Best Place for Your Savings? Reward Checking, Savings Accounts or CDs?

With the recent rate cuts of popular reward checking accounts, you might be asking if reward checking is worthwhile. So I thought it would be interesting to make some comparisons. The two institutions that I'll use in the comparison have been rate leaders over the last few years. For reward checking, I'll use Danversbank's Free Reward Checking. For a top savings account, I'll use Alliant Credit Union. I'll keep it simple and just use the last year to compare the two.

Danversbank vs Alliant Credit Union

As I've been reporting, the top rate of Danversbank's reward checking yield will be falling from 4.01% APY to 3.01% APY on October 4th. This applies to balances up to $25K. Danversbank's reward checking has a long history. I first reported on this reward checking account in April of 2007 when the yield was 6.01% for balances up to $100K. Since that time there have only been two rate cuts: 1) drop to 4.01% APY in April 2008, and 2) the rate cut that takes place next Monday to 3.01% APY. In 2008 there was also a cut to the balance cap. It fell from $100K to $25K. Once nice thing that Danversbank did was to grandfather in existing customers to the original balance cap. One of this blog readers has reported that his balance cap remains at $100K.

Alliant Credit Union has been a savings account rate leader for many years. Back in 2006 and 2007, its rates were a little bit under the rates of the top internet savings accounts. However, when interest rates fell, Alliant's rates didn't fall as much as the others. For example, it held on to a 2.00% APY for longer than most internet banks. It lasted from July 1, 2009 until April 1, 2010 when the yield fell to 1.50%. The last rate cut was September first when it fell to 1.35% APY, and it appears it's going to stay at that rate through October.

In my comparison, I'm going to assume a balance of $25,000 kept at both Danversbank and Alliant from October 1, 2009 to today, October 1, 2010. Here is an estimate of how much interest one would have earned (before taxes) in these two institutions during that time:

• $1,002.50 at Danversbank
• $434.38 at Alliant Credit Union
• Difference: $568.13 more at Danversbank

With Danversbank's reward checking account, one could have made over $568 more than if he or she had kept $25K in Alliant Credit Union's savings account. That comes out to over $47 per month more in interest.

Comparisons for Next Year

How about the future? We can only make guesses about future interest rates. For simplicity, let's assume Danversbank will be able to keep the top yield of 3.01% for the next year. And let's assume Alliant Credit Union will keep its 1.35% APY. Here is an estimate of how the interest earned from these two accounts would compare over the next year:

• $752.50 at Danversbank
• $337.50 at Alliant Credit Union
• Difference: $415.00 more at Danversbank

That $415 more per year comes out to an extra $34.58 per month. The difference won't be as big as it was last year, but it's still substantial.

Other Options: SmartyPig, Ally Bank

There are also other options to consider. There are a few other better savings account options. Of course no one knows if their rates will stay where they are now. Two good choices include SmartyPig and Evantage Bank (and its sister bank AmericaNet). Both have balance caps, but the caps are higher than the cap at Danversbank.

Ally Bank is another one to consider. Its savings account is not quite as good as Alliant (currently 1.24% APY), but you can make a lot more with its 5-year CD which has a current yield of 2.64% APY (I'm afraid it just fell from 2.69%). A 5-year CD would normally not be compared to savings and checking accounts. However, Ally Bank's 5-year CD has a very mild early withdrawal penalty of 60 days of interest (see post). So it's much more liquid than the typical 5-year CD. The benefit over the savings accounts and checking accounts is that once you open the CD, your rate is locked for 5 years.

Here are how the above accounts compare with Danversbank assuming their interest rates hold for the next year, and assuming a balance of $25K (only Ally Bank's CD rate would be guaranteed). The number in parenthesis is the extra interest one would earn at Danversbank.

• $437.50 at SmartyPig's 1.75% savings account ($315)
• $500.00 at Evantage Bank's 2.00% money market account ($252.50)
• $551.50 in Ally's 2.64% 5-yr CD with an EWP after 1 year ($201)
• $660.00 in Ally's 2.64% 5-yr CD with no EWP ($92.50)

The comparisons become much more complicated for balances over $25K. You then have to weigh the extra work of maintaining multiple reward checking accounts.

Poll Question of the Day

For the poll question for the day: Do you plan to increase your savings in reward checking accounts, savings/money market accounts or CDs? Or perhaps you're planning to grow your investments outside of bank accounts?