The high interest rates of online banks may be appealing, but before you open an account, it pays to do a little research to learn more about the bank itself.

When Dollar Savings Direct first appeared with its amazingly high interest rate, I know I was one of the first customers to sign up. The 4.00% APY savings account was amazing, as other banks dropped to 3% or lower. I saw the FDIC emblem, I saw that it was affiliated with Emigrant Direct and Emigrant Bank, but I never confirmed it. I did a little bit of research and discovered that it was once branded Banco Fortuna, Emigrant’s aborted attempt into the Spanish-speaking market. I was satisfied and opened an account. Thankfully, astute readers investigated further, even calling up the FDIC, and we learned that Dollar Savings Direct was FDIC insured but shared that protection with Emigrant Direct. In other words, having a Dollar Savings Direct account, for FDIC insurance purposes, was the same as having another Emigrant Direct account, the combined assets would be protected up to $250,000. I did not know that when I opened the account and while it wouldn’t have affected me, I should’ve known.

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If you’re looking for the best CD rates, you’ve come to the right place. Below is a list of the nationally available best CD rates, updated every single day. I looked at the best rates available for CDs of less than 18 months and listed the ones with the highest rate. Typically the longer the term, the higher the rate, but for many online banks the best rates were for periods of shorter than 18 months. For simplicity’s sake, I put the cutoff at 18 months (some banks offer higher rates for longer terms). If you want shorter term CD rates, I have also compiled a list of highest short-term CD rates (less than 12 month maturities).

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The Fed announced in their December FOMC that they were lowering their target federal funds rate “range” to 0.00% to 0.25%, a drop from the former target of 1.00%. While it was seen as mostly a symbolic move, since the actual federal funds rate was much lower than 1.00%, the language surrounding the numbers made it sound like the Fed was willing to do anything to pump up liquidity, including doing something its never done before called quantitative easing. I don’t want to get into the technicalities of everything because for most people, the biggest part of that announcement was that interest rates are going lower.

When the Fed cuts interest rates, the first thing that happens is interest rates on all banking products will go down. As you may remember, savings rates aren’t guaranteed and are variable, they can change at anytime. The same is true for the interest rates on checking accounts, money market accounts, etc. The only rate that is ever guaranteed is on a certificate of deposit (CD) and that’s only locked for the term of the CD.

Emergency Fund

I currently have our emergency fund laddered in CDs at ING Direct so there will be no changes there. I’ve been slowly rolling over CDs each month into an FNBO Direct CD because their one year rates are half a percent higher (FNBO Direct 12-month CDs are 4.00% APY vs. ING Direct 12-month CDs at 3.50% APY), but it’s been slow going since only one CD matures per month. If you don’t have your emergency fund locked into a CD ladder, you should consider it.

Mortgage Rates

Mortgage rates are falling hard. My friend emailed to let me know that his broker has rates for 30-year loans at 4.50% and Wells Fargo has 4.75% listed on their list of today’s rates. Under 5% for a thirty-year loan is absolutely ridiculous. While we’re not in the position to buy another home, if you were waiting on the fence, now is a fantastic time to start looking because the rates are so low. If and when we do have the ability, I hope that these low rates are still around.

Regular Savings

The only rates that will stick are those promotional rates guaranteed by banks. The best example I can think of is Everbank, they’re guaranteeing their 4.01% bonus rate for three months but then they’re going to drop you back down to whatever it is the rates will fall to. Does that mean you should rush out and open an Everbank account? Not necessarily, because we won’t know what the rate is afterwards but that’s the type of high yield savings account that will guarantee a rate for a specified time and still give you the flexibility of moving your funds around. If you don’t lock it into a CD, your rate can change at anytime.

Who knows what will happen in the next few months to the next year with regard to our economy, but the one thing you can be sure of is that banks will be lowering interest rates in the short term.

There have been news reports that Goldman Sachs, which recently became a bank holding company, might be considering opening an online bank as a means to generate deposits. Yesterday, Marketplace did a story about the report and here were some interesting quotes (and you should’ve heard these two guys too):

HOWARD DAVIDOWITZ (retail consultant in New York): This is a company that deals at the highest levels with America’s largest corporations, in the most sensitive sorts of deals, with the wealthiest people in the world. I don’t see how this enhances their brand.

JON OGG (investment advisor): If they want to do that, then they might as well start selling stamps online too.

I loved how these two guys seemed to look down at people who use online banks as somehow beneath them. I’ll take my 100% safe, government guaranteed high yield savings account thank you very much.

There was one quote that I did agree with:

RICHARD SPEER: There’s no shortage of Internet banking offerings. In general, most of those have been very successful in attracting high-rate deposits. They have not been successful in building relationships.

There are a lot of online banks and there isn’t much relationship building going on. I’m going to send my deposits to whichever bank will offer me the highest rates. However, I’d argue that I have no relationship with Bank of America, the bank that I have my checking account with, either. I’d also say that outside of my business checking accounts with M&T Bank, I’ve never had a relationship with any bank I’ve done business with.

Speer is right, if they want deposits, they’ll have to pony up a good interest rate.

Reader Joe recently shared a clever little tactic he and his wife use to “accidentally” save money. The strategy, in brief, involves Joe regularly transferring money from his checking to his savings to cover large planned annual and semi-annual payments such as insurance. When the time comes to actually make the payment, he’ll make it out of his regular checking account if he can cover it there. If he can’t, he pays from the savings account he’s made regular payments to. If he can pay for it out of the checking, then he has just “saved” himself the amount of the payment in the savings account.

