In the Parable of the Talents (Matt. 25:14-30), the servant who buried his master's money was scolded for not earning a return: "You could have at least put my money in the bank, so that I could have earned interest on it!"
Depositing money in an interest-bearing bank account is a time-honored way of earning a return. But with all of the financial options available these days, is putting money in a local bank still a good choice?
The answer depends on what you're looking for in a bank. If you want convenient locations and tellers who know your name, there is no substitute for a local bank. But if you want to earn the best possible return, the offerings at many local banks simply aren't competitive.
Interest rates have been stuck near zero for the past few years, with every indication they will stay low for the next year or two. That's just one more reason to go online where the best savings deals are found. Internet-only banks tend to offer significantly better rates on every type of savings instrument without giving up the security of FDIC insurance. As we discussed last month, these higher rates are the result of lower expenses, since online banks don't have to maintain physical branch offices.
Here's a local-vs.-web comparison of three common savings vehicles:
- Regular Savings: At most local banks, interest rates on regular savings accounts are so low right now as to be almost nonexistent. Expect to earn 0.25% or less. In contrast, you can earn 0.75% or more by putting your savings in an online bank account.
- Money Market Accounts: MMAs typically pay higher rates than regular savings, but require larger minimum deposits. Local banks are paying 0.25%-0.40% on MMAs, depending on the size of the deposit. Web-only banks, in contrast, are offering MMA rates in the 0.60%-to-1.00% range. (Don't confuse money market accounts with money market funds. MMFs are mutual funds, not bank instruments.)
- Certificates of Deposit (CDs): Current rates on local-bank CDs vary widely. A quick SMI survey found rates on a $10,000 CD with a 12-month term ranging from a low of .05% (at a large regional bank) to a high of .40% (at a small locally-owned bank). In contrast, web banks were offering the same type of CD with rates of 1% or higher. With rates so low currently, chasing marginally higher yields by locking into longer-term CDs isn't advised.
(Rates quoted are representative, based on actual rates available in mid-April. )
Best of both worlds. Knowing that most consumers are reluctant to stop banking locally, Internet-only banks make it easy to set up a savings account that links electronically to a local-bank checking account. Transfers from local checking to online savings are as easy as a few mouse clicks.
Meanwhile, conventional banks have responded to the competition by lowering fees, expanding online services, and even offering special web-based savings accounts that pay higher rates than their traditional accounts. Still, because of higher built-in expenses, most traditional banks haven't been able to match the rates of Internet-only banks.
The bottom line: these days you're much more likely to find the best returns at an online bank, not at the bank on the corner.
(You can also find attractive alternatives at www.bankrate.com. When making comparisons, use "annual percentage yield," or APY.)