Baby Steps: From Savings to High Yield Savings Accounts to...journeying toward higher interest bearing pastures to be continued

As I sat across from my local consumer banker asking about Individual Retirement Accounts (IRA's) and other saving options, I was shocked, embarrassed, saddened and upset when I learned that I had allowed myself to be CONNED out of interest on my money! My savings account was only paying me .2 percent interest on my balance. That means for every dollar I deposited, I didn't even earn one cent I earned .002 cent(s?) monthly!!! (Remember .2 percent is .2/100=.002 NOT 2 percent which is 2/100=.02). Meanwhile, the bank was probably using my money to make loans that yielded more than ten times my measly .2 percent interest; that's what banks do with the money you deposit. They make investments/loans which earn interest. They repay you for your kind gesture by giving you just a taste of interest and turn a profit for themselves. Outraged that this was being pushed as a good idea, I decided to search for something better.

I consulted bankrate.com to find a solution. I wasn't ready to really invest because I didn't have the time to pore over prospectuses of various mutual funds, exchange traded funds or assemble a portfolio myself; nor did I have the funds to hire someone to do this for me. I did however, have the moxie to look into short and long term certificates of deposit (CD's). After a few hours of researching SAFE options, CD's, I realized that they weren't that safe after all. Don't get me wrong, CD's are safe in that you can't lose the principal (the initial sum) you put in and are guaranteed to reap some type of return. However, CD's are NOT SAFE in THIS MARKET because one's money is tied up while the Federal Reserve cuts interest rates, more specifically the Federal Funds Rate, all willy nilly.

The federal funds rate is used to exercise control over interest rates and the economy. Banks are required to hold some of our deposits in reserve; reserves don't earn interest. To satisfy both the reserve requirements and the absolute need to profit, banks lend each other money on an overnight basis. Increasing the federal funds rate increases the cost of borrowing in the overnight lending market banks use to meet reserve requirements. The Federal Reserve achieves this rate hike by removing money from the Federal Reserve system, thereby contracting the money supply. In turn, short term rates that banks are willing to offer on money market accounts (MMA's), CD's, and savings accounts increase because banks are trying to attract your money to these accounts. The fed funds rate was 5.25% in June 2006. Now it hovers around the 0-.25% range. The subsequent cutting of the fed funds rate from June 2006 to present has depressed short-term interest rates. The rate cut basically means that there is an influx of money in the Federal Reserve System (money supply expands), so banks don't have much incentive to offer high rates on precious deposits into MMA's, CD's and savings accounts. Hence, the pitiful fall in three month CD yields from 2.76% in June 2006 to .75% in April 2009.

THINK OF IT THIS WAY. You let me hold $100 of your money for three months under the agreement that I will pay you five percent interest on it every month with one agreed upon exception. That is, if my economic circumstances sour, say: I lose my job, then my house, and lastly the cost of gas and commodities like rice skyrocket, I can pay you less and less interest. When I lose my job, I'll pay you three percent on your money. I lose my house, you get two percent on your money. The cost of rice goes through the roof, so dammit I'm hungry. In the same month the price of gas becomes explosive. Now, I can't even drive to the grocery store to pick up some Ramen Noodles because gas has just hit $4.00 a gallon and we live in NJ, so that's cheap compared to the rest of the country. I commit the ULTIMATE OFFENSE, and like a boldly indignant savings account, I pay you .2 percent on your money. You make $5.27 instead of $15.76 for a grand total of $105.27 rather than $115.76.

	Principal Amount	Month 1 (interest; balance)	Month 2 (interest; balance)	Month 3 (interest; balance)
Original Plan (5%/month)	$100	5%; $105	5%; $110.25	5%; $115.76
Change in Economic Circumstance	$100	3%; $103	2%; $105.06	.2%; $105.27

How would you feel? EXACTLY.

I didn't feel comfortable locking my money into a similar situation (i.e. a CD) for even three months--while all the turmoil listed above was actually happening and the Federal Reserve Open Market Committee tried to fix it all by cutting interest rates--if I could move it into another account earning more interest that was just as safe. In walks my solution.

I set my eyes on High Yield Savings Accounts (HYSA's)! I batted my lashes as if to say come hither my object of affection, but not too close I must inspect you first. HYSA's are online savings accounts. Banks like HSBC and ING (NOT AIG) can pay you more interest on your money because they reduce operating costs by conducting all business online. You receive your statements and account updates and transfer money online. This is much like what most banks are trying to move towards--ever heard of online banking? You do have the option of going to an ATM, at least with HSBC, but why when you can transfer money from bank to bank for free? Now, HYSA's work much like CD's in that interest rates they offer vary with the Federal Funds Rate. HOWEVER, unlike CD's, you are NOT usually bound to leaving your money in the bank's hands. Some require a minimum sum to open that may range from zero dollars to $10,000. And some require a minimum balance to avoid fees. I steered clear of all those that had anything other than a $0 minimum balance. I want the luxury, forget that, I am entitled to move my money wherever I so choose. The only downside I've experienced is that transfers are NOT INSTANTANEOUS! UGH. I have to wait four days to get my money, but that forces me to plan ahead. If anything that makes one all the more vigilant over his or her finances. I see no harm there. Also, HYSA's still tend to offer higher returns than even 1 year CD's which average returns of about 1.29% as of April 2009. My HYSA currently yields 1.65%. Check out your options here.

Did I say only one? There is ONE OTHER DOWNSIDE. I COULD BE EARNING MORE INTEREST ON MY MONEY. And so the journey towards that end must move onward...stay tuned.