The following is a guest post by 2 Cents. She runs a personal finance website called Balance Junkie that aims to help people find a better balance in life, starting with their finances.

Many Canadians keep their savings in an account at the same bank that handles their everyday chequing and bill payment needs. This can be convenient, but if you want to earn higher interest on your savings, you may want to consider using an online bank. Most of them are covered by the CDIC (Canada Deposit Insurance Corporation), so you know that your investment is safe.

In order to set up an online savings account, you usually need to have the account linked to an external chequing account. Most online banks (with the exception of PC Financial) do not offer chequing accounts, so you will need to link your online savings account to your existing chequing account at another bank.

You can set up an online savings account over the phone or the internet. You’ll probably need to send in a void cheque as well. Once the account is set up, you can transfer money to and from your external chequing account as needed. Everything is done online, and it usually takes a day or two for each transaction to be completed.

You can usually schedule regular automatic transfers from your chequing account to your savings account if that is your savings method of choice. Paying yourself first is always a great idea and the fact that it takes a day or two to transfer the money back may make you think twice about spending your hard-earned savings.

Some online banks also offer high interest savings accounts in the form of TFSAs or RRSPs. If you’re looking for a safe place to earn some tax free or tax deferred interest, look at whether your bank of choice offers these products. Most of them do offer TFSAs, but not that many offer RRSPs.

The FCAC (Financial Consumer Agency of Canada) has a Savings Account Selector Tool on their website that allows you to compare savings accounts. The rates aren’t always current, so check the footnotes to see when they were last updated. Still, the tool provides a useful summary of available accounts, minimum balance requirements, and methods of interest rate calculation.

Don’t forget to watch for fees. Unlike the big banks, many online savings accounts do not charge transaction fees. The accounts I use do not charge monthly or annual fees either, but double-check with your bank of choice before you commit to an account. Take note of any annual fees or fees to transfer your money out if it’s under the RRSP or TFSA umbrellas.

I realize that some people have reservations about banking online. You definitely need to be careful about using public computers, changing your password regularly, and taking any necessary steps to prevent identity theft. I can’t guarantee that you will never have any problems, but I can tell you that I have used online chequing and savings accounts for over a decade and I’ve never experienced any major difficulties.

Here are 3 of my favourite choices for online savings accounts for Canadians and their current interest rates:

• Ally *- 2.00%
• Canadian Tire Financial – 1.35%
• ING Direct – 1.20%

*Note: As of this writing, Ally is not yet included in the FCAC tool as it did not launch in Canada until September of 2009. The tool was last updated in August of 2009.

Many of the big banks are paying a fraction of a percent on savings and sometimes close to nothing if you have a lower balance. Have you checked out the interest rate on your savings account lately?