Internet-only savings banks pay way more on deposits

Without the cost of real estate and overhead necessary to run bank branches, online banks can afford to pay more interest. Vecteezy

Saving is never easy to commit to, and ever since the financial crisis there have been precious few carrots held out by banks to attract your money: The average interest paid on savings accounts is less than 0.20%.

But that’s just the average. Old-school brick-and-mortar banks are notorious for not paying much of anything on savings accounts. But there is a completely safe, completely legit, easy way to earn four to 10 times more in interest — payouts of 2% or more.

With more than $8 trillion in commercial bank savings accounts paying 0.20% or so, that’s a whole lot of interest banks don’t have to pay. You don’t have to be among those subsidizing the banking industry.

With minimal elbow grease, you could be earning more than 2%. Sure, that’s “just” 2%, but 2% is a heckuva lot better than earning next to nothing. That 2% could also be more than the bond fund in your 401(k) is paying; in late summer the yield on the bellwether 10-year Treasury was below 1.7%. Every little bit helps in building an emergency fund or saving for a down payment.

Move your savings to an online bank or credit union

Online savings banks dole out higher yields. Without the cost of real estate and overhead necessary to run bank branches, online banks can afford to pay more interest. Credit unions also tend to have lower operating costs — and a different business structure — that lead to paying higher rates than traditional banks.

According to Bankrate.com, in late summer, there are plenty of online banks and credit unions paying more than 2% for a basic savings account. Many have no required minimum, though you want to check the fine print to understand the rules of the road. Some may require a periodic deposit to keep earning the advertised rate.

Online banks also offer better rates on certificates of deposit, which tie up your money for a specific period of time; typical terms range between one and five years. The interest rate is set for the entire CD term. That’s different than a savings account where the interest rate can change at any time. Typically, banks make changes when the Fed changes the federal funds rate.

In late summer, some national online banks and credit unions were paying more than 2% on one-year CDs and 2.5% on two-year CDs, and savers could still lock in close to a 3% yield on a five-year CD. You will pay a prepayment penalty if you decide to withdraw money from the CD before it matures. Read that fine print, too.

It’s just a search away

Before you shop for a better savings deal, ask your bank about better rates. Citibank recently launched a savings account that can pay more than 2% interest if you jump through a few manageable hoops. But that’s the exception, not the norm.

Google “online high-yield savings” and you will land at sites that track the best current deals. You can apply online and fund an account through a transfer from your checking account –there should be no fee on either end for this “ACH” transfer.

While you’re setting things up, arrange for a monthly transfer from your checking account into your new high-yield online savings account. Automation is the key to outmaneuvering the inertia that dooms most everyone who “intends” to save.

If the website allows, give your savings account(s) a name. Emergency. Vacation. Wedding. Sounds cheesy? Research has shown a name/intention bolsters the motivation to keep saving.

Don’t ignore credit unions. Yes, many credit unions are set up for a distinct group, but some also extend membership to just about anyone. For example, the high rates on CDs from the United States Senate Federal Credit aren’t just for Senate members and staff. Anyone who makes a contribution to the U.S. Capitol Historical Society can join.

Online banks and credit unions are federally insured just like the brick-and-mortar banks. Always look for the “FDIC-insured” logo. For credit unions, search for “federally insured by NCUA.” Both promise full protection of up to $250,000 per account. If you have multiple accounts, your insurance protection at a single bank or credit union can be even higher.

Rate.com/research/news covers the worlds of personal finance and residential real estate.

Tribune Wire

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