Is internet savings for you?

With savings rates so low, it might be time to look at an internet savings account as a way to boost the interest earnings on your savings.

How The Accounts Work

An internet savings account is linked to your existing checking account when you setup the new account.  This means that you will be able to transfer money between the online savings account and your existing checking account.

The transfers are made by logging on to the internet savings account’s website and entering how much you want to transfer.

Some online accounts also offer a regularly scheduled transfer, so you can schedule to have a specific amount moved from your online savings account to your existing checking account, or the other way around, weekly or monthly.

Benefits

These accounts generally pay higher interest rates than a traditional savings account, since the online accounts don’t have to maintain a brick and mortar building, or pay tellers to process your transactions.  It’s all done by a computer.

Generally the accounts have no monthly fees, no deposit fee, no withdrawal fee, and no minimums.  And the deposits are FDIC insured.

The current FDIC limit is $250,000 per depositor.  So if you and your spouse are both on the account, it’s insured for $500,000.  Meaning, if the bank goes out of business, the FDIC will reimburse you up to $500,000.

Limitations

The limitations are due to how the accounts work.  You need to have a checking account to set them up.  You generally can’t make a payment directly out of the internet savings account, so you will have to transfer the money to your checking account first before making the payment.

Transfers to your existing checking account can take 2-3 business days.  So if the transfer goes over a weekend or a bank holiday, you’re transfer could take as many as 5 days to complete.

Providers

ING Direct – Currently offering 1.10%

ING does a good job with their internet saving accounts.  They have a interest counter that tells you daily how much interest you have earned.  It’s quite fun to watch.

They also have the option of setting up a checking account with them so that you can instantly transfer money from your internet savings account to the checking account.  This would allow you to avoid the 2-3 business day limitation mentioned above.

HSBC Advance (formerly HSBC Direct)- Currently offering 1.10%

HSBC is one of the best internet saving account options, and is the one I am currently using.  They have generally maintained the highest interest rates of all the offerings, and I have never had a problem with their customer service.

And, although I have never used it, they also have the option of getting a debit card attached to the account, and being able to make ATM withdrawals from the account.  As I understand it, this would also be a way to get around the 2-3 day business day limitation mentioned above.

Emigrant Direct – Currently offering 1.00%

Emigrant Direct is one I have used in the past, but do not recommend.

I moved most of my money from them to get a higher rate at a different bank (HSBC), but left $0.01 in the account in order to collect that month’s interest.  They closed the account and initially refused to give me that month’s interest.  After calling and talking to a manager, I was able to get that months interest paid out.  It all worked out in the end, but it left a bad taste in my mouth for this particular bank.

Cautions

Some banks are trying to compare themselves with an internet savings account, but are instead a money market account.

The difference between a money market account and an internet savings account is that money market accounts have federally set limitations on withdrawals.  For example, you can only make 6 withdrawals per month.  This may not be a limitation for your situation and so a money market might work for you and you might be able to get an even higher rate, but the above internet savings accounts do not have this limitation.

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