With the Fed dropping the federal funds rate like it’s going out of style, the interest rates of many online banks have begun dropping as well. If you’ve been watching, you’ve probably seen many 5%+ fall to the mid 4%’s and many of the banks that once offered in the 4%’s now offering in the 3%’s. So, with all these falling rates, does one’s criteria for selecting the “best” high yield savings account change? Nope.
You might be tempted to swap because of rates alone but the difference of half a percent of interest reduced even further by taxes and fund transfer time. Let’s say you have $10,000 of savings, half a percent on that for an entire year is $50. Cut that down by 25% if you’re in the 25% tax bracket and now you’re talking $37.50 for the entire year. If you consider that the transfer time between accounts is about a week, that’s another 2% off. You’re not talking about a lot of money for the hassle.
So, what criteria do I use for picking the best online savings accounts?
Must Be FDIC Insured – I had to throw this one in there even though it sounds obvious, but always confirm the bank you’re looking at is FDIC insured through the FDIC’s Bank Find tool. I’ve never written about (or used) a US bank that isn’t FDIC insured (or credit union that was NCUA insured), but I suppose there may be some out there. If it’s not FDIC insured, skip it no matter what.
Now, onto the other criteria…
While it may not be worth it to move funds from one account to another, it’s certainly worth it to keep up with the best rates when you’re moving funds out of your 0% APY checking account. The number one criteria for evaluating the best online savings account for you has to be the interest rate. It’s not the only factor, simply the first. It’s not the only factor for a variety of reasons but one big reason is that the rate could change the very next day. High yield savings accounts aren’t like certificates of deposit, there are no guarantees that the rate will remain the same.
Convenience is the next thing I look for in an online bank. Banks that offer both a savings and a checking account, most of them do, win out because I can get nearly instant access to my funds. If a bank only has an online savings account, then to access the funds I’m forced to first transfer them out (takes about five business days for most), and then I can access them. If a bank offers both a savings and checking, I can instantly transfer from savings to checking and then access the funds via the checking account.
If you have a savings and checking account combo, you can start evaluating the bank with the criteria you reserve for regular banks. ATM access, branch access, branch services, etc.
Let’s be honest, brand name banks confer a sense of trust and permanency. It’s like the white coats doctors wear. Despite the recent bank failures and acquisitions, I still think that brand name confers a sense of trust if you recognize it. While your deposits are always protected up to $100,000 by the FDIC ($250,000 through December 2009), if all other things are equal, you want to go with the brand name.
The big names are the same as the big brick and mortar banks (such as Citi, E*Trade) but you have to add in a few of the big online players (such as FNBO Direct and ING Direct, both of which are big banks but not banks that were nationally recognized before their online versions appeared). I irrationally feel more comfortable with a brand name online bank like FNBO Direct and ING Direct than I do with higher interest offerings from WT Direct and UFB Direct, though all are FDIC insured.
While most banks won’t let you “test drive” their online interface, some will offer tours. If there is no tour, read reviews of the banks and pay close attention to what the reviewer says about the interface. Is it quick and responsive? Is it easy to open additional accounts or sub-accounts? Is it easy to transfer money? Is it easy to set up a recurring deposit and cancel a recurring deposit? Is it easy to link external accounts? Does the site load quickly or has it been historically slow? This interface will be one of your own touch points with the bank, you don’t want to be stuck with an antiquated system that’s difficult to navigate.
I have an example of online interfacing trumping interest rate. I have accounts at both ING Direct (2.75% APY) and FNBO Direct (3.25% APY). My emergency fund is with ING Direct because they offered a convenient one-page CD laddering form that helped me setup a CD ladder for my emergency fund. The funds were in there to begin with because ING Direct was the first to offer a high yield savings account, they remain there because of the online interface.
What’s better about a Citi or an HSBC high yield online savings account is that if things go sour online, you can always try to find a branch in your area. Some online banks have extremely robust customer service systems because the phone is your only interface outside of the web, but some do not. Some online banks have better phone systems than brick and mortar banks because they know that the phone is the only other point of contact. Read reviews though if you’re concerned (I’ve never called an online bank, other than to unlock my account) because they are trying to keep their services lean and overhead low so that they can offer the higher interest rate.
What criteria do you use to help pick the best online savings account?