11 Things to Consider When Choosing an Online Bank.

Do you feel like your money isn’t showing a very impressive rate of return with your bank savings account? If so, perhaps it’s time to explore other options that will provide a better interest rate. The whole purpose of saving is to build a nest egg to put purchase a new home, finance your children’s college education or enjoy a comfortable retirement.

There are two primary factors which account for low interest rates on savings accounts: the relatively low short term interest on short-term borrowing (i.e. the rates bank charge one another for lending money) coupled with high overhead costs and rising expenses associated with brick and mortar locations (e.g. employee salaries, building rent). As per Bankrate.com, an aggregator of rate data, the rates for checking and savings as of August 2011 are as follows:

• Traditional Savings and Money Market (MMA): 0.05% APY to 1.00% APY
• One year certificate-of-deposit (CD): .8%
• Traditional checking with interest: .51%

Online banks that have reduced overhead expenses offer somewhat higher rates. Yet, with so many online banks in business, how do you know which one is best for your needs? Below we list 11 considerations when choosing an online bank.

1. Review the bank’s Veribanc rating which is based on six factors, commonly referred to by the acronym CAMELS: A: Capital reserves; Asset quality; Management experience; Earnings-to-debt ratio; Liquidity; and Sensitivity to market fluctuations. The best banks will have a green rating and a minimum of three stars.
2. Compare the rates you will earn on deposits. As noted, because online banks have reduced overhead costs, they are able to offer higher rates than traditional banks. However, be aware of “teaser rates” that will apply to only a part of your balance.
3. Make sure the bank is FDIC insured, meaning that your money is protected should the bank ever fail. FDIC insurance is backed by the “full faith and credit” of the Federal Reserve.
4. Does the bank offer competitive rates? Use a comparison site such as Google Advisor to compare rates offered by different banks.
5. Find out how long the bank has been in business. The longer the better since that is an indication that the bank has survived periods of economic fluctuation.
6. Find out if the bank charges monthly service fees, whether you are required to maintain a minimum balance and what happens should you fall below this minimum requirement.
7. Ask the procedure for deposits. Because you will not be able to visit a branch, ask how long it takes deposited checks to clear.
8. Determine how many withdrawals you may make per month. Some banks impose limits on this that you may not feel comfortable with.
9. Check the level of security. If you are doing all of your banking online, make sure the bank has ample security precautions in place, such as encrypted servers. Ideally, there will also be an alert system in place that notifies you of transactions over a certain amount.
10. Choose a bank with a strong ATM network. Some online banks have a network of ATMs that you may use with no fee. For those that doesn’t make sure that you can be reimbursed for out-of-network transactions on the ATMs of other banks. This is important since some banks charge as much as $5 for non-account holders.
11. Consider whether you will need paper checks. Recently, ING Direct began offering paper checkbooks to their customers. Prior to this, bank customers would have to order checks singly that were already filled out with respect to payee and then wait for delivery by regular mail. If you need to pay your rent or other services by check, it is best to choose an online bank that offers checkbooks.

Related Posts:

• How to Find the Best Place To Put Your Savings.
• New Debit Card Fees Got You Angry? Switch to a Local Bank.
• HSBC is Closing its Local Branch. Should I be Concerned?
• Capital One to buy ING Online.. So Long ING?
• How to Waste Your Money in 15 Easy Steps.

How to Find the Best Place To Put Your Savings.

The Federal Reserve has recently announced that it will be keeping interest rates that banks pay to borrow money at 0 – 0.25% for the foreseeable future. This is done in the hopes of encouraging borrowers and spenders, but punishes savers. This makes it harder than ever to find the best place to let your emergency fund grow. But just because it’s difficult to find a place to make your money work harder for you doesn’t mean you should let it sit idle in a low yield bank account!

While it’s easy to find places to stash your cash that pay more than the average bank savings account (currently 0.08%!), high yield isn’t the most important thing when looking for a home for your emergency fund.

