Many younger people are put off by the old school method of setting up a traditional savings account down at the brick and mortar location of a big bank, and for good reason. Fortunately there are many alternatives available today, more than ever actually, and I’d like to list just a few ways to save your money that doesn’t rely on the old school saving model.
I first want to mention a couple of fundamentals that should be kept in mind. The principle of ‘the time value of money’ in addition to the reality of inflation in a fiat currency system means that there should be a sense of urgency to put one’s money to work and never leave it idle.
The time value of money is the very first principle taught in finance, and it simply means that a dollar today is worth more than a dollar a year from today since interest could easily be earned on that dollar in the meantime, hence why lenders charge a rate of interest when making loans. There is essentially no reason to leave your money idle in any account that doesn’t bear interest, even if it’s only a measly few basis points in an online checking account.
Outside of the time value of money, inflation will literally destroy the purchasing power of your currency units, which means if you aren’t compounding in some way, you will never even keep up with inflation. This should be the goal at the very least, but if there is a way to outpace inflation through better rates plus compounding over time, then obviously you would want to achieve this and it’s entirely possible.
Before getting into the alternatives, I also want to again emphasize the absolutely desolate interest rates being paid out on traditional savings accounts at the big banks. Only a fool would knowingly lend money to the bank for 0.01% when far better alternatives exist. An online bank I will mention below, pays 1.35% and has no account fees. Accepting 0.01% is considered treason to those of us who encourage individuals to intelligently build wealth.
Online Savings Accounts
I’ve written before about why you should fire your brick and mortar bank and embrace entirely online banks, and the advice still stands. Virtually all online banks have zero fees and usually low or no minimums, and many come with debit and credit cards as well as reimbursement of ATM fees in some cases. This market will only get more competitive as younger generations welcome a fully online banking experience.
A quick search showed me solid option, CIT Bank which has an online savings account which currently yields 1.35%. Still a far cry from pre-financial crisis era, but vastly better than leaving money idle in a checking account. This type of online savings account is perfect for establishing an emergency fund.
High-Grade P2P Business Loans
The business of loaning out money to private companies is something that individuals and financial institutions have been doing for a very long time, but the rapidly changing world we live in today is changing the nature of this industry. Peer-to-peer lending is a relatively new classification in the financial world, which enables large numbers of middle-class investors to participate in business loans that were previously only available to high net-worth investors.
The most prominent company in this category in the is LendingClub Corp, which is also a publicly traded company with a $2.54 billion market cap. I’m not recommending investment in the stock though, but to participate in the loan program wherein you and many others will help businesses through crowd-sourced loans.
Each loan is given a credit rating, so you can choose a higher credit rating in exchange for a lower interest rate and vice versa. For the purposes of saving, choosing strictly the highest rated loans will be the best way to secure the principal while still earning a good rate.
Using the P2P platform, you can essentially play the role of the banker while the P2P company is the intermediary. You have a say in which business you want your money loaned out to, whereas a bank savings account will pay you interest from the average returns the bank generates on its loans. You also earn a markedly higher rate of interest, with LendingClub, their A-rated loans currently pay 4.86%, which trumps the best online banks available. For Canadians, the equivalent company is called LendingLoop, and their highest rated loans currently pay 5.9-7.5% interest.
Conclusion
These are only a couple of alternatives available, but if you are committing the financial sin of leaving your money idle, repent immediately and do the responsible thing for your financial well being, put your money to work for you. If you don’t take steps to do this, you will be making it that much harder to ever build sufficient wealth.
Sources:
https://www.lendingclub.com/investing/alternative-assets/diversified-portfolio#choose-strategy
https://www.lendingloop.ca/
https://www.bankoncit.com/high-yield-savings/