Where to Save When High-Yields Are Low

There are still options for decent returns if you know where to look.

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For almost a decade, I've been enjoying the benefits of high-yield savings accounts. Those benefits have become less appealing over the past few years, unfortunately. In its heyday, this special class of savings accounts earned 5 percent APY or more, a rate of return attributed to riskier bonds or even stocks. Today, interest rates are barely above 1 percent APY.

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So what can people do to earn better returns on savings? Here are some of the best options.

First of all, don't lose sight of the purpose of savings accounts. Use savings or money market accounts for any cash you might need in the next year or two, including a good portion of your emergency fund. These are not long-term investments designed to earn your money. Most savings accounts don't earn interest at a rate higher than inflation, but some high-yield savings accounts will barely increase your wealth in real terms.

The point of savings isn't to build wealth, but to protect your cash. Savings accounts insured by the FDIC are safe and will never lose value, even if your bank declares bankruptcy or folds. In order to earn more interest, you generally have to take on the risk that you'll lose some of your money.

That problem is avoided with interest-bearing checking accounts. Checking accounts are insured by FDIC to never lose value as well, and if you shop around, you'll be able to find interest rates that exceed even high-yield savings accounts. Look in your town for community-based banks or local credit unions for special deals. Some of these accounts come with limitations such as a direct deposit requirement, but it may be worthwhile to earn higher rates on accessible cash.

Money market funds are different than money market accounts. These are mutual funds that carry slightly more risk than savings and money market accounts. You might be able to find a slightly higher interest rate in a money market fund from your bank or brokerage, and these funds often offer check-writing privileges as well. Shop carefully; even Vanguard's classic money market fund is only offering a yield of 0.08 percent as of October 22.

Certificates of deposit are low-risk favorites, often offering higher interest rates than savings account as long as you're willing to leave your funds deposited for a certain amount of time. While there is little risk of your deposit losing value, the risk with CDs lies in interest rates; if you lock in an interest rate of 3 percent for a 5-year CD with an early withdrawal penalty, you miss out on the option of using that cash for a 5 percent interest 5-year CD next year when rates potentially rise.

If you believe the hype, you may be considering investing in peer-to-peer lending as an alternative to saving. The returns are hard to ignore. While investing or lending through services like Lending Club and Prosper can help your wealth grow, there are two important points to consider. Unlike a savings account, you don't have use of your money after it has been deposited. You can withdraw your savings at relatively any time; with peer-to-peer lending you'll have to sell your investment for a loss if you want to cash out early. Also, there is added risk; your borrowers may not pay.

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One final option is to pay off debt. If you pay off a credit card with an interest rate of 19.99 percent, you can increase your wealth faster than adding those funds to a savings account. The holy grail of personal finance is an investment with high after-inflation returns and low risk. Savings accounts satisfy the low risk part of the equation at the expense of the returns.

There aren't many alternatives to high-yield savings accounts that beat inflation while protecting your capital, but these options will help if you're willing to take slightly more risk or accept slightly lower returns.

Luke Landes writes for Consumerism Commentary, where he encourages discussions about money and consumer issues. Consumerism Commentary regularly tracks and reviews the best online savings accounts and other financial products.