Today's guest post comes from Jim at Blueprint for Financial Prosperity, a personal finance blog that follows the money decisions of a young professional in th ese challenging financial times.
With the economy in a slump and the Federal Reserve lowering interest rates, it's becoming harder and harder to save. If you're like me, you have a checking and savings account at a traditional bank that is earning an interest rate so low it might as well be zero. In our current economic climate, that's probably not going to change anytime soon. Chances are you've looked toward certificates of deposit as one option for your money, trading in some of your short-term liquidity for a more appealing interest rate, but balked because you are concerned you might need that money before the CD matures.
I may have a solution for you. Have you considered a high-yield savings account at an online bank?
An online bank is a bank that exists entirely online. ING Direct was one of the first online banks, but since then, there have been many others, including FNBO Direct, Everbank, HSBC Direct, and Dollar Savings Direct, just to name a few. With many of those banks, your only interface was through the Web or the telephone. Rather than pay for tellers, branch managers, and branches, online banks pass the savings onto customers by offering some of the highest savings account rates in the nation. The interest rates on high-yield savings accounts are often in the top 5 to 10 percent in the nation, are entirely liquid, and are protected by FDIC insurance.
A high interest rate on your savings account isn't the only benefit of working with an online bank. Because the website is your primary interface with the bank, it is often very sophisticated and very user friendly. They allow you to bank 24 hours a day, seven days a week, a convenience I've personally taken advantage of. Just recently, I locked in great rates on certificates of deposit from the comfort of my office. If I had to go to a branch, it's likely that I would have never done so.
Speaking of CDs, online banks often offer some of the best CD rates because their savings accounts are so high. The bank has to offer a rate that's often a percentage point higher on CDs, just to entice their customers. Some banks also make it easier to ladder CDs or buy a series of CDs of differing maturity dates so that they are effectively liquid. ING Direct has a single form you can fill out to open up an entire CD ladder.
Online banks probably sound very appealing right now, but I have to throw in a few warnings about them. The biggest concern is always that your primary interface is the Web and websites can go down because of high demand or computer failure. While not common, it's not unheard of for a bank website to go down. When that happens, it can be very disconcerting because there are no physical branches to visit. If I can't access my Bank of America account via the Web, I can always drive to a branch to access my money. I can't drive to an ING Direct branch or an HSBC Direct branch. One way to mitigate this risk is to working with a traditional bank that offers a high-yield savings account, like Citibank.
Another risk you face with using an online bank is that you're more susceptible of fraud. One common type of fraud is called phishing. It's when a thief sends you an E-mail, pretending to be your bank, asking you to log in to your account. You click on a link in the E-mail, and it takes you to the thief's site masquerading as your bank and you log in. At that point, they have all of your data. Online banks have plenty of security measures in place, but phishing won't be possible in real life (it can still happen on the phone!). You won't walk into a thief's bank and think it's your own (The Sting, anyone?).
The benefits of using a high-yield savings account at an online bank vastly outweigh the negatives I've mentioned. If you haven't taken a look at them, check them out. You may be pleasantly surprised.