In His Words

Here is an explanation in his words and then I’ll talk about why I like this strategy so much:

Jim, I’d like to share our ING strategy with you, I’m curious if anyone else is doing this:

Jen and I set up several ING accounts for some recurring expenses that come up once or twice a year. Then we set up an automatic deduction from our checking account monthly that will give us the total we need by the time the bill comes due. For example:

1. Garbage collection: If we pay for 11 months, we get one month free! That would cost us about $425, so we put $35/month in our ING account and collect interest until the payment is due.
2. Life Insurance: We pay a total of about $700/year between both term policies. So $60/month comes out of our checking account monthly.

And so on……….we have 6 accounts in all. And the money is gone from our checking so we honestly don’t even miss it.

We typically do this for annual or semiannual bills that would total anywhere from $300–$1,000. In the past, we’ve found that if things are tight, these bills (though not terribly huge) tend to show up at the worst times and can disrupt our budgeting and bill-paying in the short term. But this way, the bills become part of our budget every month, just spread out so it’s easier to handle. Otherwise with bad luck we might see several of them come due at the same time!

Here’s The Twist: If the bill comes, and we DO have the money in our checking account, we just pay the bill and leave the money in our ING account to keep growing and earning interest until the next time we may need it. And I have to say, this has been working for about a year now and many times we have NOT withdrawn the money from ING and have steadily increased our savings to over $2,100. We can use this money as part of an emergency fund, or as a downpayment on our next car (I’m dreaming of an electric plug-in hybrid).

Why I Like It

There is nothing exceptionally novel about the idea, it’s the same thing many people do to help manage large regular payments. By dividing out the single payment across multiple payment periods and saving it in a high yield savings account, you are maximizing how hard your money is working.

The twist that Joe mentions is a nice added wrinkle. It’s in part possible because some of the bills are small, only a few hundred dollars, but it’s still a good way to approach saving. I think there are many different techniques you can use to save, whether it’s this one or regular 10% transfers or snowflaking, and it’s best to find the one that fits your financial situation and your personality.

What do you think of this idea?

(Photo: xt0ph3r)

My first concrete memory of E*Trade was during a half-time commercial from a Super Bowl many years ago. The commercial was that of a monkey dancing for about twenty seconds followed by a single line flashed across the screen, “Well, we just wasted 2 million bucks. What are you doing with your money?”

Back then they were primarily a discount brokerage that offered extremely cheap trades compared to full service brokers. Since then, they’ve expanded into banking and now offer one of the most competitive interest rates available in a high yield savings account.

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Kiplinger’s put out their annual 2008 Best List and the best online savings account for 2008 is FNBO Direct. FNBO Direct is the online savings account arm of First National Bank of Omaha (FDIC Certificate #5452), a bank that’s been in business since 1857 (it’s only been “insured” since 1934 because that’s when the FDIC was created). It’s a bank that has weathered its fair share of financial and political storms in those 150+ years of existence and has nary a scratch.

The reasons why Kiplinger named them the best online savings account are the same reasons why I like them – a high interest rate (now 3.25% APY), a simple signup process (it took a few minutes), and a ton of helpful banking features including linking to up to three banks via ACH and online bill payment (with ATM access). The only minus I can think of is the plain and basic interface, but that’s hardly worth mentioning because I don’t need a lot of flash… I’ll take a higher interest rate.

Another bank that has a higher interest rate and similar online flexibility is E*Trade Bank. They offer a 3.30% APY that beats FNBO Direct by 0.05%, have an extremely versatile online system that lets you link up multiple banks, and has the added benefit of instant access to a brokerage account should you want it. The only downside that I see with E*Trade at the moment is that their future is uncertain. The stock price has sunk below a dollar given recent news that they require funds from the TARP in order to stay afloat. Your funds are always protected by FDIC insurance but the spectre of insolvency certainly gives one pause.

Undoubtably, the fact that FNBO Direct has not been in the news probably played a role in their being named the best online savings account. There is such a thing as bad press… especially if it’s about your potential demise!

When Dollar Savings Direct first appeared, I thought Dollar Savings Direct was an Emigrant Direct clone. I chatted with a CSR and learned that it was once Banco Fortuna, Emigrant Bank’s attempt to market to the Spanish-speaking banking market, and merely rebranded in English. While it wasn’t their intent, the end result is clear: Dollar Savings Direct is a clone of Emigrant Direct (both are subsidiaries of Emigrant Bank, FDIC #12054) but with a $1,000 account minimum and a better interest rate (4.00% APY).

Opening a new Dollar Savings Direct account was quick and easy. I did what any sane person would do, I closed my Emigrant Direct account and opened a new Dollar Savings Direct account. Emigrant Direct has a 3.00% APY rate and Dollar Savings Direct offers a 4.00% APY, which leads most high yield savings accounts rates. My plan is to put all new funds into the Dollar Savings Direct account.

On the fact that their clones of each other. On one hand, I’m a little miffed that Emigrant Direct didn’t just fold Dollar Savings Direct into it and just offer the 4.00% rate. On the other hand, it doesn’t really affect me too much as opening new savings accounts don’t affect your credit score (most of the time) and I didn’t have much in my Emigrant Direct account in the first place so it’s not too much hassle.

Savings account interest rates can change. Remember that savings interest rates are not guaranteed, they can change at any time. It’s pretty easy to lock in a much higher CD rate nowadays if you want to go that route. Surprisingly though, since August 30th, when I first looked at them, their rate increased from 3.75% APY to the current rate of 4.00% APY)