Long time readers of Bargaineering will know that in the last year I’ve been aggressively consolidating our financial accounts in a quest to simplify my finances. It seems fitting that, for Spring Cleaning Week, our second post of the series should be one about how to consolidate all the financial accounts you’ve accumulated in the last few years.

In an ideal world, you really need one checking account, one savings account, one credit card (debatable), and one brokerage account. We, of course, don’t live in a utopia, we live here. It doesn’t take long for financial accounts to accumulate like knickknacks on your bookcase or mantle. A change in job adds a 401(k), a change of address adds a new bank, and before long you have a dozen financial accounts you don’t even use every month with a few bucks here and a few bucks there.

While most of the battle is in just consolidating, I think that a few tips I picked up may help you in your quest.

A certificate of deposit (CD) is a deposit account that pays you a fixed interest rate over a set period. You can close a CD early and pay a penalty but the bank cannot close it (call it) early, unless it’s a very rare callable CD. CDs are nice because they often represent the highest safe return you can get since those deposits are protected by FDIC insurance.

However, when the difference between a 12-month CD and an online savings account is microscopic, you start to wonder if it’s worth the effort. I took a look at one a major online bank (I won’t say which because I don’t want to update these rates when they change, but they are a “friendly” bank and they have very good rates) and their high yield 12-month CD had a yield of 1.29% APY. Their online savings account offered a yield of 1.09% APY. While a 0.20% APY difference is large in relative terms, it’s tiny in real terms.

0.20% APY on $100 is 20 cents. By locking your savings into a 12 month agreement, you earn an extra 20 cents per $100. I’ll be the first to say that every little bit helps, but 20 cents isn’t going to cut it (this is before you carve out a few cents for taxes!).

It makes me wonder, in this era of high yield savings accounts with rates that rival certificates of deposit, have CDs been made obsolete?

Right now, the best savings account rates aren’t even 2% APY. They’re so low that even those people who are earning nothing, 0%, have very little incentive to move their money! If Bank of America is paying you 0.10% in your savings account, and an online bank is offering 1.50%, do you know how much more money you’d earn if you moved $1,000 over? You wouldn’t even make fifteen bucks more. That’s it. How much is your time worth? Certainly more than $15!

The Federal Reserve is making it hard for savers to save because they’re keeping the target interest rate so low. Why would a bank pay you 1% when they can get it for less than 0.25% from the Fed? It’s a miracle the rate is as high as 1.50%! The problem with trying to find a safe alternative is that in order to get the rewards, you have to take some risks. Savings accounts have zero principal risk because they are FDIC insured, the only risk you face is inflation risk (you earn 1% but inflation goes up 3%, you’ve essentially lost purchasing power) and everyone deals with that.

So what are some “relatively” safe alternatives?
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Pouring the foundation is the first step in building a new house. Ensuring it is level, stable, and on solid ground is more important than any subsequent step in the building process. Your finances are no different. Setting up a stable financial foundation will be paramount in ensuring your finances are in good shape.

Fortunately, the steps towards establishing a sound financial foundation are very easy. The hard part is knowing what those steps are and, unfortunately, those aren’t taught in many schools. I like to think of my financial foundation as the network of financial accounts onto which all my life’s decisions are made.

A good way to think of your financial foundation is to draw a financial network map. A financial network map is simply a picture of all of your accounts and how they are related. If you are starting from nothing (no checking account, no savings account, no credit card, etc.), your map is blank. If you have a couple accounts, draw the map and we can start from there.

Your foundation starts with three different financial accounts:
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Salle Mae Bank, which recently began offering their Sallie Mae online savings account, recently announced they were increasing their interest rate from 1.25% APY to 1.40% APY, putting it near the top of the interest rate list for high interest savings accounts. With no monthly fees, no minimum balance, daily compounding, and a competitive rate, Sallie Mae Bank has made a big splash in the online bank space despite being around for such a short period of time.

Their CD rates are competitive too, if my memory services me right (as of May 11, 2010):

• 12-Month: 1.55% APY
• 36-Month: 2.40% APY
• 60-Month: 3.00% APY

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About a year ago, a new type of checking account start appearing all over the place. They were basic checking accounts with, seemingly, abnormally high yields. It was not uncommon to see them offering over 5% APY on a checking account. Normally, checking accounts offer a very generous 0% APY. In fact, one of the reasons I recommend credit unions is because their share draft accounts, another name for a checking account, usually offer something slightly higher than zero.

When the high yield reward checking accounts first appeared, many people thought they were scams. You had the usual “if it sounds too good to be true” alarms going off but if you read the terms and conditions, it’s clear how they are able to provide such high rates. I won’t go into those details here but if you aren’t familiar with these types of checking accounts, you can click here to read more about high interest reward checking accounts.

I never took advantage of them because none were local and, to be honest, I’m just lazy. I’m curious if you took advantage of them and what you thought of high yield reward checking accounts. They’re still available now, though at slightly lower interest rates, and do current high yield savings account rates make them more attractive?

(Photo: pocheco)

If you have a savings account at SmartyPig, you’ll be happy to learn that in a month they’ll be increasing the interest rate on those accounts. It’s a variable interest rate with two tiers that applies to your aggregate goal totals. If your balance is less than $50,000 then the rate will increase from 2.00% APY to 2.15% APY. If your balance is over $50,000, you will earn 0.50% APY. If you aren’t familiar with SmartyPig, here is my SmartyPig review.

Update: Originally I erroneously wrote that there were interest rate tiers, there are not. If your balance is under $50,000 you earn 2.15% APY on everything. If your balance is over, you earn 0.50% APY on everything.

In banking terms:
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In the last few years, I’ve reviewed several online banks from the gray beard ING Direct to the more recent Ally Bank and Sallie Mae. With each review, there invariably are commenters who are totally against online banks and bring up reasons why it’s a mistake to put your money with an online bank.

They cite reason after reason that brick and mortar is better, failing to recognize that the last online bank to fail was Netbank in 2007 (and hundreds of brick and mortar banks have failed since) and that despite all their concerns, online banks are FDIC insured. Well today I’m going to tackle many of these myths head on and show why they are either wrong or grossly exaggerated.

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If you take the 120 minus your age investment allocation rule to towards retirement, the conclusion is that your investments should mostly be in safe “bond” investments and out of risky “stock” investments. Since you no longer have the time to wait out the volatile swings of the stock market, you are advised to be invested in “fixed income” investments, like bonds.

Unfortunately, even with all the strategies below, nothing replaces the dependability and safety of a high yield savings account. The days of exceptionally high yields protected by FDIC insurance are gone until we see the stock market reach its once lofty heights but hopefully some of these strategies can bridge the interest rate gap without introducing too much risk.

Fixed income investments are usually safe investments that give you a fixed rate of return. The safe part is really a relative term, as bonds are only as safe as the ability for the bond issuer to pay the fixed interest rate. The idea is that you pick stable companies or municipalities and you have a reasonable expectation that the interest will be paid. How do we use those principles to find similar “investments” to boost our savings rate?

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Sallie Mae, normally known for their federal and private student loans, is entering the savings account area with a high yield savings account currently offering 1.35% APY with no monthly fees and no minimums. It’s your standard online bank offering with a pretty standard savings account rates. In scanning their list of offerings, the only thing that stands out is their 10% bonus for Upromise earnings, which can be substantial if you’re a big user of Upromise.

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