Search Results for: High Interest Savings

A reader asked me if there was a difference between a FDIC-insured “savings” account and an FDIC-insured “money market” account. A bit of online searching and the venerable Wikipedia yielded the answer, plus some interesting facts about savings accounts.

First of all, why do savings account usually have higher interest rates than checking accounts? I think most of us know that banks make money by using our cash deposits and lending it out to others via mortgages, personal loans, or credit cards. However, we also expect that if we do want to withdraw our money, it will be there. To achieve this, each country sets its own reserve requirements, essentially how much cash the bank must physically keep in a vault somewhere to meet expected withdrawal demands.

As of 2006, the required reserve ratio in the United States was 10% on transaction deposits (checking accounts), and zero on time deposits (savings accounts). Due to fractional-reserve banking, having no reserve requirement allows the banks to lend out much more than their actual deposits.

Added: A quick explanation… At a reserve ratio of 10%, let’s say I put in $100. That means the bank can lend out $90. If whoever borrows that $90 put it in a bank, then the new bank can lend out 90% of that, or $81. This could repeat forever, leading to banks lending out 100+90+81+… = $1,000 for each $100 in deposits. This is just for a checking account. For a savings account, with zero required reserves, a bank could theoretically lend out an infinite amount of money (100+100+100+…). Aren’t you glad your money is insured now? 😉

The main difference between checking and savings accounts are their transaction limitations, as outlined by Regulation D. You can only transfer funds out of your savings account up to six times per month by any pre-authorized method like online or telephone transfers, even to a checking account within the same bank. A max of three of these can be via check or debit card. You can still make unlimited withdrawals in person via a teller or ATM.

This is why it can be difficult to use your online savings account (at over 5% interest) as your sole account for paying bills and such instead of your checking account (often at 0%). Bank often charge fees for breaking this rule, and must close accounts where this transaction limit is repeatedly exceeded.

Back to the initial question – Is there a difference between a FDIC-insured “savings” account and an FDIC-insured “money market” account? From what I could find, no. They are both time deposit accounts, just with different naming conventions. Traditionally, money market accounts have a higher minimum balance requirement, and are more likely to offer checkwriting or a debit card (subject to the limits above). These both remain different from money market mutual funds, which are usually not FDIC-insured and are instead a collection of short-term debt instruments.

As online savings accounts get more and more popular, I get the feeling that they are becoming a mature product, almost a commodity. Sure, there will still be the occasional promotions, but for the most part all of the banks now are hovering around the same interest rate (currently ~5% APY). I believe that the banks simply don’t have the ability to go that much higher and remain profitable.

Exhibit A: E-Loan Savings, which burst on the scene with a 5.5% APY rate, is now back down to 5.25% after only a few months. GMAC Bank is down to 5% APY. Both are tightly connected with streamlined internet mortgage lenders. If they can’t go higher, who can?

Exhibit B: HSBC Direct is currently offering a nice 6% APY rate on new money, but it’s temporary and will revert back to 5.05% in May.

Once every account starts paying around the same rate, they’ll will have to start competing more on customer service and convenience. People want easy online transfers between their accounts, ATM access, and a reliable and user-friendly website. Most people also value the ability to stay with their current bank.

Exhibit C: I am increasingly using my Washington Mutual 5% APY savings account (my review) because I can deposit checks and withdraw cash directly to and from the account from a local ATM, and also initiate external online transfers. If I need to write a check or make a bill payment, I just move over some money instantly to their free checking account (with 1 free overdraft as a backup). In the meantime, all but a few hundred dollars are always earning 5%.

I expect other banks with a large physical presence to follow suit, but notice that they will be only targeting internet-savvy folks who are aware of all the options! Checking accounts paying zero interest are their bread and butter, and they don’t want to make it easy on everyone to switch. WaMu’s account is only available online. (Even for their own employees! I asked.) Citibank has their e-Savings Account paying 4.75% APY, which also must be opened online. Bank of America recently rolled out an online-only 5-month CD paying 4.50% APY ($5,000 min).

Another no-fees no-minimums online savings account has arrived. This time it’s E-Trade Bank with the Max-Rate Savings Account. After looking around, here are what I see as the pros and cons of this account as compared to other online banks.

Pros

• No minimum balance, $1 to open, no account fees
• Competitive, but not exceptional (updated) 3.30% APY interest rate.
• E-Trade Bank has a great online funds transfer system. It is CashEdge-based so you can basically link almost any external bank account (also seen at HSBC, Bank of America). But what sets it apart is its transfer speed, allowing round-trip funds transfers with zero days of lost interest. Transfers both in an out are free.
• If you use E-Trade as your broker, can transfer between E-Trade accounts instantly. It appears that you can’t use this as your sweep account though.
• I have opened a few E-Trade bank accounts in the past (for bonuses), and was not hit with a hard credit pull.

Cons

• Competitive, but not exceptional interest rate. You may already be getting a similar rate, or be able to do better elsewhere, especially if you have higher balances.
• I have had bad experiences with E-Trade brokerage, including hour-long hold times and slow service. I’m not sure if the bank has a separate customer service department.

