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Best Online Banks: It’s Not Just About Rates

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Hand Painted Piggy BankA few years ago, the only high yield online savings account available was ING Direct. Their rates blew people’s minds. Until then, the only way to get that type of interest rate on an essentially 100% risk-free asset was to lock it up in a 60-month CD. Even today, check out the rates for CDs of your local bank and you’ll be hard pressed to find one under 60 months that comes close to beating the rates of high yield online savings accounts.

Now the landscape is slightly different (and more crowded). There are half a dozen reputable banks offering these high yield savings accounts and they differ by fractions of a percent. At the moment, FNBO Direct, HSBC Direct, and E*Trade all have competitive rates. You would do far better with your funds in any one of those banks than in the one you’re in now (probably).

On Interest Rates

Despite what you may think, interest rate isn’t everything when you’re trying to decide which online bank to put your deposits. It’s important, but there are many other features to consider. Even if you had the FDIC limit available to save in an account, the difference in interest earned between a 3.50% APY and a 3.00% APY is $500 before taxes. If you’re in the 25% tax bracket, that’s a take home difference of $375. You might say – that’s nearly $400, that’s a big difference! Remember that’s on a balance of $100,000… if you’re putting in $10,000, that’s only a difference of $37.50. If you’re talking $5,000, that’s a difference … you get the idea.

Interest rates change frequently. Between when I opened my E*Trade account and when I funded it, the rate fell from 3.50% APY to 3.15% APY (it’s now that 3.30%). Unlike CDs, there is no guarantee on the rates. You get whatever the bank feels like offering. So if you pick a bank based on rate alone, you could be making a mistake because those rates chance quickly.

Don’t decide on rate alone, it’s the features of the account that are important. Those features will help you in save more.

Feature Set

Linking High Yield Savings Accounts:
I was surprised when HSBC Direct let me link my HSBC Direct account with my ING Direct account. The ability to transfer from one high yield savings accounts to another is great, it cuts your transfer time in half (the alternative is to transfer to an intermediary checking account). I was surprised because many other accounts don’t let you do that. You can’t log into an ING Direct account and link it to the HSBC (or E*Trade or Emigrant Direct) account because they require a paper check. In fact, to my knowledge, only HSBC Direct (of the major banks) lets you link up to other online savings accounts (I could be wrong).

Corollary: Linking to Brokerage, Checking Accounts:
The one advantage E*Trade has over the competition is that you can link your savings account with a brokerage account. This allows you to transfer funds instantly between the two, so you’re earning the best possible rate on your cash. E*Trade also has a checking account and that can be linked to the savings account, maximizes the rate.

Washington Mutual, E*Trade, and ING Direct all offer a high yield checking account, in addition to the savings account. You can get checks, an ATM card, and access to your funds whenever you need them. WaMu has the added bonus of brick and mortar branches, if you have one nearby then that’s a definite plus.

Create Additional Accounts Easily:
ING Direct makes it absolutely painless to create sub-accounts. Each of these accounts have their own account number, but they are managed through one customer login. This is valuable because it helps you save more money. If you are able to create a new account for each of your savings goals, you’re more likely to actually save. Planning a cruise over the holidays this year? Open the Carnival Imagination 2008 account, schedule monthly transfers, and start packing your bags. You’re more likely to save because: 1) you’ve made it automatic with monthly transfers, 2) you can see the account grow, rather than seeing some master account grow and “remembering” some of it is earmarked for the trip (or your children’s education, or a new house, etc.)

ING isn’t the only bank that offers this, HSBC does too (Emigrant Direct does not), but they are definitely the easiest.

Promotions:
This is the least important “feature” about a bank. ING Direct has had a standing referral bonus of $25 for new accounts. Click a referral link, deposit more than $250, and you’ll receive $25. The referrer earns $10. HSBC used to run a $50 promotion that expired several months ago but, to my knowledge, no one else has ever run that type of promotion.

The Best Online Bank

The best online bank is the one that has the features you need. If you have savings goals and are having a difficult time achieving them, perhaps ING Direct is your best option. If you don’t need the help and want the highest rate, HSBC Direct has the highest rate.

If you want the flexibility of checking, ING just released their checking program while WaMu and E*Trade have had checking products for quite some time. If you have a checking account at the same bank you have the high yield savings, you can transfer between the two instantaneously (plus the interest rates on the checking accounts are far superior to standard rates).

So don’t pick a bank on interest rate alone, pick the one that offers the types of services that will help you reach your goals.

