This is a guest post by Sam Peters
Traditional savings accounts offer families a low amount of interest every year. This percentage is normally very small and really cannot be used to accrue any significant gains even over the course of many years. There are some financial alternatives to traditional savings accounts. Each option should be examined closely because there are risks and conditions that must be dealt with in order to garner the higher yield from these investments.
Certificate Of Deposit (CD)
CDs are very safe investments that are backed by the Federal Deposit Insurance Corporation (FDIC). These certificates tend to outperform money market accounts and can offer interest rates on money that are as high as five times the average interest of traditional savings accounts. The tradeoff for this higher yield is that the money will become unavailable until the CD matures. The shortest-term CDs can mature in only three months. One way to solve this problem is to ladder the CDs. This is done by buying smaller CDs that mature at different times. The staggering of the CDs means that some portion of the money that is being saved will become available for withdraw without penalty each month.
Bond Mutual Funds
These are mutual funds that cover a variety of different investments such as CDs and government securities. The funds normally yield higher returns than money market accounts and normal savings accounts. One large advantage is that bond mutual funds can sometimes be used like a bank account. Money is also available much more quickly than with CDs and can be withdrawn in only a few days. One issue with bond mutual funds is that they are not FDIC backed. There is no guarantee that the fund is completely safe. The principal investment amount can actually go down if the net asset value (NAV) of a fund starts to drop.
High-Yield Checking And Savings Accounts
Some banks have implemented high-yield checking and savings accounts that can potentially pay interest rates that are close to CDs. The accounts have some familiar options like a low minimum deposit and immediate access to funds. There are also normally many restrictions on the account. This can include a limited number of debit transactions each month, no access to the account through checks and reduced customer service. High-yield checking accounts are not always fully covered by the FDIC. These types of accounts are primarily available through online banks.
There are always conditions attached to high-yield accounts and funds. The rewards are normally equivalent to the risk or inconvenience that is involved. Families who are looking for more lucrative alternatives to traditional savings accounts should consider keeping money in a diverse range of investments. This can protect long-term savings from isolated market disruptions.
What is your preferred method of saving?
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