First Impression
If you already use E-Trade, opening a Max Rate savings account is probably a no-brainer due to the lack of fees. For others that move money around a lot, it may be also be useful to open one these accounts to take advantage of those fast interbank transfers.

Speaking of good local bank account combos, if you have Washington Mutual banks in your area, combining their Free Checking and their new 4.00% APY Savings account (updated rate 8/08, only available online) also makes a great option. You get the convenience of local branches and ATM withdrawals and deposits, plus the high interest rates and online fund transfers of online banks.

I’ve had the Free Checking for about half a year and the Statement Savings for a couple of months now, so I thought I’d post up my experiences with them:

Basics
The WaMu Free Checking account has:
– No minimum balance or direct deposit requirements, open with $1
– Free basic checks for life
– No ATM fees on their end
– One free overdraft per year
– Free outgoing wire transfers.

The Statement Savings account has:
– A competitive 4.00% APY on all balances (as of 5/08)
– Rate is only available online
– No minimum balance requirements, open with $1
– Instant transfer to/from the Free Checking

Opening (and Closing) Process Review
I opened up my initial Free Checking account in-branch, and posted about that previously. However, you must open the savings account online, and in connection with a (separate, new) WaMu Free Checking account. The good thing is that you can open them both in 5 minutes and even fund using your existing WaMu accounts! Here are step-by-step instructions for existing WaMu customers.

If you didn’t already have a WaMu Checking account, you’re all set. But if you did, now you have two Checking accounts. But you have to keep the 2nd one open to maintain that happy 4.00% rate, otherwise it drops to something piddly like 0.25%. So, I decided to close my initial 1st checking account and just use the 2nd one. You know what the paradoxical thing was? I couldn’t close it online or via phone. I had to go into a branch and see a teller. How backwards is that? Be sure to bring all your old checks because they can shred them all for you.

Overall Review
The lack of almost all common fees is great. No minimums, no direct deposit needed, free checks, and so on.

The account is also very convenient. I can deposit checks directly into the savings account at an ATM, maximizing my interest. Can’t do that with an online bank. I can then move money into the checking account instantly online as I need it (limited to 6 times a month I think). WaMu has ATMs all over my area as well so withdrawals are easy too.

The online interface overall is good. It’s simple and it works, so I’m satisfied. The Online Billpay is the same way. I personally like BofA’s system better.

One nice feature that they only added in the past few months in online funds transfer! So now you can link up external accounts using just routing number and account number. They link via the usual two trial deposits. Note that WaMu yanks the spare change back. 🙁 Transfers are free both in and out, making things very convenient.

If you have a good Washington Mutual bank presence in your area, the lack of fees, convenience, and very competitive interest rate make this checking/savings combination very hard to beat.

With their high-yield certificates of deposit as well, it makes a convenient package:

I recently opened an HSBC Checking Account to get the $50 bonus, but also to work with my existing HSBC Direct/OnlineSavings account paying 4.80% APY. Now that I have both, I would definitely recommend it! With my SmartPackage Interest Checking account, there is no monthly fee with either direct deposit or $3,000 in combined balances in ‘qualifying accounts’. The big question was whether the OnlineSavings account is such an account. To have written confirmation, I sent an online secure message on HSBC’s site. The response:

Your Online Savings account balance will be included for the combined balance requirement of your checking account.

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Every time there is an issue with a bank, I have to go digging to find their fine print again. No more! I have tracked down the direct links to the Terms & Disclosures for each of the banks on my high-yield savings account comparison page – Capital One 360, Emigrant, HSBC, and VirtualBank. I’ve also highlighted some of the useful information from each. Hopefully it will serve as a good reference.

Capital One 360 – Terms & Disclosures
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[Update: This review still applies, but the rates are a bit old. Currently rates for this account can be found here. As of 4/3/06, it is 4.62% APY.]

Now that Presidential Bank has raised their Premier Savings Account rate even higher to 3.87% APY*, I thought I’d post a brief review of the account since I have one. I previously posted a review of the Presidential Bank Internet Plus Checking Account.

Pros:
Great Rate! They have consistently good rates, now beating Capital One 360 by 0.72%. I’ve found their customer service to be very satifactory. The interface is fine by me, although I’m a “Does it work like I want it to?” kind of guy, and don’t need too many bells and whistles.
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A reader (Thanks Johns) just pointed out that World Savings Bank is offering a promotional 4.16% APY 7-month CD, with a minimum opening balance of $10,000 (max $100,000) [more discussion here]. Offer ends July 9th. This is a great rate, and I really doubt any online savings account such as ING (now 3%)or Emigrant-Direct (review) (now 3.25%) will be able to beat it over a 7 month period even with future rate hikes.

World Savings is a pretty good-sized bank, I’ve walked past their branches, but they are not everywhere (branch locator). However, there are no residency requirements to open an account. You can open an account right online. The 4.16% CD is the very first option to open. They have a 3-star “Performing” Safe & Sound Rating from BankRate.com.
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