Have you ever heard of rich people having a money market account? Money markets are accounts where wealthy people put their money while it isn't being invested. There's no risk of losing money in a money market account, but they give pretty high rates of returns.
Well I was never wealthy enough to afford a money market account. So the best I could do was earn an offensively low rate of return in a standard savings account. Or I could put the money in a CD, but then not have access to the money for a few months.
In recent years, we regular people gained access to our own version of the money market account. I use ING Direct and absolutely love it!
What is ING Direct?
ING Direct is a bank that offers online high yield savings accounts. If you put your money in ING Direct's Orange Savings Account, they pay you 4.5% interest per year (APY) on that money. This is significantly more than a traditional savings account, which I've found tend to pay such a low amount that I forget that I even earn interest.
Why do they offer a higher interest rate?
Presumably ING Direct has lower overhead costs than traditional banks. They have some branches, but most likely you can't just walk up to the bank and have your cash in your hands minutes later. Since their costs are lower, they are able to pay you a higher rate.
How does it work?
First, you open your ING Direct account. Then, you link your ING Direct account to your current bank account. Ideally, this bank account will be a checking account. From there, you can transfer money between your current account and ING Direct as often as you please.
Here's how I manage it. I keep however much money I'm going to need for the month in my checking account. I keep the rest in my ING Direct account, earning the higher rate of return. If I end up needing more cash, I transfer the money from ING Direct to my checking account. This usually takes a few days. To be safe, I assume that it will take a full week for the money to be transferred. So if there's a chance I'm going to need the money in a week or less, I keep it in my checking account. In the end, my ING Direct account works like a money market account.
Can I lose my money?
No, your ING Direct account is FDIC insured, just like your regular bank account. This product has all the same rules as a savings account, just with a higher interest rate.
If you're looking to deposit $250 or more into ING Direct, then I have a special offer for you. As a current ING Direct customer, I can send you a special link. Once you sign up through this link and deposit $250, ING Direct will give you another $25 for free. If you'd like to take advantage of this special offer, just send me a message with your e-mail address and I'll tell ING Direct to send the offer to you.
If you don't have this sort of product, I highly suggest you try it. ING Direct offers a great rate on its Orange Savings product, with a great web interface, and quick transfers to and from your current back account. A competitor, HSBC Direct actually pays an even higher rate, but I haven't used HSBC so I can't attest to their quality. For now, I strongly recommend ING Direct.