You may feel the need to have all your funds actively invested. However, if you don’t have liquidity (ready access to cash for unexpected circumstances), you can find yourself in a precarious short-term cash financial situation.
Especially in today’s uncertain, pandemic-driven, economic environment, where the economy vacillates unpredictably, you may want to have a plan for keeping at least some of your money accessible - since as they say - “cash is king.”
In fact, a recent survey showed that 58% of respondents stated that the pandemic changed their approach to savings, with 59% stating their intention to cut back on their spending.
But while 71% of Americans use traditional savings accounts to store their money with an annual percentage yield of 0.06%, there are other liquid savings and/or short-term investment options that can offer a 0.55% return, a 2% return, even as high as 5%, for holding your cash. That’s 10x -50x more!
In this article, we’ll give a rundown of traditional savings accounts and a variety of alternatives that offer better returns. So, if you are looking to accelerate and take greater control of your personal finances, you can consider whether these options may be a better fit for your needs.
Jump to a Section:
The Basics of Savings Accounts
What is a traditional savings account?
A savings account is a type of deposit account that is meant to hold money that you don’t plan to use immediately.
You can open a savings account at a bank or credit union and then deposit money into it. The bank will then pay you interest on your balance for holding your money. This is different from a checking account in that you can’t write checks or directly make purchases from a bank savings account.
But the benefits of traditional savings accounts are quite straightforward: they give you quick access to your money so you remain liquid, offer no risk of losing your money, and provide earnings on your interest.
Common Uses of Traditional Savings Accounts
Having a savings account is necessary because it gives you a cash cushion in the form of an emergency fund when there are sudden changes in your life or if you need to make big purchases like a car or home.
When looking for a savings account, the focus is more on saving for a specific goal while making modest returns rather than growth. So most people are really just looking for a safe and convenient option where they can save money and just forget about it.
Disadvantages of Traditional Savings Accounts
Being the default option for most people, traditional bank savings accounts are probably the most popular way to save your money. But even with their benefits, they still have their downsides that you have to consider:
Low Yield - Safety and liquidity in savings accounts come at a steep price: they offer a minimal amount of interest compared to other types of accounts. And recently, interest rates have dropped. Why? It’s because banks don't need your money right now.
Access and Availability - Yes, this can be a good thing too. But if you find easy access to these funds is too much of a temptation, then that could make long-term saving difficult.
Inflation - If your savings account has an interest rate that’s lower than the inflation rate, then it won’t grow fast enough to offset the inflation loss. That means your earned interest can get eaten up and your account balance will be worth less a year from now than it is in today’s dollars.
Federal withdrawal limits - Due to Regulation D of the Federal Reserve Board, savings accounts have limits when withdrawing funds, which is six times per month. The banks will charge you a fee if you exceed the federal limits.
Changing rates - Savings account interest rates are variable, meaning that financial institutions are free to set and change interest rates as they wish. High-interest savings account rates will stay largely in line with the movements of the federal rate.
Certificates of Deposits
If you’re not planning to spend your savings for at least a year or more, certificates of deposit (CDs) may be just for you. A certificate of deposit is a type of savings account where you’re locking in your money for a certain amount of time and are not planning to make withdrawals soon.
You must choose the term length of your deposit which comes with a fixed interest rate. The catch is that your money will be tied up for the entire term of the CD. But the benefit is the longer your deposit is held, the higher the interest rate will be.
The reason you would choose a certificate of deposit over a traditional savings account is because of the higher rate of return. They usually pay higher interest rates than the best savings accounts or money market accounts in exchange for keeping your funds on deposit for a fixed period of time.
Another reason you might choose a certificate of deposit is that it’s one of the safest options available. You are protected from risk or volatility in the market since your rate of return is guaranteed.
Disadvantages:
Less Liquidity - The main drawback of CDs is that they offer you less liquidity because you’re locked into a deposit for a fixed amount of time. And if you need to withdraw it early for any reason, you’ll have to pay a penalty fee and possibly forfeit your earned interest or even pay it out of the principal you deposited.
