Savings rates start to drop

Last week, the Federal Reserve cut the Federal funds rate from 4.75% to 4.5%. The relationship between the federal funds rate and the rest of the economy is complex and long term. You won't see mortgage rates drop by 0.25% straight away, for example, because they depend more on long term interest rates.

But we are already seeing rates coming down on high-interest savings account. ING Direct has dropped their rate from 4.30% to 4.20%. Countrywide Bank are down from 5.50% to 5.35%. We will see if Emigrant Direct (currently 4.75%) and HSBC Direct (4.50%) follow suit.

Earn more money on your savings

Where do you put your savings? If you are like many people and move money from your bank's checking account to your bank's saving account, you are not getting your money's worth.

Despite the name, most bank "savings accounts" are terrible places to put savings. Consider Bank of America: their "Market Rate Savings" account sounds great. What could be better than market rate? But that account pays 0.20%. That's right, zero point two percent. Since inflation is around 3% today, this means your savings will be losing 2.8% of their value every year!

You should have your savings in an account that makes at least 3% a year, just to break even. There are many options, such as

• A high-interest savings account
• A high-interest term deposit (a "certificate of deposit")
• Invest in the stock market

All of these have a place, but for money that you might need in the short term, a high-interest savings account is the best bet. You should keep the minimum you need for day to day activity in your checking account, and move the rest from your checking account to a high-interest savings account.

The best rates tend to be offered online. At the moment, you can get 4.3% with ING Direct, 4.5% with HSBC Direct and 4.75% at Emigrant Direct. However the best deal seems to be Countrywide Bank, offering 5.5%. All of these banks are FDIC insured, which means that if they go bankcrupt (which is unlikely) you'll get all your money back up to $100,000 per bank.

Any of those make great choices for your savings. Since these are online accounts, they "link" to your checking account. You add money to the savings account by transfering it from the linked checking account into the savings account. To get money back, you do the reverse transfer.

Signing up for an online savings account is quite straightforward. You'll need details of your checking account (a check will give you all the information you need). If you want to get into the habit of saving regularly, ING Direct is the best choice because this is something they encourage.

But any account paying over 4% for your savings is better than most regular banks saving accounts. It is your money, don't let it waste away in a low interest account.