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Alternative To Low Interest Rates


This post comes to you from the NerdWallet.com team of personal finance bloggers and experts in helping users find the best low APR and rewards credit cards.

Low Interest, No Interest: Beyond CDs and Savings Account

CDs and savings accounts, once the center of most Americans’ financial lives, are beginning to give way to alternatives, as was shown by 2010’s extremely low levels of savings account use. The most lucrative accounts only offer a rate of about one and a half percent, with many offering significantly lower rates, even below one percent. CDs have also been affected, with returns dipping under the one percent mark.

Municipal bonds: Municipal bonds have recently become more attractive since they generally have a higher rate of return and the income made from interest on the bonds is frequently not subject to taxation. There is controversy, however, about whether these bonds are a sound investment. Supporters hold that during these rough economic times, state, city, and country administrations use the money for broadly beneficial infrastructure development. Detractors argue that an investment in the financial stability of municipal governments is not a sound one and purchasers of these bonds run the risk that those governments won’t be able to pay their debts.

Utilities: If taking on some equity risk is an option, utility stocks have a history of lucrative returns. A significant number of investors hold that these are still a smart way to invest due to the availability of new markets to expand into in coming years. Utilities are getting into the business of vending the power they generate to less developed nations while optimizing and updating America’s power infrastructure at the same time. The growing demand for renewable energy is another area with a high potential for profit in the relatively near future. Since this industry is tightly regulated, the amount investors can hope to earn has been hovering around five percent, a rate matched to the overall expansion of electricity usage. With electric cars already beginning to proliferate in retail markets, utilities could be jump-started in the near future.

Person-To-Person Lending: Lending Club exemplifies a further alternative: the burgeoning field of borrower-lender networks. It helps to understand the function of traditional banking institutions in order to grasp why these networks are capable of delivering significantly higher rates of return. Banks profit and grow by lending money at a much greater rate of interest than they borrowed it for. Borrower-lender networks eliminate this role and in so doing, they both lower the rate of interest paid by borrowers and increase the payout for those lending the money. These networks have also become a strategy for people borrowing money to consolidate what they owe in lieu of balance transfer credit cards, as well as a way that lenders can avoid being burdened with bank accounts that have low rates of return.

Long-term CDs: Even though CD rates have declined recently, you can still generate a good return if you’re able to lock in to a more long-term plan. The folks at depositaccounts.com have a tool to help investors find the best rates. At the moment, a five-year CD can net you a rate of return that’s three percent or greater, plus CDs are lower-risk than investing in utility stocks or borrower-lender networks.

High-yield checking: There are also banks where you can open a checking account that has a high interest rate. Sometimes called “reward checking” this type of account is more prevalent at small banks, or ones that operate online-only. These accounts come with a few strings attached, however. It is common that account holders are obligated to maintain a high minimum balance and use their debit cards no less than a dozen times per statement period. It is also possible that having direct deposit, paying your bills online, and being restricted to getting your bank statements electronically will all be conditions of your opening an account like this.

On the other hand, such accounts boast interest rates as high as 4% for the first twenty five thousand dollars you deposit and 1% on any amount beyond that. An important caveat is that failure to meet the conditions of the account can result in a downgrade in your rate. Not only that, your rate may vary regardless of your behavior, which can take your rate down as far as the 2% mark. Credit unions are another place where you may find a more lucrative rate for your savings and checking accounts than traditional banking institutions. While the contrast isn’t likely to be huge, it’s an avenue worth investigating.

Embracing options: All these different possibilities go to show that banks are far from the only option when it comes to investing your money. Be sure and shop around, being on the lookout for nontraditional options. Overall, let your own goals for your financial future be your guide and choose the best fit for you.

As economic conditions change, the financial services to help you invest your money wisely will also fluctuate. Tough times in the market can translate to high-earning options for the observant investor.

retirebyforty> My emergency fund is in a saving account and other than that I don’t have much cash. When I retire, I will definitely convert some of the more risky investments to CD and will take a look at muni bonds again. Perhaps the muni bonds will improve then. I haven’t tried Lending Club yet because it sounds risky to me.

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{ 6 comments… add one }
  • Will @ HackingTheBank.com February 16, 2011, 7:58 am

    P2P Lending like LendingClub has a very different risk profile than a CD. I agree that there are many better alternatives to CDs out there. My friend recently got a 1 year CD that pays less than my Ally bank account. Returns on CDs are quite horrible right now, which is why I think it’s a great time to pay down any debts you may have. Why invest in a CD when you can earn a guaranteed 5% return by paying down your mortgage or an 8% return by making some extra payments on your car loan (if you have these items)? If you’re looking to store some cash for the short-term though, there really aren’t too many very low risk alternatives out there.

    • Tim February 21, 2011, 7:43 pm

      That’s actually a great alternative that I completely left out. Paying down mortgages at 6% or more, or getting rid of credit card debt at 15%+ is a much better investment than any short-term investments or securities.

      I guess I kind of assumed that anyone looking to invest was debt-free (as they should be).

  • MoneyCone February 16, 2011, 11:10 am

    I don’t have too much tied as CDs, but it is worth considering. I like cash to be liquid or invested.

    Never tried P2P lending, but I hear good stories about them. (or no one writes about the sour ones!)

  • 101 Centavos February 16, 2011, 6:30 pm

    I’ve been looking at a couple of utilities for a while, and will probably invest in a couple before long.

  • Roshawn @ Watson Inc February 17, 2011, 4:34 am

    I don’t do C.D.s either. Like moneycone: I prefer liquidity.

    Munibonds have been hit hard as of late; one definitely needs some real high risk-tolerance to keep many of them during the current times.

  • bad credit February 20, 2011, 11:23 pm

    C.D..s is not the thing i prefer. I just always thought of trying P2P lending.

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