What are the alternatives to savings accounts?

Savings are incredibly important, right? They set us up for financial success. They allow us to do good stuff, like buy nice things and go on trips, without going into debt. They are an emergency net, covering unexpected costs that might arise. And they help us build wealth and plan for retirement.

Most of us have a traditional savings account with a traditional bank. You may have had the same savings account for years, even decades. It’s where you put your extra money until it’s needed. But is your traditional savings account the best place to keep your savings?

Traditional savings accounts are safe – very safe – but they don’t necessarily offer the best growth for your money. There are other options beyond a traditional savings account at a brick-and-mortar bank.

To have or to not have a savings account

Let’s start with what savings accounts are designed to do. The clue is in their name. Savings accounts are there to help you save. Generally, when you set up a chequing account, your bank will open a savings account for you too. Chequing is for spending, savings is for saving.

However, many – perhaps even most – traditional savings accounts do not provide you any great growth on the money you store inside the account. Think of these accounts as more like holding accounts. Your money goes in there and it’s safe, away from your spending account, ready for a rainy day, but only accruing a tiny percentage in interest.

With inflation, you might even be losing money in a traditional savings account over time. Any time your account’s interest rate fails to match the rate of inflation, you’re effectively losing money (in 2022, for example, inflation topped 8 percent while most traditional savings accounts offer less than 1 percent in interest).

So, while savings accounts are safe and incredibly easy to set up and manage, they’re not your only option. Let’s consider some alternatives that could help your money earn more money.

What are the alternatives to a savings account?

There are alternatives to a traditional savings account, if you’re looking to switch. Some require a little more energy to manage, some take on a little more risk, and some are just a simple switchover.

Investments

If you’re looking for another option that can hold and grow your money, there are many different types of investments that might fit the bill. These can be especially worthwhile for longer-term savings – money you won’t need in the near future.

Real estate

Buying real estate might not be on the cards for everyone due to the prohibitive costs, but real estate is almost always a solid investment that builds value in equity over time and can also make you money through rent. As an investment, real estate is generally considered less volatile than other investment options, especially the stock market. The longer you own a property and pay down the mortgage, the more equity you accumulate. Meanwhile, your property likely will also be appreciating in value.

Stock market

The stock market can seem like a mysterious and confusing place to the uninitiated. But anyone can invest in stocks – you can either manage your investments yourself, or have someone else do it for you (including robo-advisors). And despite a common misconception, investing in the stock market should never feel like gambling. If it does, then you’re not doing it right. If you invest in a diversified portfolio (a portfolio of stocks that spans geographies and industries), and you’re willing to think long-term, then stock investing should work in your favour.

Stocks, also called shares, can be bought and held in three registered savings accounts: Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs), and Registered Education Savings Plans (RESPs). They can also be traded through non-registered accounts, which are similar but don’t have the same tax benefits.

With a diversified portfolio, you spread out your risk. If one stock dips, you’ll likely have others that maintain or grow their value. Exchange-Traded Funds (ETFs) can help you do this. ETFs are investment products you buy like a stock, but they come already diversified by bundling together multiple assets like bonds, commodities, and stocks. If you’re unsure where to start, ETFs are considered low-risk and are usually a sound investment option.

GIC

If real estate or stock trading seem too risky, Guaranteed Investment Certificates (GICs) are another great alternative savings option. A GIC is something that can be added inside a savings account, TFSA, or RRSP. GICs are low-risk investments that are guaranteed – the guarantee is right there in the name – to earn interest, as long as you leave the money be.

GICs are fixed-term investments. Their terms can range from less than a year, all the way up to 10 years. Because they’re fixed for a set time-period, you can’t take your money out during the term without paying a penalty. The longer the term, the more interest you’ll make.

Less traditional savings accounts

Sometimes getting more out of your savings is as simple as moving your money from one account to another, or from one institution to another.

High Interest Savings Accounts

Traditional savings accounts (the kind you automatically get when you open a chequing account) offer interest rates from as low as a paltry 0.1%. Obviously that’s not great. Those types of savings accounts can be fine for holding you money in place for the short-term, so you don’t spend it. But over the longer term, you want your money making money.

Look into High Interest Savings Accounts. These accounts often pay much higher interest rates – from 1.5% up to more than 3%. Try to find an account that offers at least 1.5% interest, with no opening fees or minimum fund requirements (and keep your eyes peeled for accounts offering 4% interest or higher – usually that’s a short-term introduction rate before the real rate kicks in at a much lower level).

Online banks and credit unions

Online banks are able to offer much better interest rates than big banks. Because their overheads are lower (they don’t have brick-and-mortar banks and salaried bank tellers), they pass on those benefits to their customers. Many of the better rates on high interest savings accounts can be found with online banks. Online banks are set up for the digital age, you need to be comfortable banking using your smartphone and computer, as these banks typically don’t have in-person customer service.

Credit unions are another great option. They operate similarly to banks but are structured a little differently. Because credit unions are owned by their members – the people who bank with them, their customers – they do what’s best for their members. This often means better rates, lower fees, and great customer service. Credit unions often offer higher interest rates than the big banks on their savings accounts.

Hybrid chequing and savings accounts

Another alternative is to choose a hybrid chequing and savings account, like the one offered by KOHO, which is a no-fee spending and savings account combined. The account earns interest on your full balance and it has a prepaid Matercard attached to it – so you can spend from it freely, while still earning interest. The reloadable prepaid Mastercard also earns cash back on purchases, so this hybrid is kind of a win-win-win. With KOHO, you can also create savings goals that you lock into “the vault” in the KOHO app.

Peer to peer lending

Peer-to-peer (P2P) lending has started to gain traction in recent years. It might be the least orthodox approach on this list, but it is nonetheless an alternative to traditional savings accounts. P2P lending is a way for individual investors and borrowers to connect through online marketplaces to organize personal loans. For borrowers, this is a way to obtain loans outside of banks. For investors, it’s a way to spread out micro loans and potentially earn excellent returns on their investments.

While there is some risk in losing money, borrowers are pre-screened and must meet certain requirements. What’s more, there’s safety in the spread. Investors generally lend no more than $50 per loan (if a borrower needs $5000 they will need 100 lenders each contributing $50). This way, you can invest across multiple borrowers to cover your risk and increase your potential for good returns. Due diligence is obviously recommended before investing in P2P.

Conclusion

Like most things in personal finances, there’s no one-approach-fits-all way to save your money. Traditional savings accounts are not for everybody and, for those looking to get more out of their money, there are plenty of options. You might want to consider spreading your savings across different types of traditional and non-traditional accounts, or you may want to choose the best way to save that suits you and just lean into that. Whatever you choose, the important thing is that you’re saving.