Sunday, July 22, 2012

Online Savings Accounts

I haven't blogged about one critical tool almost everyone has for their personal finances: the savings account. I've introduced bank accounts before and analyzed what are the important features to look for in a bank account, but I don't think I've specifically addressed which are the best bank accounts to have.  In a savings account, you really only care about 3 things: convenience, security, and returns.  You want it to be easy to use when checking your balance or making transfers, you want to make sure that your money is safe, and you want to make sure that you are earning as much as you can on your savings.

Most online savings banks are fairly similar in terms of convenience and security.  Any large bank should have maximum FDIC insurance coverage and the offerings in terms of tools should be the same.  You want to double check the insurance coverage for any bank account you sign up for just in case, however, and make sure you are comfortable with how to use the account.  For my generation, we are probably more comfortable with managing everything online so make sure you take a look at the website layout for any bank you are considering.  Of course, if you have some other accounts with a bank already, it may be more convenient to open your savings account at that bank.

This leaves returns as the main point of differentiation among banks.  When I think about savings accounts, they generally fall into two categories: brick-and-mortar and online.  When I mean brick-and-mortar, that means the bank generally has a physical location where you can make transactions with your account.  You can generally also make those transactions online, whichever you prefer.  However, these banks have a high fixed cost of maintaining their offices and generally have lower interest rates available.  Online savings accounts, on the other hand, generally cost the company less to manage since they don't have to pay for rent and other costs that are associated with a building.  These accounts generally feature a higher interest rate.

Currently, some of the more common online savings accounts include Discover Bank, American Express, ING Direct, and Ally.  All of these banks don't have a minimum balance requirement.  Discover Bank's online savings account yields 0.80% with a $500 opening deposit.  American Express seems to be slightly better right now with an online savings account yield of 0.85%.  ING's online savings is similar to Discover's with a 0.80% APY.  And Ally has a 0.84% interest rate.  These are commonly the main banks I look at and recently I found an even better account.  Apparently, there is a Barclays online savings than yields 1.00% without any minimum balance requirements as well.

I haven't been extensively looking, so there may be online savings accounts with higher rates than Barclays, but it looks like right now that Barclays is on top.  You may want to consider which bank will have a generally higher interest rate in the long run since whoever has the highest will change from time to time.  Before when interest rates were slightly higher around 1.20-1.40%, Discover was usually on top.

In contrast to these online savings, you can look at a brick-and-mortar bank like Bank of America, Citi, or J.P. Morgan Chase.  These banks usually have minimums and fees and lower interest rates.  The benefit is that you can actually walk into the bank to get assistance if you have any issues and you are more likely to already have an account at one of these places (such as a checking account, which you would need with an online savings account anyway).  Bank of America's savings account charges $5 a month if you go below $300 a month unless you have a automatic $25 or greater transfer from a checking account.  The interest rate is also a measly 0.05%.

Citi is similar with a 0.05% interest rate for its basic account and higher rates for a savings plus account depending on your balance but it also starts at 0.05% if you don't have at least $10,000.  They say that the fees vary depending on the package you pick and you can avoid them by maintaining a $500 minimum for the basic and linking your account for the plus.

Chase has an even smaller 0.01% APY for their normal savings account and a savings plus account that earns higher rates depending on how much you keep with the bank and whether or not you have another account with them that starts at 0.05%.  The first account has a $4 monthly fee unless you maintain a $300 minimum or fulfill other requirements and the plus account has a $20 monthly fee unless you have a $15,000 minimum or link it with another account.

You can tell very quickly the benefits of online savings with the higher interest rate and the lack of a minimum requirement and potential fees.  Brick-and-mortar banks have so many different types of accounts and rates that depend on your balance that it makes it complicated to figure out what is the best option.  The people I've spoken with who avoid online savings say that they are just not comfortable with sending money to some unknown location since they don't have a physical building.  Ask yourself if it is a really big issue since transferring money between an online savings account and checking account is fairly simple.  One downside is that the transfer could take 3-5 days, but if you plan ahead, you can easily reap the higher returns of an online savings account.

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