Pump Up Your Savings With High-Yield Online Savings Accounts
Are you earning at least 4% in your savings account? If NO, do yourself a favor: Open a high-yield online savings account and start adding some serious muscle mass to your savings. Here's the skinny:
There are advantages and disadvantages to using online banks. For many, the little bit of extra headache is worth earning more money each year.
Advantage: Many online banks offer much higher interest rates. This is the primary reason why online banks are so appealing. Dollar Savings Direct, a subsidiary of Emigrant Bank in New York, currently offers 4% APY on their savings account ($1,000 minimum) whereas Bank of America's savings account offers a ridiculously low 0.2%.
Advantage: Online banks are FDIC-insured. You can use the FDIC's Bank Find tool to confirm whether a bank is FDIC-insured but they probably are if they are doing business. For example, ING Direct has been FDIC-insured since August 2000. Never do business with a bank that is not FDIC-insured.
Advantage: Better online banking interface. Since your primary interaction with the bank will be online, the interface is typically better than at your regular bank. This may not be the case for some larger banks with larger IT budgets, but it certainly is true for smaller banks. ING Direct, which has been around the longest, has a very user friendly interface and offers useful tools like a one-page ING CD ladder form that lets you do a somewhat complicated task very quickly and easily.
Advantage: Some traditional banks also offer higher yield savings accounts. With the popularity of online banks, many traditional banks like Citi have started offering higher yield online accounts. What's nice about these accounts is that you get the best of both worlds. A great strategy is to find a traditional bank with local branches and open up a checking account. Link that checking account to the savings account and keep your funds there. This lets you transfer funds from savings to checking instantaneously, answering one of the biggest complaints about online banks.
Disadvantage: It takes several days to transfer money. Most higher yield online banks don't offer checking accounts so the only access you have to your funds is by ACH transfer. Transferring money between banks using ACH can take several days, the actual time depends on the banks involved. This is probably the largest complaint about online banks and you can mitigate this by working with a traditional bank that offer high yield savings options. I personally don't mind waiting a few days for the higher yield because there are no local banks that offer the higher rate account option.
Disadvantage: That better online banking interface is your main point of interaction. Many of the online-only banks can offer higher yields because they have lower overhead. This means 99% of your interaction with the bank will be through the online interface, if you have a particular vexing problem then you'll have to resort to the phone. You won't be able to go into a branch, though that may or may not be such a bad thing!
Disadvantage: Websites can go down. When Emigrant Direct unveiled a new interface several years ago, the website crashed and people were unable to reach their accounts for several days. A server at HSBC Direct crashed a little while back and customers could not access their funds. In both cases, the bank was fine and your savings were secure, you just couldn't log into your account until the website recovered.
Disadvantage: You may let your guard down against phishers. Online banks rely on email as their primary form of communication. With all that bank related email, you may become complacent and drop your guard against email phishers. While banks do put in security features to help prevent this (like those pictures and secret messages), you still need to maintain vigilance against clever phishers.
Get Started: Some places to look at for high-yield online savings accounts include
Dollar Savings Direct (Dollar Savings Direct review)
E*Trade (E*Trade review)
Emigrant Direct
ING-Direct (ING Direct review)
HSBC Direct (HSBC Direct review)
FNBO Direct (FNBO Direct review)
For up-to-date rate comparisons, look at the charts on Bankrate.
At the end of the day, you take the higher yield as long as you don't take on any additional risk. With FDIC insurance in place, I can't think of a significant reason why you wouldn't go with these higher rates. Do you have a favorite online bank? Or do you have a horror story you want to share?
Jim writes about personal finance at Blueprint for Financial Prosperity.
(Photo: foundphotoslj)
Post a comment
Comments:
WaMu *HAD* me at 5% APY ... a week before chase bought them. I'm at a measly 1.5 now...
I just checked my ING and it's at 2.75% Still higher than my checking account bank.
I would feel better about financial advice in this article if the author knew how to write percentages and decimals. In standard notation one does not use both a decimal point and a percentage sign. 4% is not 4.00%. The percent of 100% in decimals comes to the right of the decimal point. 4% = .04 and 100% = 1.00
I switched to Dollar Savings Direct about 6 weeks ago and am kicking myself for not doing it sooner. As long as you aren't pulling from savings that often, it's a great option - and if you are pulling from savings often, you may want to reevaluate how you have your cash flow set up.
I keep about $1000 emergency cash outside the DSD savings account, but any emergency above that I'd just charge and pay off in full, allowing me time to transfer back out of Dollar Savings Direct.
