Financial Planning

Finding the best savings account rates used to be a real challenge. In the old days, you would either need to have a lot of time to be able to scour the myriad of financial institutions in the yellow book or be really good at researching good rates by calling friends, talking to financial professionals, or doing any number of other time intensive tasks.

The internet has completely changed all that. Now with just a few clicks of the mouse you can instantly and quickly review savings rates from numerous companies at once. As a matter of fact, you can instantly view the best savings account rates for 2011 here.

How Savings Account Interest Rates Are Calculated

Have you ever wondered how the interest rates on your savings account are calculated? Why would some company be willing to take your money and offer to give you MORE money just for keeping it with them?

While the complete answer to that is far to comprehensive for this article, the foundations are important to know for anyone looking to open a savings account.

Savings rates are set based on two key factors: (1) The cost that financial company carries to manage customers’ money and (2) The risk/reward balance of leveraging that money (lending it out to others).

Since banks and financial companies are in the business to make money, the savings rates they provide are not simply pie in the sky projections, rather the result of extensive research and analysis of all the input variables that ultimately produce their stated savings account rate. These things include:

• Federal Regulations – By law, financial companies have to keep a % of their deposits available at all times. This keeps the financial system “liquid” so that people are able to access their money when and how they need it.
• Risk/Reward Analysis – Once their required reserve ration is met, banks now must look for ways to use your money in a way that produces a positive return for them. In short, they want to make money with your money. Take lending for example. They must weigh the potential borrower’s likelihood to pay the money back (why your credit score is so important) against all other options they have to use your money (treasuries, equities, bonds, etc). Banks never take all their reserves and just throw it all in one basket. They must diversify their deposit base so as to minimize their overall portfolio risk.
• Opportunity Cost – Perhaps most importantly, banks have to weigh the savings rate they provide against the cost they would incur should they do something else with it. Think of it this way. If a bank is required to keep 10% of deposits on hand at any given time, then 90% of your money can be invested in things like government treasuries, bonds, equities, or other structured investments. Take treasuries for example: If the government is willing to give your bank 3% to buy U.S. Treasuries, and your bank is only paying you 1% in interest, then the bank is net-net ahead. Keep in mind that we are somewhat simplifying the process even though this will give you a good idea of how savings account rates are ultimately set.

The Best Savings Account Rates

Now that you know a little more about savings account rates and how they are calculated, check out the best savings account rates.

Updated daily, these companies have consistently provided some of the best savings account rates for 2011. Take a few seconds to browse the offers from each of these top rated companies. Setting up your very own savings account takes just a few minutes and can be done completely online.