Top High-Yield Savings Accounts: Interest Rates And Some Thoughts

After the recent cut in the Federal Funds Rate, it is anticipated that most high yield savings accounts will follow suit and decrease the interest rates offered on deposits. In fact, a couple of fellow bloggers reported yesterday that ING Direct has already reduced it’s savings account interest rate from 4.50% (yawn) to 4.30% (longer yawn). It won’t be too long before other banks respond in a similar manner.

Although, ING’s 0.2% rate reduction can hardly be called as “significant”, for people who are used to earning interest at a higher rate, such a drop causes some discomfort. Consequently, they start looking around for other accounts that are offering better rates.

If you belong to such a group, here are some options you might want to consider.

The table below lists banks that are offering an interest rate (APY) of 5.00% or more on their respective online savings accounts as of 09/25/2007 (links are for information only - no referral links):

[Click on the column headings to sort in ascending or descending order]

The table has been compiled according to the following guidelines:

• All rates are regular, NOT introductory.
• Both, money market accounts (MMA) and savings accounts are considered.
• Accounts which offer tiered rates on deposits are NOT included [for example, accounts that offer 0% APY on balances below $5000 and 5% APY on balances above $5000 are not included]. The only exception is Presidential Online Bank which is offering the 5.25% APY for balances below $35,000.
• Accounts which charge monthly maintenance fees [based on average daily balance requirements] are NOT included. That means, none of the above banks carry a minimum balance requirement (may be $1 in some cases, but that shouldn’t be a problem).
• All accounts are FDIC insured.
• So basically, these are the top interest bearing banking accounts with low potential for surprises. Of course, you still have to read (and understand) the fine print before you sign anything.

Notes: It is very likely (but not guaranteed) that the rates in the above table will go down in the near future. However, keep the list handy - in all probability, even after a drop in the interest rates across the board, the top players will still be offering better interest rates than the rest of the herd.

Which type of accounts are better? Money market accounts or savings accounts?

Earlier, I wrote about the factors I would consider for choosing an online savings account. From the point of view of these factors, both money market accounts and savings accounts offer a similar deal. Both are FDIC insured and generally offer similar transaction facilities. However, typically, money market accounts tend to be tiered - different interest rates are offered on different amounts of deposits, unlike most savings accounts. Also, money market accounts tend to carry more fees (maintenance, minimum balance, etc.) than simple savings accounts. So watch out.

However, the two money market accounts that I included in the above table don’t have tiered structure (at present), and there are no maintenance fees involved. So, for all practical purposes, they are as good as the other savings accounts. However, keep in mind that these things are not set in stone and banks may change terms and conditions after you sign up for an account.

Other thoughts on the subject

• Take it easy: In my opinion, there is no need to go all hyper on trying to switch bank accounts just because your bank dropped interest rates on savings by 0.2%. It helps to have a sense of proportion here. Just ask yourself: how much is this interest rate drop going to cost me?

Remember, for each 0.1% drop, you stand to lose $1 in interest per year on every $1000 you have in your savings account - before considering taxes. If you consider a 25% tax rate on the interest earned, then each 0.1% drop causes a $0.75 loss in interest on every $1000.

Following the above numbers (which I hope are correct - I just did it on the fly, so let me know if the math seems off), we can easily estimate (for example) that for the recent case of ING Direct’s interest rate cut (0.2%), a person who has $10,000 with ING will stand to lose about $15 a year in interest earnings.

At this point, it’s worth looking into the reasons why you have been doing business with your current bank. Sometimes, interest rate is not the only reason why people choose different banks. If those reasons aren’t worth $15 a year (or whatever loss you are looking at), sure go ahead and get a new account at different bank.

• Considering a CD? Certificate of Deposit (CD - also known as “Term Deposit” or “Fixed Deposit”) will be an area where people will tend to look into to lock in “good” rates, especially after the recent rate cut. However, make sure you do your homework well with CD rates and shop around. As of now, I don’t see any point in buying a long term CD that pays a much lower interest rate than some top savings account in the market. For example, take a look at ING Direct’s CD rates:

Personally, I would never consider these CDs if I am getting a better rate and more liquidity with a savings account with another bank.

Also, keep in mind that banks that give top rates for high yield savings accounts do not necessarily give top rates for CDs. Again, remember to shop around before deciding on switching to CDs with your current bank.

My experience with some of the banks

• My first online savings account was with ING Direct. Although, I hardly keep anything in it now-a-days, ING has always given me a “feel good” vibe. I have contacted their customer service on multiple occasions for various reasons and had a good experience each time. Plus, their multiple sub-accounts feature is just awesome - perfect for budgeting purposes. It’s a pity they don’t offer top interest rates anymore.

• Emigrant Direct is better now (as compared to their earlier interface), but it doesn’t appear as “appealing” as ING even though it has consistently offered better rates than ING. I have an account here, but it’s largely dormant.

• HSBC Direct is my central hub at present. In terms of functionality, and security, I am most comfortable with this account. There is no restriction on how many external accounts you can connect to HSBC’s account (and hence it can act a hub) - makes it easier to organize other accounts. Also, you can set up automatic weekly/monthly transfers to/from multiple accounts for a given period of time. The account also comes with an ATM card - awesome feature for emergencies. Login procedures suck, but I can live with that.

• iGobanking is the latest addition to our army of bank accounts. Account opening procedure was a breeze, and customer service was very helpful. However, I do have to point out that their online help documentation sucks - it’s just not adequate enough (hint: try finding their routing number). However, A 5.30% APY makes up for that.