(Photo: jbhill)

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11 Responses to “Best Online Banks: It’s Not Just About Rates”

  1. tim says:

    i’m sorry, but this is the kind of idiotic rationalization that people who vehemently defend ING with its lower interest rates than the competitors use all the time. Why is it that when it comes to savings interest rates for high yield savings accounts, people seem to be matter of fact and very forgiving of the interest rates, but when it comes to interest rates that you owe on debt or paying in fees or expense ratios, etc., people are very acute to the interest rates? .5% in one given year may not be anything when you break it down as you have done over only one year; however, we don’t do the same “its only a slight difference more” logic when we talk about expense ratios from one fund to another, or an interest rate that you owe on a mortgage, car, or any other consumer credit. God, if someone said that they were paying .35% expense ratio on an index fund compared to a .15% vanguard index fund expense ratio, people would be tripping over themselves with 8×10 glossy photos and graphs (arlo gutherie anyone?) calculating how much over the long term that you would be losing out on because of the higher expense ratio. and that is only a .2% difference.

    or if someone is paying 6.5% mortgage, people would be going ballistic saying that you need to improve your credit so you can get a 6% mortgage. or people will be saying you should lower your credit card interest rate as much as possible so you don’t waste your money on paying interest

    it’s all about scales, but let’s not forget $1 is $1 whether you are paying it or are earning it no matter how you are paying or earning it. it’s part of the whole psychologimaculation thing where $5 off or earned on $10,000 is perceived to be less than $5 off or earned on $10. It’s still $5 either way.

    really, i get tired of hearing people trying to rationalize the interest rate differences between savings accounts. It is a bunch of hogwash and utter nonsense. if you stick with one bank over another for aesthetic reasons, that is fine and is your choice, but don’t couch the reason in terms of interest rate rationalization.

    Stage left depart soapbox…

  2. tim says:

    p.s. i’m not saying Jim is defending ING here, because I was making a general statement about people who stick with ING using the argument when there were .5% to 1% differences.

  3. jim says:

    For the 100% disciplined, interest rates are what matter. There’s a reason why someone like Dave Ramsey is popular with his “debt snowball” idea. We are not always rational, some less frequently than others, and sometimes the fastest way for someone to reach their goals is to do something irrational.

    I’m not defending ING here, I didn’t read what you said to imply that you thought I was, but they do have some good features. They are features you can find elsewhere but you have to weigh how much each feature is worth to you and decide from there.

    For me, the bottom line is what matters, the rest is merely icing. For some others, the icing is the cake. As long as you’re aware there are non-financial differences between the banks and you make an educated and active choice, I think you win out.

  4. B.B. says:

    I have accounts at both eTrade (3.30%) and ING (3.00%) and have successfully linked them to each other. I can send money to eTrade from ING and vice versa. They’ve made it pretty simple really, just give the necessary numbers and go through the trial deposits verification and your off. And you’re right, it’s awfully convenient.

  5. B.B. says:

    I should note that ING says they will only link to checking accounts, but I lied and said my savings was a checking and it worked just fine.

  6. MBL says:

    That is a terrific point about setting up accounts at high-interest banks to link back and forth so we can ping pong our money during the times of rate cuts and increases to take advantage of the increased interest rates.

    I hadn’t thought of that. Only a month ago, I realized I would be earning more interest if I moved a majority of my funds in my ING checking account into my ING savings account.

    I think it is a matter of preference regarding which bank to stick with. After all, too many banking accounts can hurt your growth efforts more because of having too many eggs.

    I am going to check HSBC out. Thanks for the terrific post.

  7. cm says:

    i have over 100 accounts at ing. i do this to track spending. no other bank has been so accomodating.

    granted, i use other banks for savings.

  8. saladdin says:

    If people made every choice based only on numbers then there would be less marriages.

    No person, anywhere, makes every money decision based only on numbers. It is not our nature. To suggest otherwise is just nonsense. As much as I disagree with Ramsey, the reason he is a millionaire is that he understands the human, emotional side of money and makes no qualms about it. So much of spending is emotions. And so is picking a business to give our money to. If it wasn’t then “customer service” would not exist at all in the business world.

    saladdin

  9. Lee says:

    Thanks so much for timely article, since I have been trying to find bank to put my 80k, which is currently at a bank that has zero interest. Hopefully, this can change after I read your article. :)

  10. Elizabeth says:

    FYI – WTDirect (rate is 3.26%) allows users to link other high yield savings accounts to your WTD account.

  11. will says:

    Update your information!!! Wamu is out of business!!!


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