paying little more than nothing in return these days, more and more people are looking for better options. Money market accounts, various bank account options, and mREIT investments are among them. Here's everything you need to know about it.

• Savers may struggle to find attractive interest rates on deposits held in bank savings accounts as interest rates remain around historic lows.

• There are a few low-risk options that can help you get a better interest rate.

• We'll look at three of them, including online bank money market accounts and CDs.

1. Higher-Yield Money Market Accounts

Obtaining a money market account is one of the simplest alternatives to a regular passbook savings account. Money market accounts, like conventional savings and checking accounts, are insured by the Federal Deposit Insurance Corporation (FDIC).

Money market accounts offer limited checking account amenities in addition to providing greater interest rates than ordinary savings accounts. The maximum amount of checks a customer can write on their account each month is normally between five and ten. Money market account holders earn a greater interest rate than those offered for standard savings accounts in exchange for adhering to the withdrawal restrictions. A bank offering only a 0.10% interest rate on standard savings accounts, for example, might offer a 0.25% interest rate on a money market account.

IMPORTANT: With passbook savings accounts paying so little, try to find a better place to stash your emergency fund - just watch for whether the money is still insured.

Money market accounts frequently include further restrictions in addition to the monthly transaction limit, such as a required minimum initial deposit amount or a minimum level that must be maintained. If the account falls below the minimum balance threshold, account holders may receive only the ordinary, lower interest rate offered on regular savings accounts; however, certain banks may charge a penalty fee. Examine the fine print of your agreement for any restrictions that apply to the account, as well as any fees that the account may incur, before opening a money market or other alternative account.

2. Certificate of Deposit

There are certificates of deposits available for people who do not expect the need to access their money for at least a year or two (CDs). The higher the interest rate provided, the longer clients are willing to keep their money locked up. One-year and two-year CDs now provide higher interest rates than standard savings accounts. However, your money will be locked up for the duration of the CD, which is usually a few months to a few years. If you touch the money prior to that, you may be subject to fees and penalties.

With a little planning, Individuals can distribute their wealth across CDs with different term lengths to offer themselves additional liquidity in case they need to access some of their savings. Even better, CDs are covered by the Federal Deposit Insurance Corporation (FDIC). Because CD terms, like interest rates and early withdrawal penalties, differ widely between institutions, it's crucial to shop around for the best deal.

3. Mortgage REIT Investments

It’s often possible to obtain a higher interest rate simply by moving a savings account to a different financial instrument, either a high-yield checking account or even an mREIT investment account.

There are mortgage REIT accounts that offer better interest rates than savings accounts. Most of these accounts offer a minimum of 8% annual percentage yield, in contrast to lower savings account rates. mREIT’s usually operated through websites have become increasingly popular in recent years.

mREIT provides a way for real estate investors looking to borrow money to obtain mortgage loans outside of going to a bank and for individual investors to earn excellent returns on investment by funding the loans with their investment account deposits. Through entities such as Plural America, individuals on the lending side provide loan capital for individuals on the borrowing side.

Investment accounts with mREIT are not FDIC-insured like a savings account at a bank, and it is possible to lose money. Borrowers are screened by the service and typically must meet certain requirements in order to obtain loans.

The feature of mREITs lending that vastly reduces risk is the structure of the loans. The risk on any individual loan is spread across a large number of investors. Individual investors usually fund no more than $500 to $3,000 of any one loan. An individual seeking a loan of $100,000 for home improvements, for example, may have the loan funded by 40 different individual investors, each providing an average of $2,000 toward the loan total.

The lending platform evaluates borrowers and the purpose of the loan to determine credit risk and the interest rate to be charged for a loan. Even if a single borrower defaults now and then, lenders receive some protection because the investment is spread across so many different loans.

One of the advantages of putting money into an mREIT is that an individual can open an investment account with a low minimum deposit, as little as $5,000, and can choose to add money to the account monthly just as one does with a savings account.

Although this option is not government-insured, guaranteed income in the same way that a savings account is, it can be a low-risk investment that offers potential returns far above what a regular savings account offers. However, the regulatory environment around mREITs can be complicated. Due diligence before investing-and careful examination of how payment to you as a lender is organized-is especially necessary here.

The Bottom Line

There are definitely alternatives to the traditional passbook savings account that allow you to earn higher interest rates on your money. They may not offer the liquidity of a savings account, and they do come with requirements ranging from minimum balances and monthly limits on transactions to a lack of federal insurance. But, depending on your financial situation, they could prove attractive.