Increase Your Savings Rates with Online Savings Accounts

With savings account yields at many big-name brick-and-mortar banks at a scant fraction of one percent, your return on investment is little better than if you had kept your money in a piggy bank at home.

It's little wonder then that a growing number of savvy investors are turning to online savings accounts. Interest rates aren't as rich as a couple of years ago when online savings rates topped 5%, but they're still several times what you'd get at many traditional big-name banks.

As of mid-February, online banks like Ally, FNBO Direct, Bank of Internet, and ING Direct were offering 1.2% to 1.49% annual percentage yields on savings accounts.

Online Savings Accounts for Short-Term Savings

For long-term investments, you'll want vehicles with better yield potential, such as mutual funds, bonds, or a certificates of deposit. Online savings accounts are good for short-term, liquid investments, such as money for emergencies and short-range goals like car down payments or vacations.

Opening an online account usually takes 15 minutes or less, and, of course you can do it right from your computer at home. Many of the accounts have no minimum deposit requirements and can be opened with $1. To get the account started, you simply provide the routing and account number of another bank account that allows electronic transfers, so money can be funneled into the new online account. Many online banks also allow you to open more than one account, so you can have a handful of free online savings accounts with the same institution, each account for a different purpose -- one for vacations, one for home improvements, and one for holiday gifts, for instance.

As you shop around for an online savings account, consider these six factors:

1. Bank Safety

Make sure the financial institution is FDIC insured, and check to see if it's a subsidiary of another bank. Some online banks are owned by brick-and-mortar financial institutions. In that case, your combined deposits would need to be within the FDIC limit -- $250,000 per person, per financial institution.

2. Interest Rates

Research online savings account rates to get the most bang for your buck.

3. Restrictions

What do you need to do to get those great savings rates? See if a minimum balance is required and if there are limits on any services, such as the number of transactions you can make each statement period.

4. Savings Account Fees

Many online banks advertise no monthly fees for savings accounts, but if you look at their account disclosure statements, you'll see there are fees for special instances or services, such as leaving the account dormant for a month, exceeding a certain number of transactions per month, getting next-day access to deposits, or using ATMs outside the network. Think about your needs, and make sure extra fees won't nickel and dime away yields.

5. Access to your Cash

How easy will it be to get your money? Not all online savings accounts accept deposits through ATMs, so when you have a paper check to deposit, you have to snail mail it to the institution and wait several days before it's credited to your account. You also often have to wait a couple of days for electronic transfers to be credited. At some online institutions, you can get an ATM card good for both an online savings and online checking account. Check the size of the ATM network and whether machine locations are convenient for you.

6. Savings Account Customer Service

How easy is it to get hold of a real live human being if you need help, and when is customer service open. Is there 24/7 access, or is customer service limited to traditional business hours?

These six considerations are all part of finding the online savings and checking accounts that best meet your needs.

Callable Certificate of Deposit: Be Wary

With the best one-year CD rates below two percent, callable CDs, with rates upward of five percent, can look awfully attractive. But look before you leap. These investments have major catches that in many cases wipe out any benefit from a higher yield.

Here are key points to consider:

Callable Certificate of Deposit: What Exactly Is It?

"Callable" refers to the bank's ability to terminate, or "call," the CD. At that point the bank will return the cash you've invested, along with the interest accrued so far, even though the CD's regular term is not up yet. Only the bank can call the CD. You'll have to pay a penalty for cashing in the CD before it matures.

Interest Rates

Callable CDs often offer higher yields because they generally have long terms, and longer-term CDs usually furnish higher interest rates than short-term CDs. They also feature higher yields because banks have the option to back out of the arrangements. You'll need to weigh those factors when you compare interest rates of callable CDs with conventional CDs and decide whether the callable feature and the long term are worth the investment yield.

Maturity Date

Make sure you understand when the CD matures. It's easy to get confused with callable CDs, and some brokers have come under fire for misleading clients. For instance, you might assume a "one-year non-call" CD is simply a one-year CD. But the one year refers to the amount of time that must pass before the bank can terminate the CD. It does not refer to the maturity date. That one-year non-call CD might have a term of 20 years -- even 30 years. Carefully read the fine print describing the certificate of deposit to determine how long your money will be locked up. Consider the risk you're taking if interest rates rise. With a short-term CD, you can get your money out to reinvest in a higher-yield vehicle. With a callable CD, you're stuck with the low rate, possibly for decades.

When Can the Bank Come Calling?

