Best Interest Rate Banks

With the economic woes our nation is facing, politicians would like you to spend your money faster than you can make it. They’d love it if you could max out your credit cards and put more consumer spending back into the country, but thankfully you’re smarter than that, especially if you’re reading an article on high interest savings accounts. High interest savings accounts are savings products offered by online banks that give you a much better interest rate than your standard bank. Check out the savings rate of your current brick and mortar branch and let me know what the rate is, chances are it’s 1% or much lower. It’s not unreasonable for a brick and mortar bank to offer you half a percent or even lower! If you go with a high interest savings account, you could be earning around 3% - three times even the highest rate.

Where do you find these rates? Online banks. I list the best interest rate banks on the homepage of this site, but you probably want to learn a little more about each of the banks right? No problem.

FNBO Direct: They are the online bank of First National Bank of Omaha, which first opened in 1857 and has been covered by FDIC insurance ever since its inception. FNBO Direct’s FDIC certificate is #5452 and they have four stars from Bankrate’s Safe & Sound rankings.

Dollar Savings Direct: Emigrant Bank has two online banks - Emigrant Direct and Dollar Savings Direct. Dollar Savings Direct has a higher yield, a $1000 minimum to open, and is better than Emigrant Direct in almost every way. They are covered under certificate #12054.

ING Direct: ING Direct was one of the first online banks available, known for their ubiquitous orange ball and their funny name. They are the online bank of ING Group, which is a huge international financial service company headquartered in Amsterdam, Netherlands. Their domestically headquartered in Wilmington, Delaware, and were given four stars from Bankrate’s Safe & Sound rankings.

E*Trade Bank: E*Trade Bank is affiliate with E*Trade the stock broker and if you open an E*Trade Bank account you can link it up with your E*Trade trading account, which is a good or a bad thing! They are covered under FDIC certificate #30746 and were awarded Money Magazine Best of the Breed in 2007.

HSBC Direct: HSBC Direct is the online banking arm of Hongkong and Shanghai Banking Corporation, a huge international banking conglomerate. They are covered under FDIC certificate #57890 and are headquartered in McLean, Virginia.

In addition to the high interest savings accounts, many online banks offer very competitive certificate of deposit rates. By opening up a CD, you lock in an interest rate for a specified period of time. You give up some flexibility but when minimum balances are so low, it’s easy to open a small CD just to save a little extra.

What a crazy last few weeks! Almost every major online bank has dropped their rates twice in the last two weeks. That’s right, twice! I won’t go into the exact chronology of who dropped to what rate and then dropped to what rate, but suffice it to say, your best bets right now are to lock in a good certificate of deposit rate and then try to wait things out. Forget the money markets, forget trying to get a good rate with high yield savings accounts, to ensure a good rate you’ll have to go with a certificate of deposit.

The damage, as it now stands is:

• Dollar Savings Direct - 3.50% APY
• FNBO Direct - 2.60% APY
• EverBank - 3.51% APY Promotion Rate
• WTDirect - 2.81% APY
• E*Trade - 2.50% APY
• ING Direct - 2.20% APY

If you’ve checked out the front page of Best Interest Rate Banks lately, you’ve seen the latest rates as of early January 2009 and they are ugly.

The highest rates barely peek over 3.00% and there isn’t much we can do about it. The best thing you can do is lock in a good CD rate at whatever bank you’re at and wait for better times.

One bank you might want to consider is Dollar Savings Direct with their 4.00% rate, which will likely fall very soon.

If you have the means, you might consider putting a little in the market or even in into some municipals bonds, which are offering slightly higher yields.

Bank rates will be low, and going lower, for the foreseeable future.

The Fed dropped interest rates from 1% to 0.00% - 0.25% last week as a Christmas gift to the economy and the ones who will suffer are savers like you and I. Already, the top banks with high yield interest rates are dropping their savings account rates with great ferocity. FNBO Direct, which had sported a reasonably strong 3.25% APY rate, dropped their mark to 2.80%, which only puts it a hair higher than ING Direct with a 2.75% rate. Other than that, WTDirect still soldiers on with a 3.06% APY rate on balances above $10,000 but everyone else has fallen. The single surprise in all of this has been Dollar Savings Direct, a brother bank to Emigrant Direct, still offering a mind-boggling 4.00% APY when its peers are lagging in the low 3% range.

The one move I would do right now is to get myself locked into some CDs. The best CD rates are in the mid 3% and low 4% range for CD terms of less than 18 months. Lock in some short term rates so that you can be assured that your savings don’t languish. The only risk you have is that inflation skyrockets with all the Fed moves and if that happens, you can pull your money out and put them into something better. However, the smart move right now is to lock in those rates before they sink any further.

If I had to pick my top three savings accounts right this very minute, they would be, this very order:

1. FNBO Direct
2. Dollar Savings Direct
3. E*Trade

Some might be surprised at the order of the list because the top rated bank, FNBO Direct, actually has the lowest interest rate of the bunch (3.25% APY vs. 4.00% for Dollar Savings Direct and 3.30% APY for E*Trade). Let me explain that one first. FNBO Direct has my top spot because it allows up to three external links, which means I can transfer directly from another high yield savings accounts. I can do online bank to online bank transfers, three of them no less, which is something not offered by the other two. Dollar Savings Direct takes second on the strength of their 4.00% APY rate and E*Trade comes in third because I think the brokerage account link is a crucial offering (even though you can get $4.95 trades from TradeKing, E*Trade charges $9.95).

