There are two major factors that affect your return and make you lose money; inflation and taxes. For every dollar of interest you make each year Uncle Sam takes 30%. The government treats your interest as income and taxes you on it. You just lost $1 of the $3 you earned in interest. Your year-end gain is now $2 on your hundred-dollar investment.

The next negative force affecting your investment is inflation. Inflation in the United States has been 3% to 4% every year historically. You can expect to have your money worth 3 to 4 percent less year-after-year because the Federal Reserve keeps pumping money into the economy. This means the $102 balance in your savings account can only buy $99 worth of goods and services this year. Your hundred dollars is now worth less than when you started a year ago.

Does this mean you shouldn’t have any money in a high interest online savings account? No. The alternative is far worse. If you kept your money in a checking account, regular bank savings account, or stuffed your money in a mattress the scenario would be three to four times worse. Instead of losing $1 you could lose $3 to $4 every year. Your money is better in a high yield savings account than not.

The point here is not to get too excited with online savings accounts returns. They will help you ‘tread water’ but you won’t build your wealth. You might consider a non-FDIC-Insured money market account for slightly higher yields but money there shouldn’t be considered ‘investments’ either. In the end you want most of your money in real investments like stocks, mutual funds, real estate, and/or bonds.

Please leave a comment if you have any further recommendations on this subject.

Signing up
The sign-up process wasn’t completely easy but it was manageable. One thing I didn’t like was the requirement to tell them where you were getting the money. I’ve never had to give that information before so it can’t be required by law. They also pulled my credit to open the account. I’m not sure if it was a soft pull or a hard pull. In retrospect it would have been nice if they had given me warning that opening an account involved pulling my credit. I’m sure they disclosed that in the eight page ‘terms and conditions’ I agreed to.

Connecting my external bank account
This part was easy and it only took a few minutes to do. The best part is that FNBO Direct offered two options to add an external bank account. The first option requires two small amounts being deposited into your original bank account. This method is the most common practice among online banks. It usually takes about a week for everything to be deposited and verified. The second option is much quicker. In lieu of the deposit method FNBO simply asks for your login name and password at your current bank’s internet site. After 30 seconds my bank account was verified and I could add funds to my new savings account.

Security
This is FNBO’s strong suite. They were very thorough about security. Other banks I’ve worked with sacrifice usability to increase security. FNBO allowed me to pick the answer to my secret question without any problems. Other banks will ask a question like “What’s your nickname?” and if you type in “Bob” an error message will show up saying “Your answer is too short.”. If your nickname really is “Bob” this is really frustrating. This is not the case with FNBO. Their secret questions are easy to set up and you can make them anything you’d like.

Another positive thing for FNBO is that every page on their site started with the secure https://. For those not familiar with what that means let me explain. Regular website addresses start with http://. When a website is encrypting data their website addresses will start with https:// (notice the extra ‘S’ at the end). Any time you enter your financial information or sensitive passwords make sure you look for the “S”. Some websites won’t start using encryption (https://) until you’ve gotten a little deeper into the sign up process. FNBO has it on every page of their website.

Depositing Money
An FNBO Direct account doesn’t require a minimum deposit to get started but I deposited funds anyways. It took a few days for the transactions to register in the account. FNBO doesn’t post the new deposit to your account for three business days. This is an industry standard. Something that surprised me is that FNBO doesn’t show any evidence that a transfer has occurred until the funds have settled. Most banks will show an increase in your balance but your ‘available balance’ won’t change until three business days have passed. FNBO does have a note stating that funds take three days to show up in your account.

Nice little extras
FNBO automatically sent me an ATM card which is free to use on all ATMs on the Star system. It’s a nice feature they don’t mention as I was signing up. They other nice feature they don’t mention is their Bill Pay feature. I’ve been using the Bill Pay feature with my current bank and I love it.

So…Am I done now?
When I first signed up I wasn’t sure if I was done yet. There weren’t any clear messages that said, “Thank you, you’ve completed the first stage of the sign-up process”. Instead they offered me an account number and a summary of my signup. But when I tried to sign in FNBO wouldn’t accept my new account number. What they hadn’t told me is that it takes a day to verify the account. Once the account is verified they allow you to set up your username and password. To their credit they did send some emails with these instructions but they didn’t show up for a few hours. To say the least, I was confused after I signed up.

Any regrets?
I’m kind of wishing I signed up for eTrade. While eTrade has the highest rate I was hesitant to sign up with them because they are the worst for nickel-and-diming their brokerage customers. On further inspection it looks as if they are sincere with their “No fees” claims. Right now eTrade has FNBO beat by 0.25% of a percent offering 4.10%.

Summary
FNBO is a great company and I feel secure with managing my online savings account with them. Their rates are among the highest (anywhere). They would be a good choice for anyone wanting to open an online savings account.

If you have a savings account that you enjoy please leave a comment.

Note: With WTDirect, the 1.51% rate is for the first 60 days. After that the rate is only active if you have over $10,000 in your account.

Competition among online high yield saving account providers is very high. In fact, each of the banks listed below are more then eight times higher then the national average for saving accounts. It’s important to point out that these are strictly savings accounts and not money market accounts or CDs. They operate much like traditional saving accounts.

This list doesn’t include many banks with changing terms. Because competition is so high many companies offer fantastically high rates. These rates only apply for an introductory period. After the introductory offer expires the companies I researched weren’t clear on what their fees or default rate would be. To be fair I’ve left these accounts off the list.

As a word of advice on these savings accounts I would use these accounts as a “rainy day” or emergency fund. Too often people start using these accounts as investment vehicles. They offer great rates but you’d be better off investing in stocks, bonds, or mutual funds in the long term. While FDIC insured savings accounts are the least risky they can hurt your overall wealth substantially in the long run.

Some basic information about these online savings accounts is that they are all FDIC insured. Every one of them will link up to your existing checking account. Signing up for each of them takes less then ten minutes (usually). These banks are market leaders and are trusted institutions. Deposits are unlimited and withdrawals are limited to 6 a month.

Everyone on the list meets the following criteria:

• No Fees – No maintenance fees and low balance fees. In other words, if you wanted to open the account and then forget about it you wouldn’t pay a penny.
• No Minimums to earn the high yield interest rate – If you have $100 or $100,000 you will get the highest rate they offer.
• $1.00 is the minimum amount of money required to open an account
• Market leader – They continually have the highest interest rates and are well known in the industry

*APY Updated October 2009

If you have any experience with online saving accounts please we’d love to have your feedback.