The two most important factors to determining where to keep your emergency cash are:

1. Safety
2. Liquidity

“Safety” is a measure of short term risk. Putting your emergency fund in the stock market is foolish because stocks can lose money on any given day, and you need to be able to count on your money being there when you need it.

Certificates of deposit are safe. They are FDIC insured, so you cannot lose principal. But this is where liquidity comes into play. CD’s are safe, but you don’t want your emergency fund tied up in a 5-year CD when you need that money now.

Because of these two factors, the most common places to store your emergency fund money is in a high yield savings account and sometimes a short term certificate of deposit (CD). You could put some of your savings in a savings account, and the bulk of it in a CD. This way you have immediate access to what’s in the savings account, but the bulk of your fund would be in a CD earning higher interest.

Ideally, you’d put the money you would need for repair bills on the house or car in the savings account, and you’d use the CD for that part of your savings you would tap only in the event of a loss of income or some larger emergency.

In the current economic environment however, it makes sense to use only the high yield savings account and skip CDs. Here’s why…

High yield savings account vs. a 1 year CD.

A quick look at yields on 1 year CDs shows that the highest yielding CD (currently offered by Sallie Mae) only offers a tenth of a percent more that the highest yielding savings account, but you wouldn’t have access to your money for an entire year (without penalties). That’s simply not worth tying up your money like that.

So, on to high yield savings accounts…

How to Find The Best High Yield Savings Accounts.

First, head over to BankRate.com and check out their list of high yield savings accounts. Sort by APY (the yield you can expect if you leave your money in the account for a full 365 days), and work down the list. Be sure to read the details of the terms and look for a star rating of 4 or 5.

That star rating is Bankrate’s rating system which rates a financial institutions solvency and safety, not customer service or satisfaction. It’s meant to give an indication of the likelihood of the bank being closed by the FDIC.

For the record, neither of my banks is on the list (ING direct or HSBC)*, so it’s not the only resource you can use but it is a good place to start. If there’s a bank or credit union you’re interested in, you can search Bankrate’s safety ratings.

They also offer a checking account search.

* I’ve been a happy customer of both HSBC and ING Direct for over five years now. I’ve kept the bulk of my savings at HSBC direct, but they have recently decreased their rate. It’s still much higher than the average though. ING direct has been very good to me, and they still sport one of the highest rates and easiest to use website in online banking. They’ve recently been acquired by Capital One though, and a lot of people are not happy about that. I haven’t seen any changes yet though, so I’m taking a wait-and-see approach. Plus there’s the ever popular $25 ING Referral codes that give you an extra $25 free when you open an account with $250 . (that’s an immediate 10% return on your money, for those of you playing along at home)

Look for special deals.

It’s also a good idea to check out online forums, like the FatWallet finance forum and see what people are saying about various banks and account offerings. You can also search for discussions on high yield savings accounts and learn about the most recent perks for signing up with various banks. Sometimes they offer introductory rates that are higher than normal, or cash back when you open an account. Public forums like FatWallet’s are a great source for getting the experience of real customers, instead of marketing execs.

Please share any tips, tricks or experience you may have in the comment section below.

Happy Saving!

Related Posts:

• How to Waste Your Money in 15 Easy Steps.
• 11 Things to Consider When Choosing an Online Bank.
• Why Do You Bank Online?
• Alternatives To Pet Insurance (Tips For Doing Without Pet Insurance).
• New Debit Card Fees Got You Angry? Switch to a Local Bank.

Best High Yield Savings Account Rates Of 2011.

Just as there are buyer’s markets and sellers markets in real estate, so there are saver’s markets and spender’s markets in banking. It’s by design, although the Federal Reserve may prefer to look at low interest rates as spurring investment rather than spending, but the truth of the matter is that low interest rates typical spur more debt than more investing.

Alas, such is the state of savings rates today – pitiful!

