It’s a new year and a new decade. I expect the next ten years will fly by and 2020 will be here before I know it. Thinking about how fast the future is barreling towards the present is inspiring me to start making real changes in my life, and if there is an opportunity to improve my financial condition along the way, I will do it. I want to start the decade off right.
There are a number of easy steps anyone can take to start the decade off right financially, particularly if personal finance hasn’t been a frequent consideration until now. Last week I mentioned you could set yourself up for a great decade by paying off debt. Another way to start the 10s in conjunction with paying off debt is to open a high-yield savings account.
I’ll be honest: “high-yield” is more of a joke than a description these days. The government of the United States wants to recover from financial crisis by encouraging banks to lend money. The economists in charge of monetary policy are offering these banks really low interest rates when they borrow from the Fed so the banks will in turn be more willing to lend to the public and make some money in the process. While this situation would be great for borrowers, if they qualify for loans, but it has created a bad situation for savers. Those low federal interest rates allow banks to offer laughably low rates on savings accounts to the public.
Just a few years ago banks like HSBC Direct were offering up to 6% APY while now they are offering around 1%. Even at 1%, savings accounts considered “high-yield” are still beating the traditional savings account interest rates you will find if you walk into a bank branch. The typical interest rate for a regular, non-high-yield savings account is 0.05% APY right now. That rate earns you $5 a year on a balance of $10,000. That hardly seems worthwhile.
High-yield savings accounts generally offer interest rates above the rate of inflation. So even though your money is readily accessible through withdrawal at any time, you’re not losing purchasing power while your money is in the bank, like you would be if you keep your cash under your mattress or in a typical low-yield savings account. As the economy improves, high-yield savings account interest rates will increase. These are always variable rates, so unlike most certificates of deposit, you are not locked into today’s lower rates.
If you are looking to keep your finances simple, I suggest choosing just one bank with a high-yield savings account and remaining with them for a long time. I, on the other hand, have savings accounts at about a dozen banks because I test and review them for Consumerism Commentary, but I would prefer a simpler approach for myself.
Choosing a high-yield savings account
When choosing a high-yield savings account, there are several things to consider. First, of course, is the interest rate. Over the past few years, I have seen new banks enter the marketplace with a big marketing push and a surprisingly high interest rate, only to reduce the interest rate to the middle of the pack after a few months. This is a great strategy for attracting attention and new customers who are willing to move their money to follow the top interest rate. I’ve found that rate chasing is not worth the trouble unless the difference between rates would result in an increase more than a hundred dollars a year.
For this reason, you may not want to simply choose the bank with the highest interest rate. You would do better by choosing a bank that has a long history of being towards the top of the list. This listing of historical interest rates will help you determine which banks consistently offer the best.
You may also want to consider other aspects about the bank, such as availability and helpfulness of customer service, ease of website navigation, how long it takes to post electronic deposits, and whether you have access to ATMs for free. For answers to these questions it helps to read reviews written by actual customers.
A high-yield savings account forms the basis of a personal finance portfolio. It should be where your paycheck is directly deposited to allow your money to earn as much for you as possible. Your checking or payment account should be linked to your savings account so you can automatically transfer as much as you need to pay your bills each month in addition to the cash you need to withdraw.
Here are some suggestions:
FNBO Direct. High interest rates and simple website. Read my review.
HSBC Direct. High interest rates.
ING Direct. Average interest rates (for a high-yield account) and helpful customer support.
Ally Bank. High interest rates and simple website. Read my review.
This article is part of a series called Start the Decade Off Right on Consumerism Commentary.
Photo credit: walla2chick
Updated September 14, 2011 and originally published January 4, 2010.