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Online Savings Accounts

Learn about online savings accounts and the choices available.

Online savings accounts can save money and often offer higher interest rates. [©Jupiter Images, 2010]
©Jupiter Images, 2010
Online savings accounts can save money and often offer higher interest rates.

Online savings accounts are a great way to save money and interest rates are usually higher than with neighborhood banks. With easy access via Internet and linked accounts, online savings accounts have surged in popularity.

It is recommended that individuals keep a liquid account (typically a savings or money market account) of three to six months worth of living expenses. This account is often called an emergency fund. With tools such as direct deposit, funding a cash reserve or emergency savings account online can be painless.

Web Sources

To understand whether an online savings account is appropriate for their particular situation, individuals must first do some research. Most of the information is easy to find online. A great place to start the information-gathering process is through online Web sites that are not affiliated with any particular bank. These include Bankrate and Yahoo Finance. These Web sites typically offer unbiased information on national averages for savings accounts. In addition, they offer plenty of detailed and accurate information on specific savings rates for online banks in all states. Lastly, these Web sites provide information on other rates that may be of interest to the consumer, including mortgage, interest checking, certificates of deposit and bonds.

Interest Rates

The interest rate is the rate of return that can be expected on money in a savings account. In other words, it is the rate that is paid for the use of money. The bank is paying the saver for banking with them using the bank's savings account. Interest rates are best discussed in terms of the annual percentage rate (APR). If a person has $1,000 in a savings account paying 2.5 percent interest, at the end of one year the bank will have paid the saver $25 for the use of his or her money during that time. Since more money can be earned from savings accounts through banks paying higher rates, it pays to shop around for a higher interest rate.

Since interest rates depend on inflation and the policies at the Federal Reserve, they change over time. With an online savings account, interest rates are subject to change without notice. There is no guaranteed minimum interest rate that a bank is obligated to pay to savings account holders. If a guaranteed rate of return is desired, the U.S. Securities and Exchange Commission (SEC) recommends consumers investigate other low-risk savings avenues that offer this, such as certificates of deposit (CDs).

Choosing an Online Bank

There are many online banks competing with the more traditional brick-and-mortar banks. Although inflation can drive interest rates for savings, there is still room for competition. Before online banking gained popularity, it was difficult to find competition within the neighborhood banks. Most people did not want to drive a great distance for a quarter of a percentage point. Now, with online banking gaining popularity, competition is much better, and the customer wins.

To choose an online bank for a savings account, several factors should be considered, including:

  • Amount of the initial deposit
  • Interest rate
  • Accessibility
  • Other services

If the consumer's initial deposit into the savings account is high enough, it may qualify at some banks as a high-yield savings account, which typically offers a better interest rate. Just as with brick-and-mortar banks, the Federal Deposit Insurance Corporation (FDIC) insures all online savings accounts up to $250,000. If the savings amount is more than this, it is best to consider multiple accounts or different avenues of saving and investing.

The interest rate is an important factor in deciding where the savings account should belong. Web sites such as Bankrate offer a comparison of all online banks, which can be sorted via interest rate, whether or not an introductory rate exists and by amount saved. Better rates will be awarded to larger accounts. For example, a simple savings account with no minimum balance may offer much lower rates than a money market account (MMA) with a $1,000 minimum balance.

Accessibility is critical to every online banking customer. It is important to know how to get money in and out of the online account. For individuals not comfortable with this type of online transfer, a brick-and-mortar bank with a live teller may be more appropriate. The online bank chosen for a savings account should allow a link between an existing checking account and the online account. This is helpful for transferring money back and forth. It is usually necessary to create and confirm that link in the beginning to guarantee security. This is typically done by writing a check from the brick-and-mortar bank to the online account and mailing it in. Once confirmed, all other transactions can be completed online.

Other services that online banks offer may provide a competitive edge to the educated consumer as well. For example, if an online bank is already where the individual keeps a 401(k) or IRA account, it might be a logical choice. In addition, the online bank may offer direct deposit so savers can automatically deduct from their paychecks to help save even more.

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