While it’s traditionally been considered financially sound to hold extra cash in a high-yield savings account, as rates on these accounts decline throughout the pandemic, it’s becoming increasingly tempting for some people to pursue other, more lucrative investment avenues.
Depending on your risk tolerance, there could be a number of other places to invest your savings and potentially see greater returns.
If you’ve been considering switching some of your funds out of a high-interest savings account, here are some other investments to compare.
Gold is often viewed as a safe investment when the market becomes unpredictable, so it’s common to see investors turn to gold during the pandemic. The value of gold typically increases during a recession. Between 2008 and 2012, for example, gold’s value increased by 101.1%. During the coronavirus pandemic, about one in six consumers has invested in gold.
- Not a strong upside in the short term: If you’re looking to make money on an investment and quickly sell it, gold might not be the best choice for you. Especially as gold rallies to near-historic highs during the pandemic.
- Doesn’t pay dividends: If you’re looking for some annual income from your investments, gold is not the way to go. You only make money on gold when you sell it at a profit.
- Inflation hedge: Since gold typically appreciates as inflation rises, it can be seen as a prudent investment during an inflationary period.
- Insurance against a down market: Some investors regard gold as an investment that will always perform in the long term, even if disaster strikes the market.
What to know:
- You don’t have to buy physical gold to make an investment. You can opt to buy stocks that are related to gold or even gold-backed cryptocurrencies.
2. Money market account
A money market account is a type of savings account that pays interest based on how the money markets are performing. Often, money market accounts offer higher interest rates than a typical savings account because they allow consumers some ability to participate in any market upside. For example, in January 2020, the rate on money market accounts was 0.372% APY, compared to 0.272% APY for savings accounts.
- Small returns: Just like it can be difficult to find a high-interest savings account with high returns right now, the same can be said of money market accounts, which could also have high minimum balances.
- Fees: Be sure to watch out for any monthly fees that your bank or credit union could charge, as this could eat away at any potential upside of a money market account.
- Access your cash: If you need to be able to access your investments at any time, a money market account could be a smart option as it allows up to six withdrawals per month. This limit, part of Regulation D, was temporarily lifted in 2020 by the federal government, allowing banks to suspend enforcement if they wish, so you might currently find some accounts without this limit.
- FDIC-insured: If you don’t want to tolerate a lot of risk with your investments, the security of having your money market account insured by the Federal Deposit Insurance Corporation (FDIC) could be the best way for you to feel safe about where you’re putting your money.
What to know:
- Money market accounts are a secure investment with a low return, somewhat comparable to a certificate of deposit with easier access to your funds.
3. Stock portfolio
If you have a larger appetite for risk and want to participate in the market right now, you could always consider moving some funds from your high-interest savings account into a stock portfolio.
- No guarantees: If you’re used to the security of a high-interest savings account, the stock market could feel very risky. There’s no guarantee you’ll make money or even recover your initial investment.
- Thorough research needed: If you’re going to invest in stocks on your own, you’ll need to spend time understanding what you’re purchasing. Alternatively, letting a financial advisor do the heavy lifting puts your fate in their hands and knowledge.
- Inflation hedge: Stocks have a historic track record of outperforming inflation — they have an average annual return of 10%.
- Earn dividends: While investors typically earn money from stocks that appreciate, some stocks pay dividends, which could be an added boost to your budget.
What to know:
- Stocks are a riskier investment than some of the other alternatives on this list, but they also have a greater potential upside.
Usually, a strong financial plan involves incorporating several investment strategies, not merely choosing one. Instead of viewing these options as separate ways to invest, consider how you can use each of them, or similar products, to create a financial plan that matches your comfort with risk.
Jolene Latimer has her master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.
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