FNBO Direct

FNBO Direct takes the top spot, as mentioned earlier, because they offer those three external links. They also offer a two-year 4.26% APY CD that is one of the best out there. 3.25% APY isn’t the top rate, but a competitive one, and the interface for FNBO is clean, crisp, and responsive. FNBO Direct is the online banking arm of First National Bank of Omaha, FDIC Certificate 5452, a bank that has been out of the news but in business since 1857.

Dollar Savings Direct

Dollar Savings Direct is the same as Emigrant Direct, except it has a much higher interest rate - a whopping 4.00% APY. It’s probably tops among the well known online banks. The only downside with Dollar Savings Direct is that you can only link up one account to start (likely to be your checking account) and then all future additions must be done with a ton of paperwork. Yep, it’s a pain, which is why it gets the #2 spot.

E*Trade

E*trade takes the #3 spot of my top savings accounts because the 3.30% APY rate coupled with a easy as cake to open brokerage account gives a flexibility no other online banks offers, the ability to trade in the stock market. One negative about E*Trade is that the trades are quite expensive, at $9.95 it’s nearly twice as expensive as TradeKing and their $4.95 trades (though funding a TradeKing account can be a bit of a pain at times).

There you have it my, top 3 picks for the top savings account in all the land.

In an ideal world of instant transfers, you would always transfer your savings to the bank account with the highest rate. Choosing between a 3.06% APY (WTDirect) and a 3.25% APY (FNBO Direct)? Don’t bother, always go with the higher rate. If your money is at WTDirect, transfer it to FNBO Direct. No brainer.

However, banks have been using float for as long banking has existed and some banks float longer than others. On average, it takes about 5 days to get funds from one bank to another. Five whole days. In our era of electrons flying back and forth, it seems amazing something like a transfer would take that long, right? That’s because of the float, where the bank earns money while the money is in transit.

So, the next time you’re going to rate chase, consider how much interest you’re losing when the funds are in between banks.

When you see FNBO Direct offering 3.25% APY for your savings, you might be tempted into thinking that you will get to keep the entire 3.25% APY for yourself. However, just like your job, you don’t because Uncle Sam will want to get his piece of the pie. Savings account interest is reported on a 1099-INT form and treated more like ordinary income and less like dividend interest. In other words, it’s taxed at your income tax bracket, rather than at the more favorable 0%/10%/15% long term capital gains rate that dividends enjoy.

How do you figure your actual, take home interest rate? Simply subtract out your taxes! If you are in the 25% tax bracket, take 25% away from the 3.25% (multiply it by 0.75), and you’ll see that you get to keep 2.4375% of the original 3.25%.

This shouldn’t really affect your thinking though, as all bank interest is treated the same so you’re comparing apples to apples on this one. It’s just important to always consider taxes whenever you talk money… the government will always to remember to collect its due.

One question I’m constantly asked by readers is how online banks like FNBO Direct and ING Direct can offer such high interest rates compared to your big name brick and mortar bank. The answer is actually simpler than you think. The reason why they can offer such good rates is because they don’t have to pay for the things a regular bank has to pay for.

Let’s list all the major things both online banks and brick and mortar banks have to pay for:

• Website - including online banking
• Call centers - to field customer calls
• Mailers - statements, offers, etc.
• Marketing & advertising

Now think of the things that only brick and mortar banks have to pay for:

• Branch locations - leases, taxes, tellers, managers
• ATM locations

While each one only gets a bullet, one of the most expensive items on either list is branch location. Think about how many branches each of those majors banks has. Tens of thousands. Bank of America has thousands of branches and over 11,000 ATMs. In addition to paying for the branches and ATMs themselves, those banks have to pay for the people it takes to support them. Tellers and managers and ATM technicians aren’t cheap. They need electricity, heat, water, health care, and so many other things.

Online banks won’t give you the personal relationship that a bank will. That’s for certain, but you don’t go to online banks for great relationships, you go for great rates.

It looks like we’re in the world of dropping interest rates as the Fed looks to combat a recession, banks are anticipating that they’ll cut rates in the next meeting (after the emergency cut just a few short weeks ago). Today, two banks lowered their rates by a quarter of a percent.

HSBC Direct lowered the yield on their high yield savings account to 2.60% APY and FNBO Direct dropped their savings account to 3.25% APY (from 3.50%). If you’re looking for dependable guaranteed rates, look towards CDs. ING Direct just increased some of their CD rates. I keep an updated list of the best 6, 12, and 18 month CDs.

Many of your bills can be paid annually, whether it’s your renters/homeowners insurance or your property taxes, or your trash collection fee or something else; some of those services will give you a discount if you pay them in a lump sum rather than over every month or quarter or six months. For example, my homeowners association fee will bill me every year and give me a 5% discount if I pay in one lump sum rather than two half-year payments. In some cases, the recipient is hoping to earn a little extra interest in your money but oftentimes they are simply looking to reduce their administrative overhead. Either way, you can save money simply by saving up the funds to make one lump sum payment.

The easiest way to do this is to set up recurring monthly transfers from your main checking account, where your income is deposited, to a savings account you have earmarked for this purpose. It’s simple to open up additional accounts at ING Direct, you could even name it “Annual HOA fee” and simply transfers $50 each month (in our case), then transfer that out whenever payment needs to be made.

If it’s not as important for you to have separately named accounts, I recommend FNBO Direct instead as it has a higher interest rate at 3.50% APY.