How to pick the best online savings accounts
Posted
Nov 11 2008, 09:39 AM
by
Karen Datko
Rating:
This post comes from partner blog Blueprint for Financial Prosperity.
With the Fed dropping the federal funds rate like it's going out of style, the interest rates of many online banks are dropping as well. If you've been watching, you've probably seen many 5%-plus rates fall to the mid-4% range, and many banks that once offered in the 4% range are now in the 3% range.
With all these falling rates, do the criteria for selecting the best high-yield savings account change? Nope.
You might be tempted to swap because of rates alone, but the difference of half a percent of interest is reduced even further by taxes and fund-transfer time. Let's say you have $10,000 of savings. Half a percent on that for an entire year is $50. Cut that down by 25% if you're in the 25% tax bracket and now you're talking $37.50 for the entire year. If you consider that the transfer time between accounts is about a week, that's another 2% off. You're not talking about a lot of money for the hassle.
What criteria do I use for picking the best online savings accounts?
FDIC-insured. I had to throw this one in there even though it sounds obvious, but always confirm that the bank you're looking at is FDIC-insured by using the FDIC's Bank Find tool. I've never written about (or used) a U.S. bank that isn't FDIC-insured (or credit union that isn't NCUA-insured), but I suppose there may be some out there. If it's not FDIC-insured, skip it no matter what.
Interest rate. While it may not be worth it to move funds from one account to another, it's certainly worth keeping up with the best rates when you're moving funds out of your 0% APY checking account. The No. 1 criterion for evaluating the best online savings account has to be the interest rate. It's not the only factor, simply the first. It's not the only factor for a variety of reasons, but one big reason is that the rate could change the very next day. High-yield savings accounts aren't like certificates of deposit. There are no guarantees that the rate will remain the same.
Convenience. Banks that offer both a savings and a checking account -- and most of them do -- win out because I can get nearly instant access to my funds. If a bank has only an online savings account, I'm forced to first transfer them out (it takes about five business days for most) before I can access them. If a bank offers both savings and checking accounts, I can instantly transfer from savings to checking and then access the funds via the checking account.
If you have a savings and checking account combo, you can start evaluating the bank with the criteria you reserve for regular banks -- ATM access, branch access, branch services.
Brand name. Let's be honest. Brand-name banks confer a sense of trust and permanency. It's like the white coats doctors wear. Despite the recent bank failures and acquisitions, I still think that brand name confers a sense of trust if you recognize it. While your deposits are always protected up to $100,000 by the FDIC ($250,000 through December 2009), if all other things are equal, you want to go with the brand name.
Online interface. While most banks won't let you test-drive their online interface, some will offer tours. If there is no tour, read reviews of the banks and pay close attention to what the reviewer says about the interface. Is it quick and responsive? Is it easy to open additional accounts or subaccounts? Is it easy to transfer money? Is it easy to set up a recurring deposit or cancel one? Is it easy to link external accounts? Does the site load quickly or has it been historically slow? You don't want to be stuck with an antiquated system that's difficult to navigate.
I have an example of online interfacing trumping interest rate. I have accounts at both ING Direct (2.75% APY) and FNBO Direct (3.25% APY). My emergency fund is with ING Direct because it offers a convenient one-page CD laddering form that helped me set up a CD ladder for my emergency fund. The funds were in there to begin with because ING Direct was the first to offer a high-yield savings account. They remain there because of the online interface.
Offline interface. What's better about a Citi or an HSBC high-yield online savings account is that if things go sour online, you can always try to find a branch in your area. Some online banks have extremely robust customer-service systems because the phone is your only interface outside of the Web. Some do not. Some online banks have better phone systems than brick-and-mortar banks because they know that the phone is the only other point of contact. Read reviews if you're concerned.
What criteria do you use to help pick the best online savings account?
Other articles of interest at Blueprint for Financial Prosperity:
11 sure-fire ways to save on shipping
On avoiding student loan payments
Avoid these 3 'short-term' loans
