setting your money free
Low interest rates may be great for borrowers, but they're terrible for savers. According to Bankrate.com, the average money market account pays just 0.46% in annual interest while the average interest-bearing checking account pays just 0.56%.

For those keeping score at home, that's less than one penny a year in interest for every dollar saved.

Some big-name banks are paying even less. JPMorgan Chase (JPM), under pressure for nearly $6 billion in losses suffered in its European operations, offers its regular savings customers just 0.01% and its "Plus" accounts 0.05% for balances under $10,000.

With inflation eating up 1.7% of Americans' spending power last year alone, and an average 2.42% annually over the past decade, parking money in either of these accounts -- or, really, any account held by a traditional bank -- is an almost sure-fire money loser.

What to do? Turn to the Internet.

According to DepositAccounts.com, June marked the second straight month of increases in the average rate of Internet savings accounts. Intense competition for deposits has big names such as ING and Ally pitching higher returns.

Why Banks Are Backing Off

Bricks-and-mortar institutions are under too much pressure to match their Web-based counterparts. According to DepositAccounts.com, seven banks and one credit union shut down last month, up from four banks and one CU in June 2011. North Carolina's Waccamaw Bank and its $533 million in assets topped DepositAccount's list of closures.

Meanwhile, ratings agency Moody's last month downgraded its credit assessments of 15 of the world's largest banks. Five American banks were targeted: Citigroup (C), Bank of America (BAC), Morgan Stanley (MS), Goldman Sachs (GS), and -- surprise! -- JPMorgan Chase. Bad loans, poor investments, European worries, interest rate woes, and related worries factor into how creditworthy a bank is deemed to be.

The Internet to the Rescue ... Sort Of

Web-based operations don't usually come with the same baggage, and as a result tend to offer consumers better deals.

The average rate for Internet savings accounts exceeds the average rate of all savings accounts by 45 basis points, DepositAccounts.com reports.

But not all accounts are equal, and most of their interest rates still come up short of inflation. The average Internet savings account paid just 0.675% as of this writing, up 0.2% from last month but still well short of rate of price increases taking purchasing power out of American wallets.

Why have a savings account at all in this environment? Liquidity. Cash can be transferred between accounts with a few clicks or withdrawn any time of the day or night at most automated teller machines.

Three of Better Deals Right Now

For those who insist on having that flexibility but who also don't want to give too much away to the inflation monster, here's a closer look at three of the best deals identified by DepositAccounts.com.

  1. Ally Bank Online Savings. Pays a rate of 0.84% as of this writing -- rates vary according to market conditions -- and requires no minimum deposit to open. Nor are there any monthly maintenance fees and interest is compounded daily. The downside? As with all online banks, your best bet for building a balance is to electronically transfer funds from an external checking account.
  2. ING Direct Orange Savings. Pays 0.80% as of this writing with interest accrued daily and compounded and credited monthly. ING also demands no minimum balance, though deposits are subject to a five-day hold before funds can be withdrawn. The initial account deposit remains on hold for 10 days. As with Ally, ING prefers savers use an external checking account for electronic deposits and withdrawals.
  3. SmartyPig Savings Account. Pays 1.00% annually as of this writing. SmartyPig isn't typical in that the name refers to a program rather than a bank. BBVA Compass is the financier behind the account. SmartyPig itself is a system that rewards automatic saving toward specific goals. Retail partnerships provide cash back bonuses for trading in savings for gift cards.


The lesson? Shopping around isn't just something to do at the mall or the car dealership. Bank accounts may no longer be paying the interest rates they used to, but whether it's through the local bank, prepaid cards, or the Internet, diligent consumers can still find good deals for stashing their rainy-day savings.


Motley Fool contributor Tim did not own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and past columns. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Citigroup. Motley Fool newsletter services have recommended buying shares of Goldman Sachs.


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