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 doable and has clear advantages like higher returns. While options may come with lower security and convenience, some are worth looking into. Saving decentralized, with credit unions or through peer-to-peer lending platforms are some of the best alternatives.
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 best thing is that, as you give out loans, your money grows. So, you not only save but also get your money to work hard for you. However, P2P lending does come with risks. If the person you’re lending to fails to pay you back, you might lose the money.
Luckily, modern online platforms are reducing the risk and making it safer:
Modern Platforms Have Reduced Risk in Peer-to-Peer Lending
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.
That said, people have built companies centered around enhancing the ease of P2P lending. The P2P lending platforms built by such companies are solutions that work. To begin with, transactions are online. You never have to meet the people you lend money to, making it much easier.
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.
Even better, P2P loan defaults are generally low, about 5%. Not many people default on their loans. And even if one of the people you’ve lent out money to defaults, it won’t wreck your account.
With such low risk and returns that are up to five times the interest you earn by keeping money in the bank, P2P lending is one of the best ways to save money without a bank account.
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.
Treasury bills beat saving money in the bank on every score except liquidity.
Theoretically speaking, nothing is more secure than loaning money to the government. You are “assured” you’ll get your money back. And you’re assured you’ll get whatever interest your money earned. 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.
But since the goal is to save money, the lack of liquidity becomes an advantage. You know that your money is securely held and earning you interest. The limitation on withdrawing the money actually helps you be disciplined in your saving—which is a plus.
With all these factors, treasury bills become an almost perfect way of saving. And they’re decidedly better than a bank account. At least for mid to long-term savings. You should never put your safety net into illiquid assets like treasury bills.
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, it was impossible to save your money in a better way. 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, only ensures safety. Personally, I think it also ensures growth 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.
The best advice seems to be that crypto is not the basket to put all your eggs into. To learn more about crypto investing, check out my articles on crypto here.
Crypto Savings Accounts
Instead of buying crypto and hoping for prices to increase, you can buy it and put it in a savings account.
Exchanges like Binance and crypto companies like BlockFi offer such services. Typically, you allow them to hold your crypto assets on your behalf. In return, they pay you interest.
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.
It works much like a bank, really. And when you agree to lock your assets so you can’t withdraw them for a specific period, the interest you earn goes up.
Such crypto savings accounts can give annual yields of up to 11%. The lowest yields are 3%, which are still way above what bank accounts offer.
Even better, using such platforms helps mitigate the risk that comes with cryptocurrency. Some of them are insured, which adds a level of protection to your savings. Others are structured so that, in case of insolvency, they pay depositors like you first.
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
If you don’t feel like working with crypto saving accounts, you can use decentralized finance (DeFi) platforms like Yearn to get returns of up to 20% per year.
DeFi platforms enable you to switch between high-yield offerings to maximize your crypto earnings.
Platforms like Yearn are automated and make your work easy. Once you connect your crypto wallet to the platform, you deposit some of your assets, choose a strategy, and you’re good to go. You will earn interest denominated in the cryptocurrency that you deposited.
The strategy you choose determines how much interest you earn.
Assuming the value of your crypto stays relatively stable, such platforms can be a great way of saving, especially because they come with high yields.
Conclusion
It’s possible to save money outside of a bank account. It’s also desirable. While saving money in a bank account guarantees the safety of that money, banks have meager interest rates. With high inflation rates, your savings are likely to depreciate rather than appreciate.
There are alternatives to bank accounts, all of which have better rates. Some of them, like credit unions, have the same security.
Others require extensive due diligence and the advice of professionals to ensure safety.
With the right amount of dedication, keeping your money safe while earning healthy returns is possible.