Best for:
Certificates of deposits are great if you have a ton of money in savings and just want to find different ways to invest it without having to think about it. Otherwise, you can use that money to find other investments that will give you more growth and liquidity.
Since your funds are inaccessible when in a CD, many opt for the “CD Ladder” method where you can buy multiple CDs with varying term periods. For example, you might get a one-year CD for a rate of .4%. And then you can also get a five-year CD with an interest rate of .9%.
This way, you can benefit from long-term CDs’ higher rates and short-term CD’s access to funds, so your risk is lowered AND money is more liquid. You end up getting more liquidity every single year.
Money Market Accounts
A money market account is a type of deposit account that typically combines the features of savings accounts and checking accounts in one place. They’re offered by traditional banks, online banks, and credit unions and are similar to savings accounts in how your deposit can grow over time with interest, making them interest-bearing. But like checking accounts, you might be able to write checks or even get a debit/ATM card from a money market account for purchases and withdrawals.
Money market accounts are popular because they combine the advantages of savings, checking, and even certificates of deposits in some ways. For one, they’re flexible in that you can transfer money in and out of the account from other accounts at the same bank. So you can access them easily and at any time, unlike a certificate of deposit. They’re also safe and low-risk if they’re held at a FDIC-insured bank or credit union.
Disadvantages:
Minimum balance requirements - Most banks that offer money market accounts will require you to deposit a large amount and keep a minimum balance, up to $5,000 or even $10,000 to just open your account.
Interest rates - Unfortunately, money market accounts don’t always give you the best interest rates. Sometimes they’re comparable to the annual percentage yield (APY) you could get with a traditional savings account. Or you might need to reach a minimum balance requirement to receive a higher interest rate.
Fees and withdrawal limits - Similar to some savings accounts, money market accounts can charge a monthly maintenance fee. Though you might be able to waive the monthly fee by meeting a minimum daily balance, you want to make sure they’re not eating away at the interest you’re earning with your savings. And just like savings accounts, withdrawals are capped at six per month.
Best for:
Money market accounts are a great place to store your emergency savings since it’s safe, you get a relatively good return with an annual percentage yield better than savings accounts, and you can access them at any time. It’s also a great option if you’re saving up money to make a big purchase. You can just continually deposit money into the account and not really think about it until you’re ready to use the funds.
Peer to Peer Lending
If you want a more hands-on approach to your savings, peer-to-peer lending platforms give you the option to invest your money in loans made to individual borrowers. So in this case, it cuts out the banker who’s considered the “middleman”.
The benefit of peer-to-peer platforms is since they don’t have the operating costs of a traditional bank, these loan-funded investments can offer much higher yields, going even greater than 10%.
There’s certainly risk involved if borrowers can’t pay off their loan. But the risk is mitigated because you can carefully vet the borrowers and you’re not funding an entire loan, only a portion of it in the form of “notes”.
For example, a borrower who takes out a $10,000 loan on a peer-to-peer platform may have it funded by up to 400 investors at $25 each. So you can spread your personal investment out across multiple loans to minimize the risk.
Disadvantages:
Risk - Depending on the platform, peer-to-peer lending gives varying information on their borrowers. So you may be investing blindly and have exposure to losing your investment if they default. There is also no FDIC insurance or government protection if lenders get scammed or have trouble with their borrower’s payments, leaving you with no options to claim compensation.
Time - You’ll have to do your own vetting and take on the associated risks of choosing a borrower to loan your funds to. A lot of people prefer not to do this because of their busy schedule and may be looking for less time-consuming options.
Best for:
Peer to peer lending is great for those who want an active, hands-on role in monitoring their investments and like to do their research. For example, you can control your risk by investing more aggressively with higher risk, higher yield loans or more conservatively with lower risk, lower yield loans.
Online Banks
It’s no secret that since the pandemic, mobile and online bank usage increased while branch visits declined, making online banks increasingly more popular. Online banks are exactly what it sounds like, with mostly all the same services as a traditional bank.
The difference between online banks and traditional ones however is that they don’t have a brick-and-mortar bank or the associated costs that come with it. So all of their resources are focused on providing their customers with better APY rates, financial tools, and service.
