High Yield Savings Account

Before the economic crisis began in late 2007, high yield savings accounts averaged up to 5 percent interest, with online savings accounts providing the greatest opportunities for returns. Unfortunately, as of press time in January 2010, you’ll be hard-pressed to find a savings account with a percentage like that. However, this will change as the economy improves.

There are a number of reasons some banks offer high yield savings accounts and others don’t.

• Special introductory high interest rates to capture your business. These promotions are extended to new customers only, offered on certain minimum deposits, or combined with a checking account.
• Some banks are better funded than others. The banking regulatory agency FDIC allows some banks that have more capital to offer interest rates about the national average. Because of this, the bank is in a better position to offer you higher interest.
• The bank may count on your business in other ways. For example, the number of checks written per month, debit usage, ATM withdrawals, and other fee-based services are easy profit for a bank.
• Overhead may be low. Online banks are popular high yield savings options because they don’t have the typical expenses brick-and-mortar banks have. This increases the bank’s profitability, and some try to pass that savings on to you.

As we stated above, the state of the economy at press time has weakened high yield accounts. As of January 2010, the average rate for savings accounts is as low as .75 percent, and as high as 1.47 percent. It will take a long time to see interest rates reach 5 percent or higher again.

However, it’s important to save. Conventional theory recommends putting money away where you’ll earn something on the investment, rather than stashing money under the proverbial mattress. But before you open a savings account, answer the following questions:

• What am I saving for? This is the most important question. Do you need an emergency savings account with immediate access or are you establishing a cushion in case your income is reduced? Experts advise having at least two different savings accounts: one set up as an emergency fund and another for larger goals. Keep in mind that a high yield savings account is not a replacement for a more lucrative long-term investment, such as stocks and bonds.
• How quickly do I need to access the money? You can walk to your local bank and withdraw money from your savings immediately. Online banks sometimes take up to three days to process the transaction.
• Am I saving a certain amount for a larger investment? This means you won’t need to access the money any time soon, and can look for low-fee options that help you save a lot to reach the next stage.

Also, make sure to research the following factors:

• How long has the bank been in business?
• Is the bank FDIC insured?
• Is the advertised rate a promotional rate? If so, what will the rate be after the promo period?
• Is there a minimum deposit required to secure the rate?
• Will the rate reduced if the account falls under the minimum?
• What is the fee structure?
• Are there any hidden fees?
• How accessible are your funds?
• If dealing with an online bank, how secure is the site?

Do more research on financial institutions on sites such as Money Rates.com and Bankrate.com.

A number of banks offering the highest yields right now are online institutions. Many are long-established companies that either have brick-and-mortar locations and diversified online offerings, or are only online institutions. Here are some top options.

• Ally is currently offering 1.49 percent APR, no minimum balance, and no monthly fees.
• Dollar Savings Direct, a division of Emigrant Bank, has a 1.50 percent APR right now on a $1,000 minimum deposit and no fees.
• Emigrant Direct has 34 branches in New York City metro and online options as well. The current offering is 1.20 percent with no minimum deposit and no fees.
• Everbank has a promotion at press time of 2.25 percent for a new money market account (quite similar to a savings account) for three months. After that, the rate drops to roughly 1.7 percent for one year.
• HSBC has locations around the world, and extends an online savings account for 1.35 percent with no minimum and no fees.
• ING Direct Orange Savings offers 1.25 percent with no fees and no minimum.

There are some financial blogs which do a good job explaining high yield savings accounts and the options available. A couple to review include Get Rich Slowly and The Smarter Wallet.

If you’d like a higher interest rate on your savings, try a certificate of deposit, or CD. Banks secure the rate because you agree to keep your money in a CD for a set period. For example, an 18-month CD may issue 2.5 percent interest monthly or quarterly. At press time, CDs averaged twice the interest rate of the highest-yielding savings account. If you don’t need immediate access to some savings, a CD may be a better option.

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