Online Savings Accounts: What are they and how do they work?

Have you looked at what your traditional savings account pays you in interest lately? If you’re banking at one of the traditional big banks, it’s probably something like 0.01% per year. There is nothing exciting about that, but fortunately, there is a good alternative to this. An online savings account can help you earn 100 times more than your average 0.01% APY savings account.

What is an online savings account?

An online savings account is a bank account that pays a higher interest rate for deposits than a standard savings account. You may also hear them referred to as high-yield savings accounts. Either way, it’s a great account to consider if you’d like to make a little bit more on the money you’re saving than essentially nothing at your normal bank account.

Currently, online savings accounts are paying between 1.00% – 1.50% per year. This means if you opened an account and deposited $10,000 and you were earning 1.00% per year, you’d get $100 in interest paid for the year. Now, I know $100 in a year doesn’t seem like a big deal — it’s not going to make or break your savings goals — but it’s still much higher than the $1 you would earn on the same deposit in an account paying 0.01%.

How can these banks offer these high-yield accounts?

Online banks can pay significantly higher interest rates because they don’t have to support the building and running of physical branches nationwide.

What’s the catch?

The main catch with an online savings account is just that — it’s online. For most of you, it’s probably not a big deal, but for some people not having a bank branch they can physically go to is a deal breaker. I spent over 5 years of my life working inside of a retail bank branch and have gone back in only once since I left almost 2 years ago. With today’s technology, you can do almost all of your banking from your smartphone and ATMs.

So the biggest catch is trading the convenience of branches you can walk into for a higher interest rate that you’ll earn. Other catches can be monthly maintenance fees or maintaining minimum balances. However, there are online savings accounts out there that you can have open with as little as $1.

If there are no branches, how do I withdraw money?

You can transfer money electronically out of your online savings account into your traditional checking account via ACH or a wire transfer. Some online banks also provide you with an ATM card and give you a list of ATMs you can use at no charge.

Is my money safe?

For most of these accounts, your money is as safe as it would be in a traditional savings account: FDIC insured up to $250,000.

Where can I sign up?

You can do some research online to find an account that would best fit you. You can also check out this article on nerdwallet.com. It has great information on the pros and cons of different online banks — I found it very useful when doing my own research.

Disclosure: Nothing on this post or site should ever be considered to be advice, research, or an invitation to buy or sell any securities. 

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