Friday, January 10, 2014

What Are The Alternatives To Savings Accounts?

Have you taken a look at how much interest you get on your savings account recently? If you have, the chances are that you are feeling pretty depressed. If you are very lucky, you may be earning over 1%, but the chances are you are getting considerably less. At these rates, you are actually losing money when you take inflation into account. There has to be some other way that delivers better returns.

Actually, if you are looking for a zero-risk investment – one that is federally insured – then you are going to struggle to find many other alternatives. For example, a certificates of deposit (CD) used to be quite an attractive investment. However, when you consider how Fed policy suppresses CD rates now, you are still only likely to earn around 1%. You may add a little bit more if you’re willing to make a long-term commitment – say 5 or 10 years – but locking up your money for that period of time may not be a good idea given that interest rates are at historic lows.

Another risk-free investment is treasury bonds. Provided that you are willing to make a long-term commitment, you can get 2.75% for a 10-year bond and 3.75% for a 30-year bond right now – which is a better rate than you would get with a savings account or a CD. However, the same issue applies as with CDs – you are locking up your cash for a long period of time. Actually, you can sell treasury bonds after you have bought them, so your money isn’t completely tied up. However, you are only guaranteed to get back your principal – the amount that you paid for the bond originally – when it expires. If you sell before that and interest rates go up – which is quite likely – then other investors will only buy your bond for a discounted price.


If you are willing to take a little more risk, then corporate bonds may be a better option than treasury bonds. You are likely to get a better rate, and your investment is still fairly secure provided that you buy bonds from blue-chip companies. However, remember that no corporate investment is completely secure – for example, General Motors went into bankruptcy in 2009, and IBM nearly went broke in 1993. As a minimum, try to invest in companies that have at least an AA rating, and steer clear of junk bonds entirely, unless you can take the risk.

As an alternative to corporate bonds, you could put your money into dividend-paying stocks. With these, the dividend can reach as high as 6% per year of the cash that you have invested. For example, AT&T is currently running at around 5.2%, and Verizon is at approximately 4.2%. However, remember that unlike corporate bonds, you have no guarantee that you are going to get your principal back in the future. You are exposed to ups and downs in the stock market, and while high-quality stocks tend to go up over time, you cannot automatically assume this is going to be the case. Furthermore, dividends are tied to earnings, so they are not guaranteed either.


Image source: http://graphics8.nytimes.com/images/2008/01/30/timestopics/feddc.jpg
Image source: http://cdn.ifanr.cn/wp-content/uploads/2011/07/9lou-gerstner-ibm-and-rjr-nabisco.jpg

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