Since the coronavirus pandemic, inflation has jumped from 2% to highs of over 8%. At the same time, the interest rates on savings in most banks have remained lower than 1%. If your savings are in a bank account somewhere, you’re automatically losing money.
Saving money without a bank account is possible, but each alternative changes the balance of return, liquidity and protection. Credit unions, peer-to-peer lending and crypto products were among the options discussed when this article was written.
It's important to save through inflation. Read on for an overview of your best options if you want to save money without a bank account. I’ll highlight the major advantages and disadvantages of each. I’ll also go over any potential security concerns and how to alleviate them.
1. Peer-to-Peer Lending
When you save your money with a bank in the US, you’ll likely earn an interest of 0.13% per year. That’s the national average rate.
You can find banks that offer higher interest rates. The highest they can go is slightly above 2% in some cases.
In contrast, in 2015, peer-to-peer lenders enjoyed annual returns of between 5% and 9%.
In peer-to-peer (P2P) lending, individuals lend money to other individuals. You can open an account with a P2P lender and deposit money to use the account for saving.
The potential benefit is that your money earns interest. However, P2P lending puts the principal at risk when borrowers fail to repay.
Modern online platforms tried to spread and price that risk:
How Modern Platforms Managed Peer-to-Peer Lending Risk
If you decided to run a lending business independently, you’d quickly realize that it’s hectic. Your main challenge would be dealing with loan defaulters. And you might find yourself losing a lot of money to bad debt. Simply put, it’s a bad idea.
Companies built online platforms to make P2P lending easier to manage. Transactions happen online, so lenders do not need to deal with borrowers directly.
Secondly, you deal directly with the platform, instead of the borrower. As the middleman, the platform provides such value as screening potential borrowers to reduce the number of potential defaulters.
They also evaluate the reasons for borrowing money and assign each transaction a risk value, empowering you to decide which transactions to get into.
But perhaps the most impactful feature of modern P2P platforms is the distribution of risk. If you choose to lend out $10,000, your cash will be split into a large number of smaller loans, distributing the risk of loan default.
Equivalently, if a borrower wants $1000 as a loan, as a lender, you might only finance a small part of that transaction—let’s say $50.
The $1000 will be financed by a total of twenty people, significantly reducing the risk in case the borrower defaults on the loan.
The historical data cited here put defaults at about 5%, although the actual rate depends on the platform, borrower quality and economic conditions. Diversification limited the effect of a single default but did not remove the risk.
P2P lending offered a higher potential return than a bank account, but that return came from taking borrower and platform risk.
Suggested reading: Is Saving 20% Of Your Income Enough?
2. Treasury Bills
When you loan money to the US government, typically for a maximum of one year, you have bought a treasury bill.
At publication, treasury bills offered a higher yield than many bank accounts, with lower credit risk than the other investment products discussed here. The main tradeoff was liquidity.
Treasury bills are backed by the U.S. government, so I regarded the default risk as very low. Selling before maturity could still expose the holder to a different market price. As a bonus, you don’t have to pay state income tax on the interest you earn from treasury bills.
Then there are the interest rates. A one-year treasury bill comes with a return of 2.7% at the time of writing, but this fluctuates over time. Compare that to the measly 0.1% you get with a traditional savings account in some banks.
At the time of writing, a one-month treasury bill comes with a return of 2.36% per year.
The liquidity problem exists. Once you’ve bought a treasury bill that will mature after one year, you can’t withdraw your money until the bill matures. In a bank, most accounts allow you to withdraw your money whenever you want it. All you can do before this period is up is sell the bill to someone else.
For money that was not needed before maturity, I saw the limited liquidity as a useful commitment device as well as a constraint.
For mid-term money, I saw treasury bills as a strong option when their yield exceeded bank rates. I would not use them for an emergency fund that needed immediate access.
Suggested reading: How Much Should YOU Save Per Year? (Examples and Charts)
3. High-Yield Stocks
Stocks are more of an investment than a savings plan.
One of the disadvantages of most investments is that there’s always the chance that you’ll lose your principal. In a bank, whether the interest is low or not, you are assured of the principal amount being safe. Even if the bank fails, your money is insured.
High-yield stocks will give you good yields, typically between 3% and 4%.
However, you should do thorough due diligence before picking the stocks.
Assuming things go well, you will gain in two significant ways:
You’ll receive dividends.
The value of the stock will go up.
If the stock you bought continues to perform well, it will appreciate and you can sell it for a profit. At the same time, as long as you own the stock, you’ll receive dividends.
Risk aside, this is a much better way of saving your money than a bank account. And having a professional adviser can greatly mitigate the risk.
Suggested reading: How To Save $400 Per Month
4. Credit Unions
One of the best alternatives to keeping your money in a bank is a credit union.
Think of a credit union as a group of people who collectively save money and then lend it out to the members who need it. And therein lies the major difference between a bank and a credit union.
A bank is a corporation whose primary goal is to make as much money as possible for shareholders. On the other hand, a credit union is a cooperative whose focus is on the financial well-being of members.
Credit unions offer most services offered by banks. And in many other aspects, the two are the same. For example, up to $250,000 of the money you keep in a bank is insured by the Federal Deposit Insurance Corporation. If the bank collapses, you get your money back. Credit unions offer the same security.
In fact, credit unions are much better than banks in a number of ways.