But just because rates are low, doesn’t mean there aren’t better choices than the 0.01% local banks seem to give. Here’s a list of the highest yielding savings accounts as of August, 2011 (in order of rate, highest to lowest):

• Everbank offers high-yield money market account with an APY of 1.01%. The minimum deposit is $1,500 and there’s an $8.95 per month fee whenever your balance is less than $5,000 and a $10 transaction fee for every transaction over the monthly limit. (click the link above for details)
• Incredible Bank offers a checking account with 1.21% APY with a $1,000 minimum deposit to open. There’s a list of additional fees though.
• SFGI Direct offers a 1.11% APY savings account with a $500 minimum to open.
• Discover Bank has a 1.15% APY online savings account with a $500 minimum to open. click here for fees
• CNB Bank Direct offers 1.15% APY on its high-yield savings account with a $1 minimum balance. No mention of fees
• Sallie Mae Bank has a 1.10% APY high-yield savings account with an additional 10% rewards match on Upromise accounts.
• SmartyPig is offering 1.10% APY on its savings account.
• Capital One has an online savings account that pays 1.10% APY on balances over $1000. If you have a Capital One credit card, you can earn a 10% bonus on your interest earned.
• Nationwide Bank is paying 0.50% APY with a $300 minimum balance. (click the link above for fees)
• OneWest Bank has a Green Savings account that currently pays 1.00% APY, with no minimum.
• iGOBanking is providing a 1.01% APY with no fees and no minimums.
• One of my favorites, ING Direct is paying 1.00% APY with no minimums on its Orange Savings account Note: If you’re interested in ING, you can get an extra $25 when you open with one of these referral codes (email me if they have expired, and I’ll send you a fresh one)
• American Express offers a 1.00% APY high-yield savings account with no fees and no minimums.
• Dollar Savings Direct has an APY of 0.90% with no fees and a $1000 minimum balance.
• FNBO Direct has an 0.85% APY online savings account with a $1 minimum deposit.
• The HSBC online savings account currently provides an 0.80% APY. There are no fees and no minimums, but you need at least $1 to open the account. HSBC is my other high yield savings account (ING is the 1st), and I’ve had no complaints.
• Emigrant Direct also offers 0.80% APY with no fees and no minimums.

You’ll likely notice a trend as you go down the list – as the yield drops, so do the fees and additional requirements. Also, many have implemented new fees and requirements due to the Frank-Dodd financial regulation passed by Congress after the recent financial meltdown. You didn’t think the banks were going to pay those new regulation fees out of pocket, did you?

Related Posts:

• How to Find the Best Place To Put Your Savings.
• HSBC is Closing its Local Branch. Should I be Concerned?
• Why Do You Bank Online?
• High Yield CDs (FDIC Insured) For March, 2010.
• ING Direct Orange Savings Referral Links.

HSBC is Closing its Local Branch. Should I be Concerned?

I just received an email from HSBC stating that as ” part of a new strategy to focus on fast-growing emerging markets” they were selling their branches local to me to another bank. Part of this new strategy includes their plan to cut 30,000 jobs, but that doesn’t effect me directly. Nor does the closing of the local branches.

I don’t have my money at one of those physical branches, but I keep my emergency fund in an HSBC Direct online account. I realized early on that I simply don’t have enough in that savings to warrant chasing the interest rate from institution to intuition, and that it’s better to keep the number of bank accounts limited, so I kept my ING and HSBC accounts. HSBC had been offering a higher rate than ING until recently – HSBC now only offers 0.80% compared to ING’s 1.0%.

But I digress…

Even though I keep my money in their online account and never used a physical branch, it always gave me a cozy feeling to know that there was a branch nearby should I ever need to access one. So admittedly, it’s more of a psychological things than anything else, but with Capital One buying ING and now losing my local HSBC I’m feeling a bit more uncertain about my banking future…

PS: For those of you who are affected directly by a branch closing, here’s a link to the HSBC FAQ about the branch closings.

Related Posts:

• Why Do You Bank Online?
• 11 Things to Consider When Choosing an Online Bank.
• How to Find the Best Place To Put Your Savings.
• Best High Yield Savings Account Rates Of 2011.
• Capital One to buy ING Online.. So Long ING?