Born in the 1970s, I didn’t get to experience the days when anyone with a bank account could earn 18% APY in their savings. When I started being aware of interest rates — something that didn’t happen for me until I was out of college, struggling to earn a living, and thinking of a savings account as something I might never afford to have — the concept of online banking had already taken off. Brick and mortar banks were offering paltry interest while NetBank and ING Direct were offering higher interest rates and sign-on bonuses. This is the reality for every generation from Generation Y on down; superior products are often available to those who wish to look past the traditional teller-based banking system.

What is the point of saving? The financial media place the strongest emphasis on interest rate — the fee banks pay depositors for the privilege of using the customers’ money. The interest rate is important, of course, but this singular focus leads to the idea that a savings account is a type of investment. Customers often chase the highest interest rates blindly and get upset when their savings, even at the highest interest rates offered today, lose purchasing power thanks to inflation.

Savings accounts were never meant to be investments. They do play a role in investing by being a super-safe (no-risk) option for investors looking to balance the riskier (and potentially more rewarding) selections in the portfolios. This safety feature drives people to savings. Besides being a foil to riskier investments, everyday savings is best for any money you think you’ll need to use in the next year, including or in addition to a good portion of your emergency fund.

How do you know which savings account is best? Since my first introduction to online saving, the number of options for banking with savings accounts, online and offline, has grown. To muddle through the myriad banks and accounts, focus on specific criteria for making your selection. There are four basic criteria for a bank account. In order of importance:

1. Stability
2. Accessibility
3. Interest income
4. Service

Stability. When it comes to savings, stability comes first. While it’s good to be a customer of a solid bank, any bank can fail. When yours does, FDIC protection will ensure your money is never lost. While you may believe that some banks are more stable than others, unless you’ve personally reviewed their balance sheets and cash flow statements, you’re relying on marketing for your judgment. Big banks are perceived as the safest, but they often have trouble in major financial crises. Small banks fail, too, and there are many more of them than large banks.

Big or well-known banks in the United States always have FDIC insurance. If you are unsure, look for the FDIC logo or use FDIC’s search engine to review the bank before you deposit. Credit unions have insurance coverage from the National Credit Union Administration (NCUA), and this coverage is similar and as effective as FDIC insurance.

Accessibility. If your money is in a bank that has no branches near your living or working location, you might have a delay getting your money when you need it. This is the one drawback to online-only accounts; if I want to see that money, I need to first initiate a transfer to a local brick-and-mortar bank and withdraw the funds from there. That process could result in a delay of at least two business days. That’s one reason I suggest a tiered emergency fund.

Interest income. Most savers might not profit enough from a 0.1 percentage point difference between banks, so chasing the highest interest does not always pay off. Chances are good that the interest rate you receive, especially after taxes are paid, will not exceed the rate of inflation. Over time, the purchasing power of your money in savings decreases, but it decreases much less than it would if you were leaving your savings outside of the banking system. Earning interest in your cash isn’t really investing, but compound interest will benefit your balance over time.

Service. Having good customer service, including good tools for customers like websites and mobile access, is the number one reason a saver is likely to stay with a bank. As ING Direct fell from its reigning position at the top of the interest charts, many customers stayed with the bank thanks to their easy-to-use website and friendly customer service, though inertia likely played a role as well.

ING Direct, Ally Bank, and Discover Bank have been cited recently for offering the best all-around savings accounts. I’ve been a customer of these three banks and many others, and I offer my reviews and suggestions here.

Photo: Bytemarks

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