Cash.  Everyone needs  it.  It takes many forms.  Perhaps you have $50 in your wallet, and a few thousand in your checking account.  Hopefully you've got an emergency fund somewhere as well.  Your portfolio is all about balancing liquidity with returns.  Your stock mutual funds locked up in a 401K aren't exactly easy to get to.  But you don't need $20K in your wallet.  You need something in between.  Years ago, people would keep some money in their checking account and then open a savings account at the same bank.  It paid a little more than the checking account, but at the cost of a few restrictions (like you couldn't write checks on it.)  When banks were regulated on their interest in the 1970s, money market funds were born, allowing similar liquidity (and even check-writing), without the limitations on interest.  Deregulation put banks back on equal footing, and not only did they raise interest rates in savings accounts, but they quickly began opening “money market accounts”, which were simply savings accounts that paid a little more, in return for a few more restrictions.  As the internet age began in the 1990s, companies changed.  Those with “brick and mortar” businesses developed an online presence, and entire companies were founded that had no “brick and mortar” buildings at all.

It didn't take long for the bankers to realize that eliminating the costs of a “brick and mortar” establishment allowed them to offer high yields on their savings accounts while still allowing for healthy profits.  For years these yields were competitive with money market funds AND offered FDIC insurance.  Sure, you couldn't go down to the local branch and ask a teller for your money, but it was quick and easy to transfer the money to and from your local checking account, and eventually people got used to it.  When the credit crisis began and short term interest rates were cut, money market fund yields essentially became zero, or about the same as your checking account.  The online bank savings account yields also dropped dramatically, but since they had other sources of revenue (and needed funds to loan out) those yields didn't drop as dramatically, or as far, as the previously comparable money market funds.

So what did investors do?  Well, those who weren't already using high-yield online savings accounts moved their money from money market accounts to an online bank.  The best of these currently yield about 1%.  That isn't much, but it's 1% more than you're making anywhere else.  If you haven't done so already, here are your current top choices:


Ally Bank

This is the old GMAC bank, and as such some people have an aversion to it.  They're still mad about having to bail out GM during the financial crisis.  For those who aren't bothered by that, Ally offers a nice savings account rate, good service, and some unique features such as the “raise your rate” CD.  Their current APY is 1.04%.  When I finally gave up on the Vanguard Prime Money Market Fund getting back to “normal” anytime soon, I opened an account here, and daresay I haven't had any problems with it.  Interest compounds daily and there aren't any significant fees or minimums. Like other accounts, you can only withdraw money from it 6 times a month.  If you want to get the same rate AND check-writing, open their money market account.  That account is just as FDIC insured as the savings account.  In fact, as near as I can tell, there is no benefit of the savings account over the money market account.


Discover Bank

Discover requires $500 to open and to maintain without fees, hopefully that won't be an issue for you.  Their rate is slightly better currently than Ally (1.15% APY) [Update: 8/14/2012, rate is now 0.80%] and interest compounds daily.  There are a few fees for additional services (including $20 if you close the account within 90 days.)  Their money market account pays a little less, but you can write checks out of it.  Disclosure: I have an advertising relationship with Discover Bank.  If you click on their link, I get a tiny commission.  It's a great way to support the blog and check out a great product at the same time.


Capital One Bank/ ING Direct

Capital One recently bought out ING Direct, you know, the online bank with the “Orange” account.  ING Direct was one of the great original online banks.  Minimal fees, great rates, simple features, and a useful website.  Hopefully, those features will persist.  The ING website is still up, and it seems you can still open an account with them.  The savings account has an APY of 1.00%, but has no fees or minimum balances and interest compounds daily.  If you have $50,000 to invest there, you might as well get their checking account.  It pays the same and allows you to write checks. Disclosure:  I also have an affiliate relationship with ING Direct.  Feel free to support the blog by opening an account. Their current deal gives you $50 and me $20 if you open an account from this link:

Capital One has an InterestPlus Online Savings account that pays 1.10% (have to keep at least $1000 in it) plus a quarterly bonus of 10% of the interest earned if you either keep $10K in the account or you use your Capital One credit card once a month.  I'm not sure what the effective rate would be in that case, but I suspect it could be as low as 1.13%, although it could be as high as 1.21%.  It isn't quite clear yet how these two entities will be combined.  For the near future, Capital One says it doesn't plan to change anything about ING.


Sallie Mae

Sallie Mae offers an FDIC-insured money market account with no fees, no minimums, check-writing, and a rate of 1.15% APY.  They offer a savings account as well, but it only pays 1.10% APY.  I see no benefits of that over the money market account right now, but rates can change at any time.  Interest compounds daily.

There are several other online banks offering rates of 1% or higher but none are what I consider “household” names.  They include Colorado Federal Savings Bank, First Trade Union Bank,, First Internet Bank of Indiana, EverBank and OneWest Bank.  There are many bank accounts out there offering less than 1%, such as HSBC and DollarDirect (which used to have some of the top rates). But you have to draw the line somewhere.

Do you use one of these online bank accounts?  What has your experience been, either good or bad?  Comment below.

Disclosure:  Besides ING and Discover Bank, I also approached Ally, Everbank, and HSBC about sponsoring the blog through an affiliate relationship, but they declined.  Punks.  I guess Ally has been a little hesitant about affiliate relationships with blogs who fully disclose their conflicts of interest.