A lot of credit unions offer high interest checking with lots of other features like worldwide ATM fee rebates and limited or no fees on many other bank services. They do this via a program from BancVue.com that basically converts the merchant fee from signature-based check card use into revenue your credit union pays out as interest on your average monthly checking account balance. For example, my credit union (AAFCU.com) currently pays me 4.07% APR on my checking account balance up to $50,000. In exchange I have to receive electronic banking statements only (no paper in the mail), have at least one direct deposit or auto-debit a month, and make 12 signature-based check card transactions a month. Downside: I feel a little awkward using "credit" to buy groceries and small things, and I'm concerned to what extent cash/debit purchasers are subsidizing the merchant fees I profit from. (These are also concerns for people using credit cards to earn frequent flyer points and such.)
eTrade's customer service is terrible. ING has always taken care of every problem I've ever had in one day or less.
I know its FDIC insured but....
didn't ING get tangled in that Madoff Ponzi scheme?
[investmentfraudpro.blogspot.com]
If you use one of these services, how do you deal with things like deposits (of checks and cash), direct deposit, and automatic credit card payments?
They allow for direct deposit, and bill pay, but deposits have to be done to your traditional bank and then you have to initiate a transfer to the high-yield account from your checking account.
I wonder if anyone knows about DollarSavings Direct? I've never heard of them, but 4% is a big difference from the 2.75 I'm getting at ING right now
@danep: Typically you link a more traditional checking account to it, or an online checking account, and deposit checks or cash that way (followed by a transfer). Most will also let you mail in deposits, though I'm not sure I'd do that with cash. Direct deposit isn't a problem and works just like direct deposit with any other bank account (you just use the routing and account number). Some of the online banks will let you make automatic credit card payments directly out of your savings account, but some won't (and in any case, all savings accounts have a limit on how many times you can withdraw money per month). You can always set up an automated or manual transfer of money if you need to do that.
BTW, Bank of America does not just one type of savings account as this article seems to imply. They also offer some savings accounts that are much more comparable to high-yield online savings, but they are mostly accounts offered either to people with larger amounts of deposits with them or to members of "affiliate" programs like AAA, various professional organizations, etc.
I use HSBC and have 3% Online Savings, easy interface and automatic transfers from my normal bank (Wachovia) each month.
I also use Mint.com for one-stop quick updates on all my accounts.
@ironchef: That seems to reference non-bank services (ie, investments, which ING also offers). It also seems like it was just a couple of crooked financial advisers, according to your link.
I prefer ING Direct. They also offer a checking account with no checks, only online bill pay or if you need to pay someone with a paper check, they will send it for you. I believe the checking offers 2% or so and often they have a promotion going of 1% bonus on all debit card purchases.
For another option, check out ShoreBank Direct: [www.shorebankdirect.com]
They provide a 3.5% APY, and have a social and environmental mission as the leading community development and environmental bank in the US.
(Note: ShoreBank is a client of the company that I work for.)
@ngth: it's a good disclaimer...like when NBC does a story about General Electric (their parent company). doesn't make it sound like pure schill...
i have both an hsbc cd and savings account. love them. i've earned hundreds of dollars in interest. right now i have a 3.5% cd account, and i think my savings is at 3%. pretty sweet!
I go back and forth between HSBC and eTrade. Currently eTrade has a 3.01% APR to HSBC's 3% so it is a toss-up. eTrade used to have 3.3% and last spring HSBC had 5% or something like that for a month or two.
The only annoying thing that I have found is that HSBC's security is incredibly inconvenient. So much so that I opened the eTrade account in the first place.
"Disadvantage: It takes several days to transfer money."
Zzzzzt. This is an advantage. It's one of the main reasons I like my ING account. This is what a savings account is supposed to be. Available, but far enough out of reach that I don't blow it on a sale. Just like a piggy bank. I can get at it, but it'll take a hammer and I'll need a new piggy bank when I'm done.
Something else that has really helped my savings has been ING's super easy scheduled transfers. Every time I cut a monthly bill, I set up an automatic transfer for half that amount. For example if I turn off my $60/mo cable I set up a $30/mo auto transfer into my ING savings. At this point I'm putting away about $250 a month with that. Add on interest and pretty quickly those emergency expenses and long vacations don't sound so scary.
I have an EmigrantDirect account, whose rate, like most, tends to fluctuate around the federal rate. So, while a few years ago when I opened it, it was above 5%, it dropped to 2.75% last week. Still better than a B&M bank though.
The few times I've had to take money out of my HSBC savings account through an ATM(which is good in emergencies) all my atm fees are quickly refunded.
I can't recommend anyone ever use ETrade. The customer service is atrocious. Money they're supposed to transfer out (and are counting on) will mysteriously not be. Any money you get in higher interest will be lost when they hit you with imaginary fees for accounts they opened for you that you never even knew existed.
A friend recently got with a $40 yearly account fee even after he told them to close his accounts last year. Well it turns out they'd opened SEVEN different accounts for him (though they couldn't even tell him what they all were) and then only closed one of them.
Took a couple hours on the phone to get them to admit this and (maybe) close them down. I guess he'll find out next year when he gets his next $40 'service' charge.
