One of the most annoying things in personal finance is opening a bank account and then seeing the interest rate drop. This happened very often in the falling interest rate environment of the last year and a half. I remember opening an online savings account only to see the rate fall the next day! It’s not bait and switch, it’s not sneaky, and banks don’t do it on purpose because nothing stops you from leaving. Interest rates aren’t guaranteed. It’s just how it is.

There is only one thing more annoying than falling interest rates, it’s rising interest rates after you’ve opened a new certificate of deposit! With CDs, if you close one before it matures, you will pay a penalty of three to six months’ interest. Again, it’s not bait and switch, it’s just the nature of fluctuating interest rates.

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If you are looking for a high yield savings account to earn more money, you have come to the right place. This page will give you three of my choices for the best online bank along with their rates, a list of comparable banks, and between the two you will find a savings account that will beat your current one.

High yield savings accounts are the rage these days, with people pouring billions of dollars into banks and certificates of deposit. A few years ago, the only online bank with a high yield savings account was ING Direct. At first I was a little apprehensive – an entirely online bank with no physical branches I could visit? But they were FDIC insured and it’s turned out well. Since then, dozens have popped up to offer high yields because they run leaner than traditional brick and mortar banks. No branches, no tellers, no managers, no paper statements – all result in higher yields.

Enter in a new class of deposit account – the high yield savings account. It follows all the rules of a regular savings account except the bank running it is cutting costs wherever it can and passing it along to you, the customer, in higher interest rates. So which online banks offer the best high yield savings accounts?

Best High Yield Savings Accounts

Everbank’s 2.51% Bonus Rate

If you’re looking for the best rate you can get from an a high yield savings account, Everbank is the one for you. Right now you get an interest rate of 2.51% for three months, which is certainly among the highest, and the initial deposit requirement is only $1,500. You only earn the bonus rate on the first $50,000 you deposit, anything over earns 1.50%. EverBank, along with every bank on this site, is FDIC insured since 1998 (FDIC Cert. #34775) up to $250,000.

In terms of accolades, they have collected several in their years in the business. Kiplinger’s Personal Finance once named them the “Best Checking Account” because their yields were often 10X that of industry averages while Money Magazine named them a “Best of the Breed.” For five years in a row, Forbes.com named them the “Best of the Web.” This isn’t a bank that will pull a bait and switch, they’ve been here for a while and their reputation speaks for itself.

Ally Bank

A relatively new entrant into the online savings account world is Ally Bank. Ally Bank is an online bank that’s been FDIC insured since August 2nd, 2004 under FDIC Certificate 57803. They are a unit of GMAC Financial Services and was once known as GMAC Bank before changing their name in May of 2009. The reason I like Ally Bank is because they have no minimums on any of their deposit accounts, they offer plenty of options from an online savings account to no penalty certificates of deposit; all of which are at market competitive rates. They are certainly worth a look.

Click to apply for an Ally Bank account today!

Best High Yield Savings Accounts Rates

I’ve compiled a list of the best of the best FDIC insured (now up to $250,000 through December 2013) banks below.

* Everbank offers 2.51% promotional rate for the first 3 months, then 1.77% thereafter.

Are these online banks safe? Yes, they are FDIC insured and you can confirm that with the FDIC’s Bank Find tool. In fact, with all the bank failures lately, you might be surprised to learn that not a single one was an online bank.

Every week I get an email from Ally Bank informing me of how the rates will be changing (Ally Bank rates are adjusted on Fridays) and their rate structure has been confusing me as long as I’ve been getting these emails.

Ally Bank’s Savings & CD Rates

• As of August 28th 2009, their current online savings account interest rate is 1.75% APY.
• As of August 28th 2009, their current 9 month CD rate is 1.55% APY.
• As of August 28th 2009, their current 9 month no-penalty CD rate is 1.85% APY.

Rates are subject to change, here are the current Ally Bank CD rates.

Why Is This Weird?

Typically, your online savings account interest rate should be the lowest of the three. Next would be the 9 month no-penalty CD rate followed by the regular CD rate. You should get a lower interest rate on the account with the most flexibility. Since you withdraw money from a savings account at any time, you should be paid the least amount of interest in that account. Since you can withdraw your money from a no-penalty CD at any time without penalty, it should have a lower interest rate than a regular CD, where you would have to pay a penalty to access your funds.

Ally Bank has had this interest rate irregularity for a while now but recently it’s come back in line.

So What?

If you have money in Ally Bank’s online savings account, you should open a 9 month no-penalty CD immediately and transfer all your funds into that CD. Should the online savings account interest rate ever increase past the no-penalty CD, then you could liquidate the no-penalty CD without penalty. If you need the money, you can liquidate the no-penalty CD.

In fact, the best strategy would be to open up multiple no-penalty CDs so that if you do need the cash you don’t have to close out one big CD. Ally Bank does not have a minimum for CDs. For example, if you have $5,000 to save and you aren’t sure if you need the money. Open up five $1,000 no-penalty CDs. If you need $500, you can just close one of the CDs. If you opened up one single $5,000 CD, then you’d have to liquidate the whole to get access to just $500.

