Alternatives to Savings Accounts

A penny saved is a penny earned. Often mistakenly attributed to Benjamin Franklin, this phrase has origins dating all the way back to the early 1600s. The original meaning behind the phrase is that a penny unspent is akin to a penny earned, as the spender would normally have been without it. As time went on, the phrase evolved to encourage opening savings accounts at banks or other financial institutions. From an early age, we’re taught to save at the bank, yet savings accounts offer minimal benefits when compared to other alternatives. Typical savings accounts offer an average .06% annual return. This means a $10,000 investment into a savings account will yield about $60 a year. This is hardly your money working for you. Before stashing your cash into a standard savings account, explore alternative vehicles that can help you save more. Achieve your personal financial goals with a smarter alternative to a savings account.

1. Making Investments

While a penny saved might represent one penny extra, a penny invested may result in exponentially better returns. Stocks, Bonds, ETFs, and CDs offer alternatives to traditional savings accounts with potentially higher returns.

Stocks

Representing a portion of ownership, a stock transforms the buyer into a shareholder of an entity. Stock returns are dependent on the success of the issuing entity on the stock market. Throughout the day, the values of stocks can increase and decrease and stocks may be traded throughout trading hours. Stocks can be volatile; returns are not guaranteed. It’s important to become educated in stock management before becoming involved in the stock market. Talk to your financial advisor before buying or selling stocks.

Bonds

Bonds create a lending agreement between the buyer and the issuing entity. Bonds may be issued by businesses, governments, and people. Unlike stocks, bonds offer a set percentage return for the investment, payable at a predetermined date. Bonds are relatively stable but are subject to the longevity of the issuing entity. While bonds seldom offer returns as high as stocks might, they typically offer much better rates of return than savings accounts.

ETFs and Mutual Funds

ETFs are exchange-traded funds. These are bundles of stocks and securities which, while granting no ownership to the buyer, offer buyers a return of the value of the stocks and securities. As the package increases in value, investors receive a percentage based on that. ETFs offer flexibility for moving in and out of markets and are traded throughout the day just like stocks. Like purchasing stock, investing in an ETF carries with it degrees of volatility. Mutual Funds carry less volatility and correspondingly, offer a typically lower Return on Investment (ROI). Mutual Funds are pools where investors share in the value of the fund, itself a collection of investments managed by a financial professional. To find out if investing in ETFs or through Mutual Fund is right for you, talk to your broker.

CDs

CDs, or Certificates of Deposit, tend to offer better returns than a traditional savings account, with the trade-off that the deposit amount cannot be accessed until a predetermined date. CDs are not a loan. Generally, the rates of return for Certificates of Deposit increase as the term of the deposit increases. While the rates of return may not be as impressive as those for stocks could be, CDs typically offer a relatively stable solution for earning more returns than through a bank or credit union savings account.

2. Saving for Retirement

If you’re saving for retirement, a traditional savings account at your financial institution is a long way to get there. With brutally low APRs, savings accounts can make it difficult to build sizable nest egg. Increase your ability to save for retirement through an Individual Retirement Account. IRAs can be utilized for making other investments, such as stocks, bonds, Mutual Funds and more. Different IRAs are available to suit investor needs.

• Traditional IRAs offer the ability to make untaxed contributions to the retirement account. IRAs are taxed at withdrawal, with withdrawals treated like income. Often, contributions are eligible as tax write-offs.
• Roth IRAs are taxed upon deposit but can be withdrawn tax-free. Roth IRAs have different rules for making withdrawals. The funds in a Roth IRA account can be used for making other investments.
• SEP IRAs are for entrepreneurs looking to create their own retirement plan as an employer. Simplified Employee Pension (SEP) IRAs are taxed at withdrawal, the same as traditional IRAs.

Different IRAs offer benefits advantageous to different investors. To find out which IRA is the best retirement savings alternative for you, talk to your financial advisor.

3. Saving for College

College 529 accounts are savings tools that pay for tuition, textbooks, and other eligible expenses from most accredited colleges and universities. Withdrawals from College 529 accounts are free from taxation. College 529 accounts allow for easy contributions by family members and friends, helping the account grow. Contributions are typically invested in other vehicles to create potentially larger returns. College 529 accounts do not have age limits for withdrawal but will be penalized for withdrawals made for non-qualifying expenses.

4. Paying off High-Interest Debt

Investments with high APRs are very attractive. Your credit card company thinks so too. Paying off high-interest debt can be just as effective at improving finances as saving or investing – sometimes even more so. High-interest debt acts as a negative investment, draining borrowers of resources which could be better invested elsewhere. Before looking to spread your resources over investments, clear high-interest debt and free yourself from unnecessary finance charges.
Opening, growing, and tending to savings accounts remain a noble endeavor, and saving money is generally better than spending it on a frivolous expense. Still, for those looking to achieve more with their hard-earned dollars, there may be better alternatives than traditional savings accounts. Depending on your goals, different investment options are available to help get you where you want to be. Save with purpose. To learn more about structuring investments around your goals, budget, and comfort level call us at 858.792.7027 or visit OverlandShanahan.com.

The Financial Consultants at High Bluff Private Wealth, Inc. are Registered Representatives with and Securities, offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through High Bluff Private Wealth, a registered investment advisor. High Bluff Private Wealth, and High Bluff Private Wealth, Inc., are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing in mutual funds involves risk, including possible loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Exchange Traded Funds concentrating in specific industries are subject to higher risks and volatility than those that invest more broadly.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program.

Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.