Competition for online savings deposits is heating up; here's a written transcript and an audio link to an interview I did Monday with Dimitri Sotis of WTOP Radio in Washington, D.C.
Even though interest rates have been in a very steady decline for nearly five years, we are seeing a bit of a turnaround in the online savings account arena. These are accounts that are nationally available (and) pay the top yields. Right now, we're not only seeing new entrants to the market, but also an instance where we're seeing the most aggressive payers increase their payout -- and that's in stark contrast to the underlying trend of the last several years.
Barclays Bank is a new entrant into the online savings account arena, and they're paying 1 percent annual yield. CIT Bank recently increased their payout; they're now up to 1.05 percent. That's noteworthy in an environment where we're still seeing, week in and week out, yields generally declining.
You can always compare the best yields at Bankrate.com. (Competition) really puts an emphasis on the need to shop around. (This is) not only so you get the best return, but it's those banks that are paying the highest returns now and most aggressively seeking deposits that are most likely to keep their yields at attractive levels even when interest rates do begin to rebound.
An online savings account has the same FDIC insurance protection as one from a bank right down the street. The difference is, you're going to get a much better rate of return. Your interest earnings will be several times what you would get if you didn't shop around. You have access to the money -- you can move the money online, linking that to your checking account.
For banks that are looking to raise deposits, it's a lot cheaper to pay an attractive yield on an online savings account that's available nationwide, and to market that via the Internet, than it is to try to grow those deposits by building a bunch of bank branches or making expensive acquisitions. As consumers, we benefit from this competition. The banks that are paying the higher rates of return give us an opportunity to get an additional rate of return without having to take on any risk.
If you're going to get a yield of 4 percent or 5 percent in this environment, it's going to mean taking some investment risk. You're going to be looking at something like a much riskier bond, either a very long-term bond that is susceptible to rising interest rates or a bond issued by an entity that has a lot of credit risk. In other words, some uncertainty as to whether or not they're actually going to be able to pay the bills.
Dividend-paying stocks are another area where you could get a return of 4 percent or 5 percent in terms of the dividend, but the risk you're exposed to is that the share price could fall. If you want attractive rates of return, you're going to have to be willing to take some risk. If you're not willing to take risk, then you're going to have to settle for lower rates of return, something in the neighborhood of the 1 percent that you're seeing on online savings accounts.
Everybody needs an emergency savings account. The only thing that we can really count on in life is unplanned expenses that always seem to arise at the worst possible time. It's your emergency savings that's really going to help you sleep at night knowing you have some money tucked away when those unplanned expenses arise. The place to put that emergency savings is in an online savings account where you're going to earn a much better return than you would at the bank down the street. Yet, you're not sacrificing safety or access to the money in order to get it.