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Dr. Don Taylor, CFA, advice columnistShopping for a high-yield savings account

Dear Dr. Don,
There is a lot of advice on the Bankrate Web site and in your column about developing an emergency fund. I am 25 and have been able to save up a little over $2,000. I currently have it in a money market account earning approximately 3.3 percent. This number seems low compared to the other options out there.

My question: On the Bankrate Web site there are a number of high interest online savings account advertisements. Is it likely that these high interest savings accounts will keep pace with money market accounts or are these types of accounts too new to understand how they will evolve? I am debating whether to change my money market account to one with better performance or to transfer it to a high interest savings account.

I appreciate any advice you can offer.
-- Brian Buildup

Dear Brian,
A savings account typically has a stickier rate than a money market account. What I mean by that is, a savings account doesn't react as quickly to changes in market interest rates. A high-yield savings account, by its nature, is more competitive than the average passbook account at your corner bank.

You always have the ability to vote with your feet if you find that your high-yield savings account isn't competitive. After all, it's not a CD with early withdrawal penalties. That said, you should make sure that you haven't committed to having the money on deposit for a period of time before you decide to move funds.

While advertisers love to have you click through their ads to shop for a new account, I think you're better served to first shop rates using Bankrate's 100 highest yield feature. Sort by annual percentage yield, or APY, and see how things shake out. Many of these financial institutions allow you to click through from the rate page, and for those that don't, it is easy enough to use your browser's search feature to find them.

High rates can sometimes mean that a financial institution is struggling to bring in deposits, so you want to consider the bank's Safe & Sound rating, too. An FDIC- or NCUSIF-insured deposit is backed by the full faith and credit of the United States government, but if the interest rate is the same, you should go with the higher rated bank. Bricks and mortar don't make a bank safer; it's how the bank is managed. That's why the Safe & Sound ratings are important.

Getting a competitive rate of interest on your emergency fund money makes it a whole lot more palatable to have this money invested in a liquid account. You should be able to pick up an extra 1.5 percent to 2 percent on your account. Keep in mind that for $2,000, that represents only an additional $30 to $40 per year, so don't spend a ton of time or energy trying to wring out the last 0.01 percent in shopping for that account.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."'s corrections policy -- Posted: Nov. 1, 2006
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