Am I missing something?

We have twelve bank accounts.

You read that correctly, we have twelve accounts.

Ally Bank, FNBO Direct, ING Direct, HSBC Direct, Bank of America, M&T Bank, … the list goes on.

We also have a dozen credit cards. Citi, Discover, Capital One, … again, the list goes on.

We have so many accounts because we’ve slowly acquired them over the course of the last ten years. Our financial network map is an intricated mess despite our best efforts to simplify our personal finances.

That’s why we need to hit the reset button on our financial life.

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How much money do you have sitting in a savings account? $500? $1,000?

Do you have plans for that money? If not, it should be in a certificate of deposit at your bank. If your bank doesn’t offer good CD rates, then you should open a CD with an online bank and take advantage of their better interest rates. If you don’t think you have enough money, you’re wrong. You can open a CD at an online bank with a single dollar.

One dollar.

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Ally Bank was the first online bank to offer a no-penalty certificate of deposit and now it appears that the idea is catching on. Discover Bank will announce tomorrow that they are making their 12 month CD a no-penalty CD, where you can withdraw your funds should you involuntarily lose your job. All new and renewing account holders will get this benefit (existing account holders won’t, I assume because neither party can change the terms before maturity).

What is a No-Penalty CD? If you read my Certificate of Deposit Zoo post last week, then you’ll know that no-penalty CDs are ones where you can withdraw your deposit before the CD’s maturity date without any interest penalty. Normally a CD will charge you 3-6 months worth of interest to close it early, no-penalty CDs let you close your account.

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Two weeks ago, I applied for an account at Ally Bank, the new rebranded name for GMAC Bank. Their rates have fallen in recent weeks but are still competitive, so I wanted to open an account to take advantage of certificate of deposit rates while they were still strong.

Ally claims the account opening process takes only 10 minutes, which, after my experience, is probably accurate if you don’t run into any problems (more on that later). It’s also important that you have all the information present, including but not limited to your social security number, your driver’s license, and any banking information for the accounts you want to link to your Ally account (ABA routing number, name, account numbers, etc.) It’s all fairly standard stuff.

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If you look at Ally Bank’s current rates, there appears to be a discrepancy in the way they’ve structured their rates. I tweeted about this last week and it appears the difference in rates has persisted through a recent rate drop, making it doubly curious. Let me explain what I mean.

As of today (June 22, 2009), here are the current rates of several of their products:

• Traditional 9-month CD: 1.75% APY
• No-Penalty 9-month CD: 2.15% APY
• Online Savings Account: 2.00% APY

Two things surprise me:

1. A traditional CD should never have a lower yield than a no-penalty CD of the same maturity. With a no-penalty CD, you have the right to close the CD before the maturity period without penalty. The bank can’t close it. You should be paying, through a discount on the interest rate, for that flexibility. When the no-penalty CD first debuted, its interest rate was a tenth of a percent lower than the traditional CD’s rate.
2. The no-penalty 9-month CD with a higher yield than the online savings account represents an opportunity. We’re in a period when rates on savings accounts and CDs are dropping. However, should rates ever make a turn and start rising, being locked into a CD might be bad news. However, with a no-penalty CD, I can close at anytime so the risk is minimal! There is no reason why someone should keep their funds in an online savings account when the same exact bank is offering a no-penalty CD option with a higher interest rate.

This morning I transferred all my funds from my Ally Bank online savings account into the 9-month no-penalty CD to get that extra 0.15% APY. If the two accounts weren’t at the same bank, I wouldn’t have done it because the transfer time would’ve cost me interest. However, anytime someone is willing to give me a $2 bill in return for a $1, I take it.

Is there something I’m missing?

In mid-May, GMAC Bank changed its name to Ally Bank. With General Motors in the news every day for something negative, it’s hard to do business when everyone thinks you’re about to go out of business. The funny thing about it all is that GMAC Bank’s parent company, GMAC Financial, hasn’t been a part of General Motors for several years. When you have financial companies in distress and auto companies in distress, a bank that people think is inextricably linked to auto company is in some deep trouble.

So, they changed their name.

But are they a good bank to do business with? Let’s find out.

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(Updated 11/6) I’ve been keeping a list of the best CD rates for certificates of deposit in the 12-month to 18-month maturity range, figuring that’s typically the sweet spot for rates. If the CD maturity is too short, banks won’t give you a good rate because it’s such a short period of time. If the CD maturity is too long, the customer is taking on a lot more inflation risk than the bank is probably paying out for. However, short term certificates of deposit still have their place:

• You’re setting up a CD ladder and you need CDs to fill up those short period slots.
• You have funds in an account that currently isn’t earning the highest yield for savings, transferring the funds will take time and cut down on your interest earned… so you might as well throw it into a short term CD to get a better rate.
• You simply don’t want to rate chase and open up a new account with each new online bank that offers a high rate, so you might as well hit up a short term rate with the bank you’re worth just to get a little extra.

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