With Savings Back in Style, Look Online for Top Yields
If you were given the choice between making $25 or $250 this year on your $5,000 rainy day funds, which would you choose? It's a no-brainer, right? So why haven't you moved your short-term savings to an Internet-only account?
Online banks offer hearty yields--more than quadruple rates offered by bricks-and-mortar banks in some cases. To sweeten the appeal, the accounts are usually easy to navigate with a few clicks, fee free, and typically require no minimum deposit.
While money market accounts offer competitive rates, banks often require $1,000 or more for an initial deposit, will slap you with an additional monthly charge if you fall below a set amount, and might even add on a monthly service fee. As a result, small-time savers opt for a traditional savings account.
But the difference in interest yield between a conventional account and an Internet one is significant. For example, a standard Bank of America savings account currently yields a paltry 0.5 percent on a minimum daily balance of $300, while an online account with HSBC pays a healthy 4.5 percent annual percentage yield on all balances.
When you figure that inflation is currently running 2.5 percent, you'd be foolish not to shop for a high-yield account for your cash. "Every household needs a liquid savings account in a place that keeps up with inflation," says Greg McBride, a senior financial analyst at Bankrate.com. "Without the overhead of bank branches, Internet banks are aggressively passing through higher rates that are hard to ignore."
But inertia sets in. If you're like most savers, you probably never check the interest rate on your savings account. A third of consumers holding more than $10,000 in liquid assets never check their savings rates, according to Forrester Research.
Here's what you need to know to open an online savings account:
Look for the FDIC logo. If putting your cash in a virtual bank account makes you squeamish, keep in mind that up to $100,000 is protected in a bank insured by the Federal Deposit Insurance Corp.
Hunt for high yields online. The highest yields recently ranged from 3.6 percent to 4.75 percent. Interest should be compounded daily and credited monthly. You can shop for yields at Bankrate.com.
Plan for some inconvenience. Online bank services are not swift. The biggest drawback for many consumers is the transaction lag time. At EmigrantDirect, the online branch of New York's Emigrant Savings Bank, initial deposits cannot be withdrawn for 10 business days. Future deposits may be withdrawn after five business days. Funds transferred in or out of the account usually take two to four business days to clear.
Moreover, there's no check writing, access to an ATM, or hand-holding from a teller. So make sure that it's easy to get your questions answered online or with a toll-free call.
Check for higher-yield accounts at your bank. Still reluctant to make a move? See what's available at your existing bank. Citibank now offers an insured e-Savings account with a yield of 4.75 percent to customers who already have a checking account with the bank. That's compared with the anemic 0.7 percent APY doled out by its day-to-day savings account. No minimum balances, free transactions, no-brainer.
This story appears in the May 29, 2006 print edition of U.S. News & World Report.