This allows them to offer high yield savings accounts with rates up to 0.56%, almost 10x a traditional savings account!
Their strengths are really in the digital banking experience that they provide. In this day and age, customers are virtually always online and prefer online self-services and remote-friendly customer service to in-person visits. With online savings accounts, all of your primary interactions take place on the bank’s website and mobile app with simpler interfaces and intuitive user experience.
They’re also completely liquid so you can move your funds to and from other banks easily, and even access them from a network ATM.
Disadvantages:
Security - The one big concern with banking online is security. You could have your account hacked with personal and financial information stolen or even have money stolen from your account via fraudulent wire transfers or credit cards. So it’s important to follow all security measures to protect your online banking information. Also, look for online banks that are FDIC-insured.
Lack of brick-and-mortar stores - The obvious drawback of online banks is that they don’t have a physical location if you want to talk to a representative in person. So they may not be for people who don’t have a certain level of comfort with modern technology.
Best for:
Online banks are best for those who simply want a normal savings account and don’t need brick and mortar banks.
Since most online banks have different features and policies, you want to find one that fits your particular needs. For example, find an online bank that has minimum fees and lower minimum balance requirements, if that’s a priority. Or compare banks to find one with competitive APY rates on its financial products. And of course, find an online bank that offers the specific products you’re looking for, whether it be checking, savings, money market accounts, CDs, or other products.
EquitySlice Vault
The EquitySlice Vault is one of EquitySlice’s financial investment products that offer a high rate of return compared to savings accounts, in fact, up to 50x more at 5.06%.
EquitySlice Vault uses a type of demand note whose funds are used to buy and secure income-producing real estate assets. They employ a floating rate that always pays 2% above the average savings account as reported by the FDIC.
The yield also offers premiums dependent on your account balance and lock-up periods. The higher and longer they are, the better the rates of return so it can be both a short-term and long-term investment.
For example, if you commit $25k for 12 months, you get a premium reward rate of 0.25% and 1%, respectively. So the new APR would be 3.31% instead of the floating rate of 2.06%.
Lastly, your cash is still highly liquid because EquitySlice Vault maintains a cash reserve and you can access your funds anytime if you don’t commit to a lock-up period.
Disadvantages:
To reach the premium interest rates reward, you must have a high account balance. For example, to reach the +0.1% premium reward, your balance must be above $10,000. The same goes for the lock-up period. The longer you’re willing to lock up your money, the higher your interest rate offering will be.
The Vault is also not FDIC insured. So there is no guarantee of their obligation to make payments on the Notes. Thus, investors will have to rely on EquitySlice’s cash flow from operations and other sources of funds for repayment of principal at maturity or upon the investor’s request for redemption.
Best for:
EquitySlice Vault is for anyone looking for a higher return on their investment than normal savings accounts. They offer high APY, liquidity, and the ability to dip your toes in real estate investments without investing a huge bulk of your money.
If those terms sound appealing to you, you can speak to a specialist about EquitySlice’s investment options today.
Conclusion
For most people, it’s important to have sufficient savings readily available to cover three months of living expenses and ideally six months’ worth as an emergency fund. Therefore, having liquidity and ready access to your capital is important.
Equally important as your money is liquid, you really want it to work for you and maximize your return. The first step to figuring out the right savings vehicle for you/your family, is understanding your savings options, goals, and risk tolerance – either on your own or with the help of a financial advisor.
Hopefully, this article helps you better understand the differences between traditional savings accounts, and some of the new, potentially more attractive savings alternatives to help you find the right option which fits your return, liquidity, and security needs.
EquityBrix can help you grow your wealth through our fractional real estate investment platform. Our team marries the needs of investors and real estate developers by providing opportunities for above-market returns. EquityBrix is committed to creating high-yield investment offerings, and we can help guide you through the new era of real estate investing.
If you want more information about tokenized real estate investing go to EquityBrix or EquityBrix.com/Learn.
If you are looking to grow your wealth and diversify your investment portfolio by learning about innovative ways of investing in real estate go to EquityBrix, or contact us for more information, or sign-up for the EquityBrix Newsletter.
*Disclaimer: EquityBrix is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
