Passbook and statement savings accounts barely pay
By Laura Bruce • Bankrate.com

Some things never change. Despite 15 rate hikes by the Federal Reserve, interest rates for passbook and statement savings accounts have barely budged.

Bankrate's spring 2006 survey of passbook and statement savings accounts shows that the average passbook account interest rate rose 4 basis points over the past six months to 0.59 percent; the average rate for statement savings accounts moved up 1 basis point to 0.54 percent. A basis point is one-hundredth of 1 percentage point.

As usual, thrifts -- savings and loan institutions -- pay better rates than banks. On average, thrifts are paying an additional 23 basis points on passbook and statement savings accounts.

The series of Fed rate hikes has pushed the fed funds rate from 1 percent in June 2004 to its current rate of 4.75 percent. The fed funds rate has an indirect, but major, impact on savings rates, and some financial institutions, in an effort to boost consumer deposits, have responded by offering high-yield savings accounts and CDs.

But passbook and statement savings accounts haven't benefited. These accounts are the most liquid of bank accounts. They're also extremely convenient. Every bank carries them. Open a checking account and get a savings account on the side to keep excess money that's not needed to pay bills.

Going nowhere

The Federal Reserve has raised the fed funds rate 15 times since June 2004, but people who keep money in passbook and statements savings accounts haven't profited. Interest rates for these accounts have pretty much flat-lined the past few years. Many institutions take advantage of consumer inertia -- these accounts are convenient and customers often don't bother to move their money to high-yielding savings and money market accounts.

Semiannually, Bankrate surveys savings rates offered by the 10 largest banks and thrifts in the top 10 metropolitan markets. Survey after survey has shown that consumers pay a high price for the convenience of these accounts. There's a much more profitable way to save, and the inconvenience is minimal.

Visit Bankrate's high-yield savings money market accounts database and you'll see more than a dozen institutions offering 4.5 percent or better on their high-yield accounts. Many of these accounts can be opened with anywhere from $1 to $1,000. Sure, you have to open an account and, perhaps, link it to your checking account, but the return is worth that little bit of inconvenience. Put $2,000 in one of these accounts and you'll earn $90 interest in one year versus $11.80 from a passbook account paying 0.59 percent interest.

There's really no reason to give your bank an interest-free loan, which is what you're doing when you keep money in a low-rate savings account. In addition to high-yield savings and money market accounts, there are a few high-yield checking accounts that are a better alternative to giving away your money.

Everbank's free checking account pays an introductory rate of 5.51 percent for the first three months and then drops to a minimum of 3.01 percent for balances under $10,000. You'll need $1,500 to open the account, but after that there is no minimum balance to avoid fees. Expect to see more online institutions, including ING Direct, jump into the free, high-yield checking account arena in the near future.