Get More in Returns than with Your Local Bank with these Alternative Investments

If you’ve borrowed money, then you know interest rates are on a constant rise. However, the same isn’t true for your savings. Local banks offer peanuts for interest rates in these accounts making it almost worthless to have a savings account.

Data from the FDIC shows that average interest rates stand at 0.09% and 0.16% for savings and money markets, in that order. However, inflation rates stand at over 2%. This means every day your money sits in a bank is a loss.

With this in mind, it’s time to forget about your bank as a savings partner and find a new one. These five options will offer you more money than what your local bank will.

 

  • Treasury Securities

 

This investment option is an inflation beater. Thanks to its secure nature against inflation, Treasury securities will offer you more in interest than your local bank. In simple terms, a treasury security is a debt extended by the US government. This means both the interest and the principal enjoy protection.

If you intend on investing in US treasury securities, then you must understand the various types available. The main differentiator is the duration of the Treasury security. For example, you can choose:

  • Treasury notes: These securities mature between I two and 10 years.
  • Treasury bonds: The maturity date extends between 20 and 30 years.

However, you may also want to consider Treasury bills. These securities allow flexible liquidity because they mature in a short period, specifically, between one month and a year.

While they may not offer better liquidity compared to a savings account, you can access your money after a short while. In addition, they benefit from higher interest rates. Even better, you can cash them in them before they mature if you encounter a cash crunch, but the interest will be reduced.

The interest rates fall between 2.36% and 2.70% for one month and a year respectively. As you can see, the longer the maturity period, the better the interest rates. Nevertheless, you don’t have to stash away your money for 30 years with these rates.

 

  • Online Savings

 

Before the internet gained traction, investing in it presented numerous risks. However, after significant advances in technology, banks moved in to take advantage of its convenience and power. Most of the banks crossed over to the digital movement, hence creating online outlets, but what makes them different from traditional brick and mortar banks?

First off, online banks operate online. Therefore, they can reach a wider audience without investing in physical branches. In turn, they end up saving tons of money on overhead costs, including payrolls. For this reason, they can afford to offer high interest rates on deposits.

For instance, CIT Bank, Synchrony Bank and Ally Bank offer 2% and more on online savings accounts. Apart from the high interest rates, these accounts offer liquidity as well. You have the liberty to move your money from an online account to another one in another bank. Furthermore, you can withdraw your money at an ATM.

Before opening an account on an online bank, it’s important to do some basic background checks. This includes the bank’s history and whether the FDIC insures them.

While online banks offer better interest rates on deposits, you may want to keep some money in your local bank to deal with realistic loans and checking. Also, if you want more interest on your deposits, consider certificates of deposits. Online banks do have appealing rates on CDs.

 

  • Bonds

 

Bonds are also securities that offer higher interests compared to savings accounts. Nevertheless, bonds aren’t 100% safe, since their value tends to fluctuate from time to time. Therefore, it’s vital to stay away from individual bonde issues.

The safest way is by trading through the exchange-traded funds tied to indexes. For this, you’ll get multiple bonds under professional management, thus avoiding the risks associated with individual bond issues.

Bonds come in two types: Municipal and high yield

High yield bonds offer more returns on short term investments thanks to high-risk companies issuing them. For instance, expect a 5.35% yield over a year in returns if you invest in iShares iBoxx & High Yield Corporate Bond ETF.

On the other hand, municipalities and states issue municipal bonds, but they offer low interest rates compared to high yield bonds.

However, the good thing is the interest from the returns are tax-free. Also, if you reside in the same state as the bonds issued, you’ll enjoy tax-free interest income.

ETFs present the safest way to invest in a municipal bond. One example is the iShares National Muni Bond ETF which after 1 year, you’ll earn 2.46% in interest.

Since bonds are volatile, you don’t want to put emergency funds in them.

 

  • High Dividend Stocks

 

Just like bonds depreciate, high dividend stocks can also lose their value and fast. Therefore, you must prepare yourself for some degree of loss. Again, for such volatile investments, it’s advisable to keep your emergency funds away from them. However, you can invest a certain percentage of your savings to gain higher returns.

For instance, a high dividend stock can offer between 3 and 4 percent in yield. Some pay more, and while these stocks can lose value, they can also appreciate fast. To identify a high dividend stock with the potential to appreciate in value, analyze the stock’s history. Have their dividends been constantly increased?

If this is the case, you stand to enjoy high dividends in addition to the stock’s increase in value. Some of the platforms you can use to invest in stocks include Charles Schwab, Fidelity, and E*TRADE.

 

  • Mixed Portfolio

 

This strategy takes advantage of the safety bonds provide. By mixing stocks and a higher percentage of bonds, you get the best of both including high yields from stocks. For example, you can create a portfolio with 20 percent stocks and 80 percent bonds.

While this portfolio has the potential to offer high returns, they still pose a higher risk compared to Treasury securities and CDs.

The advantage of a mixed portfolio allows you to benefit from capital appreciation on stocks and high interests from bonds.  It sounds complicated, but you can use robo-advisors to build this portfolio on automated platforms. One such platform is Betterment and Wealthfront.

This is how robo-advisors work. They’ll analyze your risk tolerance, time duration, and goals to come up with an investor profile.

Keep in mind that you can still lose money with this strategy. However, it won’t be as much as in a volatile stock portfolio. Again, this strategy is perfect for long-term savings, so it’s not wise to invest your emergency fund in this portfolio.

Some other platforms include Prosper and LendingClub. The main drawback to this form of investing is liquidity. For instance, once you invest in a note, you’ll have to wait until it matures, which may be between 3 and 5 years. Mixing your maturities will be your best way to achieve liquidity.

The Bottom Line

The investments listed in this article will pay you more than your local bank. However, some of them require tons of patience and come with risks. Therefore, when investing in any of them, you must have available funds you can tap into if you encounter an emergency, since what’s discussed here are best-suited for long-term savings.

Also, you don’t want to place your money on a single investment. Instead, the best strategy is to have a stake in a number of these investments. For instance, invest more in online savings and less in high dividend stocks to reduce the risk levels.

Overall, it’s clear that you have several alternatives to the tiny returns your local bank offers.

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