@tsume: Really? Chase has you at 1.5%? How do I get in on this? They have me at 0.05%. Yes. one twentieth of a percent APY. I've gotten 9 cents so far this year.
I've been very satisfied with my HSBC online savings account, but I'm kind of horror-struck by the image that goes with this post.
some tax exempt muni funds were paying >5% last time I checked.
I'm not sure why nobody ever mentions high interest reward checking accounts. I have one and get 6% interest. I've found them to be an excellent way to manage finances. Because the interest rate is so amazing, I just leave all my money there and I don't worry about overdraft charges ever. Yes, there is a 25000 limit (SO not a problem for me LOL) and you usually have to do at least 10 debit charges a month, but if you're using it as a real checking account that shouldn't be a problem. I'm earning over $26 a month on my measly 5 grand and it's only going up as I let the checking balance rise.
@johnva: That's a good point, I didn't know about these special kinds of accounts so I only took a look at the generic savings account product as a point of reference.
@DidntYouHear: ShoreBank used to comment spam my site (and a bunch of other personal finance blogs) all the time, you should tell them that they should stop that.
@Crazytree: They're also not FDIC insured, so you could lose principle value. Granted, a muni bond is a bit safer than most because the government has taxation powers. But a lot of local governments may be in serious financial trouble right now because of the housing crisis and resulting decrease in property tax revenues. Higher reward = higher risk, for the most part, so keep that in mind.
@danep: Some of them are extensions to brick and mortar banks (ie the HSBC Direct one, which has bank branches in the parts of the Northeastern US) which let you make ATM deposits as well, or that can be linked to traditional checking through their normal branches.
@danep: I have a Capital (tol?) One high-yield savings. They send me an envelope every month with my mailed statement that I can use to mail checks for deposit. I more typically deposit checks at my local credit union, go home, and transfer the funds electronically (which does take a few days), but I have mailed them with no problem. The envelope has a little bar code on it that I assume is for better sorting.
My wife has an ING account. It takes her several days to move money out of it. But it stops earning interest the day the request is made to move it out. So ING gets that few days worth of interest while she's waiting for her money.
In the end, it's a trade-off for the higher interest rate. You have to decide if that's worth it or not.
(disadvantage) This means 99% of your interaction with the bank will be through the online interface, if you have a particular vexing problem then you'll have to resort to the phone.
Offsetting this disadvantage is the fact that some brick and mortar banks (I'm thinking specifically of Citibank) no longer offer any sort of customer service, aside from opening accounts, in the branch. Citibank used to have top-notch customer service, but the last time I went in to talk about my mortgage escrow account because I had not had much luck talking to a non-native English speaker on the phone, the lady in the branch referred me back to the phone support line. :(
i just checked my Bank of America money market account, and it's getting 1.54%
also interesting, saw this on the statement just now:
Important Information for Your Account
Effective 2/9/09, we are changing the Overdraft Item Fee and the NSF: Returned Item Fee. The fee is $35
for each overdraft or returned item. However, you will be charged for no more than 10 items per day.
Bank of America offers services to help you minimize or prevent fees. Sign up for Overdraft Protection
service to transfer available funds from your Bank of America credit card or savings account to help
cover checking overdrafts. To learn more, talk with an associate at your local banking center or call the
customer service number listed.
so, wheee, now when i overdraft, i won't have to pay out more than $350 per day!
so, this is the last weekend before christmas and there are zero posts about it. What happened to you consumerist?
@sleze69:
inconvenient? it's extremely secure...does it bother you to type in two passwords? honestly, just curious.
@DorianApe: 4% most certainly is 4.00%. The only difference is that the latter implies more significant digits.
I usually browse [bankdeals.blogspot.com] for the latest and greatest news on CDs and checking/savings accounts deals.
Still using FNBO Direct and ING here. FNBO had its hiccups but they seem to have gotten their act together.
@tsume: holy crap! I'm glad you mentioned it's @ 1.5%. Time to go talk to one of the ones on list...
HSBC was at 5% APY when I signed up. It is now at 3%. I am not happy at all with this, but it's lightyears better than the miniscule APY I had in my Chevy Chase savings account.
Holy crap I had no idea emigrantdirect's online savings account's interest rate dropped so low (2%) And Dollar savings direct (a subsidiary of emigrantdirect) is at 4%! DOUBLE!
I'm switching over today!
Or if you were smart you would just get out of the US Dollar completely before it collapses.
I use HSBC Direct for emergency savings and ING Direct for rent payments (or at least it will be used for rent payments when I find a decent place) and I have payroll deductions made accordingly to each account. It really makes budgeting simple.
We use ING for all our mid term and long term savings goals. We use a combination of ING savings and ING CD ladder.
Our work around for the 2-3 day transfer delay is to keep $1000 in our Wachovia savings account. Our Wachovia savings earns bascially nothing in interest but we use it as our overdraft account and in case we need cash quick.