If you’ve read any personal finance blogs, you’ve likely encountered bloggers extolling the virtues of HSBC or ING or GMAC or ASAP (totally made that last one up). Online savings accounts offer drastically higher rates than most brick and mortar banks. They can do this because they save money by only having an online presence. They don’t have to pay for the branches, the tellers, or that stale coffee and Styrofoam cups way off in the corner for the little old ladies coming in to open a CD. If you don’t have an online savings account, you should seriously look into getting one.

Now, the downside is that you can’t walk into a corner branch and use the ATM or ask a teller for help on this account (usually), if you ever need it. But the benefit is the much, much higher rate. And if you don’t believe me take a look at this.

Here are the yields for a few popular online savings accounts right now (as of 9/10/06):

Not too shabby.

Now, let’s take a look at a few brick and mortar banks.

Quite frankly, you’re pouring money down the drain if you keep money in these accounts.

Now, keep in mind that these accounts are best used for short-term savings, such as an emergency fund (or an “I’m gonna use this money to run around Asia and get piss drunk” fund). Your long-term savings, such as retirement funds, should be kept in higher yielding investments, such as index funds or high-yield bonds. But back to the savings accounts.

ING Direct used to be the only game in town, but as online savings accounts have grown in popularity, other banks have joined the game, which is great news for us. Of course, now with so many different accounts available, it’s often hard to know which one to pick. And that snazzy account you just opened last month that was the highest rate in the land at the time, might not be next month as a new bank comes along and offers a better rate (bastards)!

And interest rates aren’t going to be the only consideration. There may be convenience factors involved or other benefits you might get from staying with a certain bank. So it’s hard for me to recommend one certain account for everyone.

I’ll tell you what I do and why I do it. You should be able to see the things you need to consider when choosing a bank.

I keep all my adventure fund money in a Citibank e-savings account.

It currently yields 5.00%, which is pretty good. There are a few other banks that offer a higher rate, but I don’t bother chasing them. Here are the main reasons why:

  • I also have a checking account and several credit cards with Citibank. It’s much more convenient to have all my banking done with one bank. When I log onto the Citibank website, I can see all my accounts and get a picture of my financial health (or lack thereof). This also means that I can leave money in my e-savings account until the last possible day before I need it. For example, when I used to have an ING Direct account and I knew I had to pay a bill soon I would usually just keep the money in my Bank of America checking account (also now gone). The delays in transfering money out to earn interest and then back into checking account when I needed it were prohibitive. But since Citibank has instant transfers between accounts, now I can keep earning interest on the money until the day I need it.
  • Citibank has several ATMs where I live. Now, the benefit to this is obvious in that I don’t have to pay ATM fees for other banks if I’m out somewhere and need some quick cash. But the other benefit here is that I can withdraw money from the e-savings account at ATMs if I ever needed to, which many online banks don’t can’t provide for since they don’t have ATMs, of course.
  • The Thank You Network. Citibank has a rewards program called the Thank You Network. Like most reward systems, you get points when you spend money with your Citibank credit card. But what they also do is offer you points based on how many different products (i.e. checking accounts, savings accounts, CDs, direct deposit, etc.) you have with Citibank. You can earn up to 9,600 points a year (about $100) this way for basically doing nothing. And I’m not even inconveniencing myself to get these points. If anything it’s making my life easier AND they’re going to reward me for it. Me likey.

This section is not meant to be an advertisement for Citibank. Just because something works out well for me, it doesn’t necessarily mean that it’s best for you. The point of this article is to help explain some of the things you need to think about when choosing an online bank or a regular bank.

Also keep in mind that I have a perverse fascination in finding every possible angle to play when it comes to banking. You may not. The truth is that as long as you’re not keeping your savings in a “stale coffee” bank (with equally stale interest rates), you’re doing much better than most.

Further reading:

Bank Deals Blog - A cool site that tracks, um, bank deals.

Bankrate.com - A cool site that tracks (say it with me) bank rates.



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