A callable CD stipulates the non-call time -- the number of years that must pass before the bank has the option of terminating the CD. After that period a bank might call its high-yield CDs if interest rates drop.

Early Withdrawal Penalty

The early withdrawal penalty for callable CDs is heftier than for traditional CDs, as much as 25% of the principal. That combined with the long term are among the factors financial experts advise against these investments for older people. The North American Securities Administrators Associations tells of a retiree in Iowa who invested more than $100,000 of her 97-year-old mother's money in three callable CDs. She wanted to use the money to pay her mother's nursing home bills, not realizing the CDs had 20-year terms and big early withdrawal penalties.

Investments and Your Financial Goals

As with any investment, consider callable CDs in the context of your financial goals. How would they fit in with the rest of your portfolio and investment timeframe?

Know Your Certificate of Deposit Broker

Callable CDs are marketed through brokers, and because deposit brokers aren't licensed, anyone can call himself one. The U.S. Securities and Exchange Commission says to check the background of any brokers or companies you're considering. Also, know which financial institution is offering the CD to make sure it is FDIC-insured. Your deposits are insured for up to $250,000 per FDIC-insured institution.

Savings Bond or Certificate of Deposit: Which Is Right For You?

Both CDs and government savings bonds are safe, reliable investments and can be a part of a smart savings strategy. But which alternative is best?

Consider these five points when weighing whether to invest in a certificate of deposit or savings bond:

1. Your Savings Time Frame

Savings bonds are a good option for long-term goals, such as retirement or your children's or grandchildren's education. The bonds continue to earn interest for up to 30 years. Both savings bonds and CDs carry penalties if you cash them in early. Savings bonds must be held for at least a year, and you pay a 3-month earnings penalty if you cash them in before five years. CDs vary in terms, from one-month to several years or more. Choose a short-term CD if you think you might need the money in the next five years.

2. Interest Rates

Shop around for the best CD rates and compare them to those offered by savings bonds. There are two main types of savings bonds: The Inflation Indexed bond -- or I bond -- carries a fixed base rate plus a variable rate based on inflation, which is calculated twice a year. The Series EE savings bonds earn a fixed rate of interest, which is set in May and November every year for new bonds issued. Interest accrues monthly and is compounded semi-annually for both types of bonds for 30 years.

I bonds issued between now and May 1 have a 3.36 percent earnings rate, which includes a .30 percent fixed rate and a 3.06 percent inflation rate as measured by the Consumer Price Index. Series EE bonds sold during the same period have a fixed rate of 1.2 percent.

3. Investments: How Much is Available?

Savings bonds can be purchased for as little as $25, but you'll need to invest at least $1,000, if not thousands more, for high-yield CDs. Consider a savings bond if you have a small amount to invest and you have a long-term savings horizon. Savings bonds are also a good alternative if your bank deposits exceed the FDIC insurance limits, now set at $250,000 per person per financial institution. However, you can't purchase more than $5,000 of I or EE savings bonds in a calendar year.

4. Tax Advantages

Savings bonds offer tax advantages you don't get with CDs and money market accounts. You don't pay any state or local income tax on savings bonds, and federal tax is deferred until you cash the bonds. There are also tax benefits for using savings bonds for education, but there are income limits and some restrictions, so check with the IRS to see if you qualify.

5. Purchasing and Tracking Your Investments

Like CDs, you can purchase savings bonds from most banks or buy them online. Check with your employer, too; you might be able to purchase them through a payroll deduction. Go through the U.S. Treasury Web site to buy, manage, and redeem electronic bonds. (You can replace paper bonds or convert them to electronic savings bonds if they're lost or stolen.) For the first time ever, you can also buy I bonds with your federal tax refund using the direct deposit feature. Just include IRS Form 8888 and tell the IRS how much you want to invest in a savings bond.

Savings bonds are a bit tougher to track than your CD investments because the federal government doesn't send you regular statements. However, the U.S. Treasury's Web site does provide tools to track your bonds online.


U.S. Treasury • Introduction to Savings Bonds • http://www.ustreas.gov/offices/treasurer/savings-bonds.shtml
U.S. Treasury • Press Release: Series I to Earn 3.36%, Series EE to Earn 1.20% Fixed Rate, When Bought from November • • http://www.treasurydirect.gov/news/pressroom/currenteebondratespr.htm
Sandra BlockDon't get burned by tricky brokered CDs • Turning your tax refund into an I Bond may be a smooth move • • http://www.usatoday.com/money/perfi/columnist/block/2010-01-25-your-money-i-bonds_N.htm


Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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