I’ve recently been getting a lot of emails asking what I recommend for folks looking to open a high yield savings account and, having not kept up to date with the APYs, I didn’t really have much advice other than that they should take advantage of the ING Direct new account referral bonus and then select either FNBO Direct or E*Trade for their main online savings account. (which actually turns out to be good advice)

Until recently, there were a couple folks in the high yield category, including Citi e-Savings, Emigrant Direct, and HSBC. However, just a few days ago the Citi e-Savings dropped their yield down to 4.75% so they are no longer in line with the leaders of the back (I define inline as within a tenth of a percent or so). Unfortunately, ING Direct hasn’t tried to keep up and Emigrant and HSBC are the current leaders in the clubhouse.

Now, HSBC recently announced that they’d offer a promotional interest rate of 6% for new funds until the end of April, giving you a little less than three months of interest earnings – not enough incentive for folks with existing accounts (you lose yield by moving the funds around because of the lag) but it’s a good reason for people without accounts to open one and put their funds there (assuming it will fall back to the 5.05%).

So, in a nutshell, here are where the major (in my mind) online savings accounts stand in terms of interest yield:

• HSBC: 6% until 4/30, then 5.05% presumably. (if I didn’t have an account, I’d open it here)
• Emigrant Direct: 5.05%
• Citi e-Savings: 4.75% – One plus of this account is that you can link regular Citi accounts to it and transfer money very quickly.
• Virtual Bank: 4.6%
• ING Direct: 4.5%

ING Direct & Virtual Bank Referral Bonuses:
If you know someone who has an existing ING Direct or Virtual Bank account (I have both, please email me if you want a referral or go to the self-serve ING Direct $25 Promotion page), they can send you a new account referral and you can earn money for signing up. For ING, you’ll need to deposit $250 and you can get a quick $25 (the referrer gets $10). For Virtual Bank, I’m not sure what the minimum is but you get $20 for signing up (so does the referrer). Once you have an account, you can refer up to 25 people for ING and 50 for Virtual Bank.

Caveats to Online Savings Accounts:
With the high yields come some inconveniences that are consistent with savings accounts but that you may not be familiar with because of how you use savings accounts. For example, there is an FDIC limit of six transfers to and from any one particular savings account (reasons are in the linked post) and there is generally a nearly one week lag for moving funds. The one week lag is because the savings account generally doesn’t having an associated checking account, like you would normally, and so in order to access the funds you’d need to ACH it to another account – that ACH process can take five business days. A workaround is if you have a Citi e-Savings account because you can link it to a regular checking account and the transfer would be internal to Citi and immediate. So, with the higher rates, you have to suffer some inconveniences – it’s not as bad as a certificate of deposit though!

If you want to stay current, I recommend visiting Bank Deals, they do a great job getting the latest and greatest info out to you and they also do a weekly summary that has this sort of information, but in greater detail, which is linked to from their sidebar under Weekly Bank Deals Summary.

Update: My funds are now safely split amongst FNBO Direct, ING Direct, and an HSBC Direct account. (ING Direct is merely my online account firewall with PayPal, so it doesn’t have the same amounts as the other banks)

Right now I have all my savings, including my 0% balance transfer funds, in an Emigrant Direct account. With the latest hubbub about Bankrate lowering their rating to two stars (read the discussion here, hat tip to Tessa to clueing me into it initially), I started to rethink my online savings “strategy.” Tessa mentioned that Emigrant Direct could potentially hold my funds hostage for 30 days and so I thought… I shouldn’t have all my eggs in one basket. (Honestly, if I’m in a bind and need the money, any delay is too long) Right now, 75% of my cash is in that Emigrant Direct account (but half of that is 0% balance transfer money)… which is way too much anyway.

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All the “where to invest $100″ articles telling you to buy CDs and open money market funds are dead wrong. Absolutely dead wrong. Where should you be investing $100? Look for promotional offers from online bank accounts (where you can generate some more income by referring friends and relatives), brokerage firms, and other financial institutions to get the most bang for your $100. Then, after you’ve earned enough through those offers you can start thinking about “conventional” investment vehicles.

Don’t have $100 you want to invest, consider signing up for a credit card that offers statement credits or gift cards that you can convert to money to invest.

To learn more, plow onward!

1. Sharebuilder

First step is to open up a Sharebuilder account using a promotion code that will give you free money. Currently there’s a $50 bonus code 50GO28 if you deposit some funds and make a purchase. Stock purchases are a mere $4 but stock sales are a pricy $14.95. Let’s say you put in $50, make a purchase, get the $50 bonus money, and then sell your stock back at your purchase price. Net result is a gain of $30.05 ($50 less $4 purchase commission and $15.95 sale commission) which is a 60.1% gain on a $50 investment. Now you have $130.05 to invest. Some have reported being able to repeat this process over and over again on multiple promotion codes. I list all of the codes I know of on this Sharebuilder promotion code post.

2. Bank of America

BoA frequently has promotional offers for opening a checking account such as this $50 promotion (MYA). The minimum you need to open most accounts is $100 and account fees are lower if you setup a direct deposit into the account. The “cheapest” account is the MyAccess Checking account which actually has no minimum and $5.95 monthly fee, waived if you have a direct deposit. Once you open an account, the $50 bonus will be deposited into your account within 50 days. Deposit $50, wait 50 days, get the $50 bonus. You can sign up for a BoA promotion every 60 days. According to their representative, the verification department runs a credit bureau report and a report from ChexSystems. After doing this once you’ll have $180.05 waiting to “invest.”

Now you’re on a roll… you can repeat these types of signup deals until you reach $250… (here’s a great list of bank signup promotions)

3. ING Direct

This promotion is for only $25 but it’s an easy $25. Just get someone who already has an ING Direct account to send you a referral (I have some available, hit up this self-serve $25 ING Direct promotion page if you’d like one). All you have to do is deposit $250 and ING will send $25 your way, a quick painless $10% gain with no risk. In return, your friend will get $10. Now, you can give out twenty of your own referrals and start earning a little extra cash with no risk whatsoever. If you get all twenty, that’s $200 in your pocket. So, now you have $450 to “invest,” where to turn now?

4. Virtual Bank eMoney Market

Virtual Bank has a $20 referral bonus, much like ING, except the referrer gets $20 too and you can refer up to fifty people (that’s $1,000 in your pocket, contact me if you need a referral). This offer is available to new accounts only, you’ll have to ACH money from an existing bank account, and the $20 isn’t available for the first 30 days. That’s all pretty standard online banking terms and conditions. So, after your account is approved you’ll immediately be eligible to start referring your friends. After you sign up, refer fifty people and you’ll have $1470 to invest.

Now that you have close to $1500, you should start moving towards conventional investments like investing in those stocks you always get emails about (just kidding!). Vanguard’s STAR fund with a minimum account balance of $1000 is an option but it’s up to you what you’d like to do. You can always peel off some of that money and go back into doing bonuses but at least now you can read “How To Invest $1000″ articles which are typically more exciting.

Want to see an interesting comparison of the interest rates of HSBC, ING Direct, Virtual Bank, Emigrant Direct and the Federal Funds rate in a table and easy to understand chart? Me too. That’s why I stumbled onto a thread at Fatwallet Finance documenting the interest rates of all those savings accounts (there are a couple more that I omitted) I thought a graphical representation would be an interesting thing to see. Historical is in quotes because this only goes back to January ‘05 so it’s not exactly History Channel type depth but I think it’ll suffice.

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