This is the next installment in a series at Consumerism Commentary about taking control of your finances. Please consider subscribing to the Consumerism Commentary RSS feed for updates.

If you’re on your way to spending less than you earn, then you’re going to need a good place to put your excess income. Even before setting savings goals and before establishing an emergency fund, it’s best to let your cash earn as much interest as possible while staying somewhat accessible. High-yield savings accounts are the best options.

Typical savings accounts at most banks pay an interest rate well below 1%. With conservative estimates of inflation running 3% to 4%, you’re losing purchasing power quickly by leaving your money in these accounts. In the last several years, internet banks paved the way for higher interest rates. Theoretically, these banks without branches could afford to pay higher rates because the companies lacked the expenses associated with owning a network of branches on street corners or in strip malls. More recently, traditional brick-and-mortar banks added more accessible high-yield savings accounts to compete with these offerings.

Interest rates have fluctuated over the past few years and we’re currently at one of the low points. Great interest rates are harder to find, but there are a few quality savings accounts offering 4% or close to it. While you may barely beat inflation at this rate, the purpose of a savings account is not long-term investment. You want to cash available to you within a day or two. All it takes to withdraw your cash is perhaps an online transfer and a visit to an ATM.

You shouldn’t just chose the savings account with the highest interest rate. Banks offer high interest rates because they want to compete for your deposits. If any particular bank is in the midst of a capital crisis — if they don’t have enough cash on hand to pay their expenses and liabilities — they will raise rates to attract more customers. For example, earlier this year, Washington Mutual raised rates several times and was frequently at the top of the list of interest rates. The purpose of this plan was to receive more cash. In the end, Washington Mutual failed and was bought by JP Morgan Chase.

Despite turmoil through bank failures, mergers, and acquisitions, there is very little risk in savings accounts. The FDIC insures these deposits on behalf of the banking industry. As long as you stay within the coverage limits, you should be able to access your money even in the event of your bank going out of business or being taken over by another bank. There may be a delay in your ability to access the money, but that is not typical

I have two recommendations for high-yield savings accounts. I am a new customer and new fan of FNBO Direct, the online division of the First National Bank of Omaha. I’m not the only fan of this account. Recently, Kiplinger Magazine honored FNBO Direct as the “best online savings account.” As of today, the online savings account offers a 3.25% APY. Since opening my FNBO Direct account in September, my experience with FNBO Direct has been smooth.

My other recommendation is ING Direct. With the Orange Savings Account’s 2.75% APY, this is not the highest rate you can find. ING Direct was one of the first banks to popularize the idea of branchless banking, and they have historically offered great interest rates. All reports indicate that customer service is fantastic and they have one of the best websites for navigating your accounts. It’s also very easy to organize your money at ING Direct into different labeled subaccounts. With ING Direct you can earn up to $525 in bonus interest my participating fully in their referral program.

Last Friday, I wrote about newcomers to the high-yield party, including Venture Bank Direct, ShoreBank, and DollarSavingsDirect. I also maintain an index of the popular high-yield savings accounts, organized by interest yield on the first $1 of deposit. The list was updated last night to include the rate changes from the past few weeks, and there have been several.

The high-yield savings account is an important piece of healthy finances and it will come into play as someone further develops money management acumen. Here are six tips for optimizing your savings:

1. Open the high-yield account. It will take only minutes to be approved, but funding your account electronically may take several days.
2. Keep your change. Use a jar to collect your excess coins every day and take the jar to the bank.
3. Automate your savings. Set up Direct Deposit for your paycheck so you’re saving first, withdrawing for expense later.
4. Divert small, unnecessary daily expenses to savings. If you spend $10 on two gourmet coffee drinks each morning, switch to one $2 Dunkin’ Donuts regular coffee and deposit the $40 you save each week into your savings account.
5. Hide your savings from yourself. Try to forget that you have money stashed away earning interest and survive without it.
6. Make your raise invisible. If you receive a 3% increase in your salary, increase the amount you leave in savings each month.

If you do things right, the money in your high-yield savings account should grow each month. It feels good to be in control of savings.

Image credit: Redvers

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