In the Parable of the Talents (Matt. 25:14-30), the servant who buried his master's money was scolded for not earning a return: "You could have at least put my money in the bank, so that I could have earned interest on it!"

Depositing money in an interest-bearing bank account is a time-honored way of earning a return. But in these days of broad access to other financial instruments, is putting money in a local bank really a good choice anymore?

The answer depends on what you're looking for in a bank. If you want convenient locations, tellers who know your name, and perhaps a branch manager who coaches your son's Little League team, there is no substitute for a local bank. But if you want to earn the best possible return, the offerings at many local banks are simply no longer attractive.  

Today, the sweetest savings deals are online. Internet-only banks (sometimes called "direct banks") tend to offer significantly better rates on every type of savings instrument — and you don't even have to give up the security of FDIC insurance.

The higher rates are the result of lower expenses, since online banks don't have to maintain lots of "brick-and-mortar" branch offices.

Here's a local-vs.-web comparison of three common savings vehicles (rates quoted are representative, based on actual rates available in April 2009):

• Regular Savings: At most local banks, interest rates on regular savings accounts are so low right now as to be almost nonexistent. Expect to earn somewhere around .25%—or less. In contrast, you can easily earn 2.00%—or more—by putting your savings in an online bank.

• Money Market Accounts (MMAs): With MMAs, the larger the minimum deposit, the higher the interest rate. At a local bank, expect to earn somewhere between .50% and 1.25% on an MMA, depending on how much you have on deposit. Web-only banks, in contrast, are offering MMA rates in the 2.00-to-2.50% range. (Don't confuse money market accounts with money market funds. MMFs are mutual funds, not bank instruments.)

• Certificates of Deposit (CDs): The attractive thing about CDs during a time of falling rates is that they offer a fixed rate for a specified period of time, ranging from 30 days to five years.

Current rates on local-bank CDs vary widely. A quick SMI survey found rates on a $10,000 CD with a 12-month term ranging from a low of less than 1% (at a large regional bank) to a high of 2.00% (at a small locally-owned bank). In contrast, web banks were offering the same type of CD with rates of 2.25% or higher.

Best of both worlds. Knowing that most consumers are reluctant to stop banking locally, Internet-only banks make it easy to set up a savings account that links electronically to a local-bank checking account. Transfers from local checking to online savings are as easy as a few mouse clicks.

Meanwhile, conventional banks are starting to respond to the competition by lowering fees, expanding online services, and even offering special web-based savings accounts that pay higher rates than their traditional accounts. Still, because of higher built-in expenses, most traditional banks haven't been able to match the rates of Internet-only banks.

The bottom line: these days you're much more likely to find the best returns at a bank on the Web, not at the bank on the corner.

(For current rates, go to BankRate.com. When making comparisons, use "annual percentage yield," or APY).

© Sound Mind Investing

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