Personal savings in America is dismal. In fact, the personal savings rate went from -0.5% in 2005 to -1% in 2006, the only negative years since the Great Depression. Some media pundits will argue that consumers don’t need to have traditional savings because their cumulative wealth is tied up in other assets (retirement plans, mutual funds, real estate, etc), which are suitable substitutes for basic savings. We strongly disagree.

In a previous discussion, we detailed How to Choose the Best Checking Account. Feedback was excellent, but many readers wanted more information about choosing the other critical bank account: Savings. As a result, we've put together some information on the second most important financial account everyone should have: an easily-accessible, high-yield cash account.

We Prefer "Cash Account"
Of course, we could have just come out and said a “High-Yield Savings Account”, but there are a few other high-yield options that also fit the bill. Having said that, for the average consumer, a high-yield savings account is the perfect solution. Here's why...

Just In Case
For most people, the main purpose of a savings account should be to serve as an Emergency “Rainy Day” Fund. Let’s face reality; you just never know when a financial crisis will occur, and it is prudent for you to set aside some liquid money that you can tap if a financial crisis ever occurs. By liquid, we mean you should be able to access the money in a matter of days without incurring any penalty, loss of asset value, or transaction fee. These criteria rule out the certificate of deposit (CD), stocks, mutual funds, 401k, IRA, and the home equity loan/line of credit as emergency fund tools. Then you naturally ask, What If an Emergency Never Happens?

A Financial Tool...and Then Some
An emergency fund is equally as much an emotional and psychological tool as it is financial. The confidence and peace of mind you will have by knowing that you have some protection “just in case” is invaluable. And if you never need to use it, then lucky you! As a general rule, we recommend that you accumulate 3 to 6 months of living expenses inside of your Emergency “Rainy Day” Fund.

Online All the Way
When selecting a checking account, we gave you the option of brick-and-mortar versus online, but the savings account is a no brainer: Go online. As with the checking accounts, online savings accounts offer superior interest rates, equal FDIC protection, no fees, and fast transfers.

Our three favorite online savings accounts (and their APYs)

1. E*Trade Bank (5.05%)
   
2. Emigrant Direct Savings (4.75%)
3. HSBC Direct Savings (4.50%)

Beyond Savings
For the savvy savers, a few other options exist:

Money Market Account (MMA) – Offered by banks and credit unions, the MMA is takes the higher-interest feature of the savings account and combines it with the check writing ability (usually up to a limit each month) and FDIC insurance of a checking account. Sort of like a TV/VCR/DVD combination unit, it does several things sufficiently…but none great (and the MMA will never eat your videotape). If minimizing the number of open financial accounts is your number one priority, then a money market account is worth a look.

Money Market Fund (MMF) – In contrast to the Money Market Account, a Money Market Fund is a product purchased through a brokerage. The same companies that sell stocks and bonds typically also offer mutual funds that invest in low-risk, highly-liquid securities. Money market funds typically invest in short-term government securities, certificates of deposits, and corporate commercial paper. Because MMFs place your money into open market financial instruments, investor losses are possible (although rare), and your money is not insured against these losses.

U.S. Treasury Bills - Issued and guaranteed by the U.S. Treasury Department, Treasury Bills (“T-Bills”) are considered one of the safest investments; additionally, they are exempt from state and local taxes. T-bills offer a quick and easy way for the U.S. government to raise money from the general public. Here’s how they work: Consumers bid on Treasury Bills at a reduced price (a “discount”) and—3 to 12 months later when the bill comes due—the government will repay the discounted price plus interest.