Now That You’re Saving Money, Where the Heck Do You Put It?

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The recession has turned the U.S. into a nation of savers. After years of spending like it was a job—and in some ways it was a job to buy stuff and keep the economy pumping along—we are finally saving some money. The national savings rate was around 7 percent recently. But now that we’re saving, interest rates in a typical bank savings account are next to nil. So where should you stash your cash?

The big-name banks offer the convenience of lots of locations. But they also tend to nickel and dime customers with fees—an ever-increasing number and ever-increasing dollar amounts—compared to community banks and credit unions.

Credit unions present themselves as fee-friendly alternatives to large banks, but they too have fees, including something that they call a “courtesy overdraft.” The service, which saves customers from bouncing a check, costs $25—generally less than the fee for the service charged by big banks—and customers are automatically signed up for it unless they specifically decline. USA Today points out that this “service” actually winds up costing customers big-time—well over $1,000 a year in many instances:

Even though financial institutions often charge the same fee whether they pay or deny the bounced transaction, covering it ultimately generates more revenue, says Brad Nickum, who used to work at Earnings Performance Group and Profit Technologies, which consulted with institutions on overdraft programs.

“When you allow an overdraft, it increases the probability of subsequent fees” because consumers have less money to cover other transactions, says Nickum, who now advises regional banks.

Industry consultants say 10% to 20% of households generate the bulk of overdraft income. The households hit hardest by overdrafts pay an average of $1,374 a year in fees, estimates G. Michael Flores, founder of Bretton Woods, a management advisory firm that works with financial institutions.

Consumers with the least savings, who may not qualify for less-expensive products such as a line of credit, are the ones who tend to use courtesy overdraft most, says Joseph Ridout, a spokesman for Consumer Action, an advocacy group.

These consumers are often getting hit with sky-high interest rates as a result. If consumers overdraw on a $20 debit card transaction, are charged the median fee of $27 and repay the credit in two weeks, they’re effectively paying a 3,520% APR, according to the Federal Deposit Insurance Corp.

The consensus is that online banking is the way to go. Sure, there are no neighborhood locations, and you’ll rarely if ever interact with a live person. But honestly, the last few times I had to wait and talk with a bank teller, I was thinking to myself, “Wow. This would have been so much quicker at my computer, or even at the ATM.” Online banks also offer incredible convenience because of how easy they make it to pay bills—instantaneously, with no postage required.

Lately, online banks are paying about 1.75 percent interest for savings accounts, which isn’t going to knock anyone’s socks off. It sure beats the pathetic 0.10 percent or less (sometimes nothing whatsoever) that many brick-and-mortar banks pay, however.

Which online bank should you go with? Kiplinger rounds up the best online banks for low-minimum balances, the best for low fees, the best for saving, and so on. A Boston Globe story dissects some online banking offers, and also looks at the current state of CDs, bonds, and mutual funds. tracks interest rates for bank savings and checking accounts, CDs and other products.

Take an especially look at the minimum balance requirements for any checking or savings account. If it’s high, don’t kid yourself that you’re going to be able to keep the balance when you know it’ll be a challenge. If you dip below the minimum balance, any interest you’d earned will quickly be swallowed up by fees.

Whatever you do, don’t stash your money in your mattress, at least not if a family member may be likely to replace that mattress, not knowing that there was a million bucks inside.