High savings. Low spending. We’ve established that is the key to financial independence. Over the past few months we’ve discussed a number of passive investments ideal for growing wealth, primarily through index and exchange traded funds. 

These are super vehicles, but even when the average long-term investment return is 7 percent, there are plenty of years when returns are significantly more modest or even negative. 

This volatility makes saving for an expensive purchase over a medium period of time (a year or so) less desirable, to say nothing about the taxes on any gains or fees for buying and selling equities. 

Medium term investment factors

These are the factors should be considered investing medium term?

• Accessibility: The cost and effort of retrieving funds is a top priority. As noted above, accessing funds tied up in equities requires a sale, a trading fee, and taking capital gains (which could impact taxes). 
• Stability: Risk is the factor that determines returns. Generally, the higher the risk, the higher the return. A crypto currency might return 1000 percent, but it will more likely go to zero. Just ask anyone who bought at the top of the market in February 2018. At the opposite end of the spectrum, you could bury your money in a lock box in an isolated corner of Antarctica. Excluding the polar bear attacks and judgmental penguins, the risks of monetary loss minimal. But the returns will be zero. Finding an investment with minimal risk means modest returns. That’s the trade-off.
• Investment return: Just because there is a risk mitigation priority doesn’t mean we can’t still target a return. It’s just that scale tends to be on the lower end of the spectrum. 

Investment priorities will dictate the ranking of these factors. One of the most accessible and stable investments is a savings account. If you need to get the money out quickly it is easy to withdraw. 

As mentioned previously, Mr. FIRE Power is currently saving for a down payment on a second house.  The best investment vehicle for that year of saving (we’re in month six, if anyone is curious) is a savings account. 

The average American gives little thought to shopping around for a higher rate of return. You know how I know that? It is because of the horrifically low interest rate offered by the big banks. Do you know what the average return is for a savings account in the United States today? According to the FDIC, the average return in June 2019 is 0.10 percent. After a year, investing $10,000 in that average account will generate a $10. That is abjectly awful. 

You probably rely on one or two banks to issue credit cards and offer loans. Whatever extra cash is lying around is stored in that same bank’s savings account. Recognizing that most Americans will favor the convenience of a one-stop banking solution to multiple accounts, the big banks are able to offer these low interest rates. 

You can do better. 

The online-only bank

The great news for the consumer is relatively new online-only banks offer savings account options with significantly higher returns than the big banks. These banks offer a competitive interest rate because physical infrastructure is limited, all correspondence is digital (no mailings), and much of the customer service interaction is online. All that saves cost. Those savings are passed on the to consumer in the form of higher annual percentage yields (APY, or interest).

The downside of these online-only offerings is the pared down offerings of the banks. Many offer no ATM access or impose strict limits on free transfer activity each month. This is either a minor inconvenience or a nonissue if a customer is just looking for a safe place to grow some cash. 

Lets take a look at some of the top contenders today.

Highest interest savings accounts

Citizens Access: 2.35 percent APY 

Citizens Access’s online-only department offers one of the best rates of any savings account on the market. This bank requires a $5,000 deposit to open an account. A high cost when compared to some of the other banks on this list. But there are no fees for opening the account. If the balance drops below $5,000, the fine print offers an important caveat; “0.25% APY for balances of $0.01 – $4,999.99.” Still, this is an excellent offering for those hoping to park more than $5,000 in an account for some medium time horizon. 

Pure Point Financial Online Savings: 2.35 percent APY 

Pure Point’s online savings account is terrific for those with larger balances. For those that can maintain a $10,000 or higher balance, the 2.35 percent APY is available. Below that amount and the interest rate drops to .25 percent (which is still more than double the national average, if disappointing compared to the other offerings on this list). 

HSBC Direct Savings: 2.3 percent APY 

HSBC addresses one of the biggest disadvantages of the previous two entries by significantly lowering the minimum balance requirement. Open this account with as little a $1. At 2.3 percent APY, this is among the top rates offered today. There are no monthly fees for using this service. Signing up for this account also opens a range of financial tools for the user. Similar to Personal Capital or Mint, these tools are a personal financial management service that allows a customer to consolidate and manage financial information in one place. I’m increasingly skeptical of these services because of the personal data ceded to them. But that’s a discussion for another post. 

Personal Capital Cash: 2.27-2.32 percent APY

This is a fairly new service and is not even an online bank. Personal Capital is an online personal financial management service that allows a customer to consolidate and manage financial information in one place. It also offers financial advisory service, which is an important consideration with the APY. The Personal Capital Cash claims a 2.30% APY, but its really 2.27 percent (they note it is “rounded to the nearest basis point”). For Personal Capital advisory clients, the APY is 2.35% (2.32% rounded up). To participate in the program, a customer opens an account at UMB Bank, through which funds are placed in accounts at participating program banks. A marketing scheme for Personal Capital to collect bank fees.

Marcus by Goldman Sachs: 2.25 percent APY

Marcus by Goldman Sachs offers a competitive 2.25% APY for customers. There are no monthly fees and no minimum balance to earn interest. It offers little in the way of services beyond a point for savings. There are no checks or ATM options. I opened an account with Marcus at the beginning of the year. I’ve enjoyed the service. For those outside of the United States, the bank does not allow you to log in for an international IP address. Spool up the VPN from abroad and you’ll be fine. 

Barclays Online Savings: 2.20 percent APY 

With no minimum balance requirement or monthly maintenance fees, the Barclays Online Savings account is another option for savers. 2.20 percent APY is a solid compared to national averages. While there is no minimum balance to open, for interest to post to the account a customer must maintain a minimum balance that would earn at least $0.01. That’s a fancy way of saying keep your account balance above 50 cents and you’ll continue to draw interest. 

Conclusion

With the wealth of online options available there is no excuse for making less than 2 percent interest on your savings account today. Open an account today to get your money working for you.