Since they aren’t dedicated to making a profit, credit unions have more pocket-friendly fees. Their loans are also more affordable, with lower interest rates.
And best of all, when you save money with them, you might earn more interest.
Suggested reading: Can Saving Money Make You Rich?
Credit Unions Offer Better Rates Than Banks
The table below compares the interest rates of common savings products in banks and credit unions:
| Financial Product | Credit Unions | Banks |
|---|---|---|
| Certificate of Deposit (5 year) | 1.00 | 0.74 |
| Money Market Account (2.5k) | 0.15 | 0.10 |
| Regular Savings Account (2.5k) | 0.09 | 0.10 |
| Interest Checking Account | 0.07 | 0.07 |
The figures used in the table above are national averages for the second quarter of the year 2022.
As seen in the table, credit unions are at least as good a place to put your savings as banks. And for money market accounts and certificates of deposit (CD), you’ll get a higher interest rate than you get in a bank.
The table below uses national average data on various types of credit to compare credit unions and banks.
| Financial Product | Credit Unions | Banks |
|---|---|---|
| Adjustable-rate Mortgage (1 yr) | 3.51 | 4.12 |
| Personal fixed-rate unsecured loan (3 yrs) | 8.84 | 9.93 |
| Used Car Loan (4 yrs) | 3.06 | 5.13 |
| New Car Loan (4 yrs) | 2.90 | 4.71 |
The interest rates you pay on loans taken from credit unions are lower.
Assuming the main goal is saving and growing your money as fast as possible, credit unions offer an advantage over banks. However, it’s only a slight advantage.
5. Crypto
At this point, the term cryptocurrency has become almost ubiquitous. Crypto can be defined simply as a decentralized technology for facilitating payments. Instead of having the central bank control currency, crypto is controlled by peer-to-peer networks.
In many ways, crypto is like traditional currency. And just like money, you can hold crypto in a safe or store it in a "crypto bank" where it earns you interest.
Even the very act of buying and holding cryptocurrency, without putting it in a “crypto bank,” can be a way of growing your savings. I’ll look at that before exploring the merits of storing your crypto assets on a platform that earns you interest.
Holding Crypto Can Be a Way of Saving
Since Bitcoin was launched, it has been a great long-term store of value.
While the best savings products in banks gave an annual interest of a meager 2%, crypto growth rates dwarfed every other saving and investment avenue. Between 2020 and 2021, Bitcoin grew by upwards of 1200%.
During that period, Bitcoin outperformed the conventional savings products discussed above. After all, one of the goals of saving is to grow your money.
At its peak in November 2021, Bitcoin was worth over $65,000 a unit. In 2022, Bitcoin plummeted to below $20,000. This drastic drop in value, invariably reflected by other cryptocurrencies, brings me to my next point.
Crypto Currency May Be the Most Unstable Way of Saving
When you save money, you hope for two things:
That your money will be safe.
That your money will grow.
A bank account assures you of safety, but it’s not very good for growing your money.
Bitcoin, on the other hand, does not offer the same protections as a bank account. Personally, I think it can grow in the long term, but that's far from certain.
At the time of writing, Bitcoin is down almost 80% in one year. This was expected, as Bitcoin is a cyclical asset. The dim macro view of the economy, the rising interest rates, and the high inflation are the main reasons for Bitcoin's recent bad performance.
In any case, saving and investing in crypto will remain the same: It will offer huge potential rewards at huge risk.
Crypto Savings Accounts
At the time this article was written, several companies marketed interest-bearing crypto accounts as an alternative to simply holding crypto.
Exchanges and lenders such as Binance and BlockFi offered such services. You gave the company custody of your crypto, and it paid interest in return. These were lending products, not bank savings accounts.
Once you give them custody of your crypto, they can do any of the following with it:
Lend the crypto and earn interest.
Stake the crypto in a certain blockchain to earn staking rewards.
Invest your crypto.
The basic exchange looked familiar, but the protections were very different from those of a bank. Longer lockups often came with higher advertised interest.
Such accounts advertised yields well above ordinary bank rates. The higher return came with counterparty, withdrawal and insolvency risk, and any insurance or depositor protection was not equivalent to a regulated bank account.
Please keep in mind, giving custody to these platforms is risky. If they are hacked, or they go bankrupt, you might lose all your money. We have a saying in the crypto space: "Not your key, not your crypto". This basically means, if you don't hold your own crypto, you don't own it. You should therefore keep custody of your own crypto and not risk losing. Check out this news article to get an example of how terrible it can go.
Decentralized Finance Platforms
Another option discussed at the time was using decentralized finance (DeFi) protocols such as Yearn for variable yield.
DeFi platforms can move deposits between strategies in search of yield.
Protocols like Yearn automate this process. Returns remain exposed to the deposited asset, smart contracts and the strategies the protocol uses.
The strategy you choose determines how much interest you earn.
These products are better understood as high-risk investments than as savings accounts.
Conclusion
It’s possible to keep money outside a bank account, but that is not automatically better. Bank accounts prioritize access and protection, while the alternatives discussed here trade some of that certainty for potential return.
Some alternatives advertised better rates than banks. Credit unions offered comparable protections, while investment and crypto products took substantially more risk.
No single option combines maximum safety, liquidity and return. The right comparison depends on what the money is for and which risks you are willing to take.