Being Online No Longer a Secret

(Edited 29 Aug 2006 at 6:45 pm)

OK, so you have a savings account. How much interest is it gaining? If you’ve decided to go against the grain of the American instant gratification system and opt for the ability to save your way to wealth or park your 3-6 month emergency fund, shouldn’t you be rewarded with more than 0.75% interest? The online banks think you do. Read on…

Perhaps you’ve heard of the concept of the online bank to store savings. I’ve written about it before. These banks are gaining more popularity as people begin to shift their savings into these crown jewels of low risk "investing." The main banks out there are ING Direct, Emigrant Direct, and HSBC Direct, and there are many others—you can check them out at http://www.bankrate.com/. It’s not a good idea to hold large amounts of money in your checking account if it won’t gain interest (which we will address later). Here are a few reasons why you should consider the online banks:

1. The Interest Rates – With inflation eating into your money at about 3% per year, you need to put your money in a place that returns values higher than that. Otherwise, saving a dollar this year would give you a buying power of about 0.96 two years from now. Imagine if you set a goal to save to make a purchase of an item in two years (or maybe even a down payment on a home) and you come to find that inflation leaves you a couple thousand dollars short of your goal at buying time.

So you need a bank that will reward you for saving by keep your interest rate high. Online banks generally have very few (if any) brick-and-mortar locations so their overhead is low. Currently the highest published interest rates for savings accounts in the industry, according to Bankrate are shown below:

Top 5+1 Online Banking Rates (among no fee, $1 minimum banks)

Rank - National Institution	Rate (APY)	Website
1 - UFB Direct Savings	5.26%	www.UFBdirect.com
2 - Emigrant Direct Savings	5.15%	www.EmigrantDirect.com
3 - HSBC Direct Savings	5.05%	www.HSBCdirect.com
4 - Citibank Direct Savings 5 - WaMu Statement Savings	5.00% 5.00%	http://direct.citibank.com Google "5% WaMu"
6 - ING Direct Savings	4.35%	www.INGdirect.com

Moving forward, the Wealth Weekly blog will keep the top 5 (+1) savings rates on the front page, so when you’re ready to jump in, you’ll know the best places to put your money. We don’t advocate rate-chasing (it’s a hassle), but your money should be safely stashed among one of the top 5 performers. For a low-risk “investment,” these accounts provide a pretty significant return.

2. Safety – Tracking your money online is a turn off for many savers who fear that their account information being compromised. However, many of these types don’t think twice about making purchases online (airline tickets, for example), or banking online at their local bank. However, one should take comfort that the big boy online banks have as good or better security than most online banks—in addition they are FDIC insured—meaning that you have a layer of protection of up to 100,000 per bank!

3. No fees – No fees! That may sound weird—the way banks charge fees these days is outrageous. You’re charged money for not having enough money. You’re charged for walking in the door and talking to the human teller. You’re charged for withdrawing your money. (Washington Mutual, excluded of course.) Even the mighty WaMu has jumped into the game, offering 5% APY for accounts opened online (though not advertised heavily). Most of the online banks have no minimums or fees charged for the account. So if you have $1, or $1000, you can open an account and not worry about low balance fees, and you can still get the high interest rates they publish.

4. Account Access. For these banks, once the money has posted to the account, you can usually get it transferred to you in two business days’ tops—if you need it. Its transferred directly into your checking account with no need to eliminate with whom you currently bank. However, it’s best to place only your long-term savings (longer than a month) there to get the superior interest. Therefore, be aware that if you need $1000 by tomorrow for some reason, its best to have that $1000 sitting in checking for immediate access. Depending on which online bank you choose, this may not be a problem either. Some of the banks, including HSBC Direct, Citibank Direct, and provide an ATM card that you can use to withdraw money from any STAR/PLUS ATM instantly, and many reimburse you for fees incurred for withdrawing from a owner’s ATM.

5. Few Downsides

For all the great features of a money-market savings account (that’s what most of these online savings accounts are) there are risks. If you need money for an immediate emergency, it will be difficult to get the money before two-days’ notice. If your “emergency” can wait that long, then you’re in good shape. These banks offer the best return for a low-risk investment like savings. If you’re afraid that your money will disappear or that the dollar will become useless, then this is not the account for you.

Interest Checking?

In addition to high-interest savings accounts, some banks do offer interest checking above a certain amount. The most popular, Presidential Bank, Bank of Internet and Evergreen (also know as Everbank Freenet) offer pretty sound rates, all well above inflation (most banks have 0% interest on checking for most accounts). Careful, there are only about 5 of these banks in existence, and they do come with NSF fees, and some charge monthly fees. You can find more info on Presidential here and the other four banks here.

So, interested?

If this piques your interest, you have several options to choose from. Different banks have different rates (in both Savings and Checking) so make an educated choice. Choose a bank that has returns greater than inflation, which means the return on your money should be at least above 3% (at the minimum). Most online banks start above 4%. Next, make sure the bank you choose fits you. Some banks have high rates but charge fees or minimums/tiers—for instance while one bank may return 5.15% with no fees or minimums, others may return 5.25% but require your balance to stay above $1000.

This site at BankRate provides an excellent table to get you started with the online banking:

Pay attention if you venture into the world of online checking. If you feel safer having a neighborhood brick-and-mortar bank, leave some money there—pare it down to a few bucks above the minimum (if there are minimums). Keeping some money with your bank can build loyalty if you ever need them for a loan. Hopefully, the only thing you’ll need a loan is for a purchase that goes up in value (a home) and not down (a car).Otherwise, don’t feel obligated to your bank. Remember whose money it is!