The following is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. If you’d like to contribute a guest post, check out Money Q&A’s guest posting guidelines.
If you’re reading this, then you probably have some kind of understanding of online conveniences. Maybe you also check your email or shop online. The point is that the virtual world offers some real advantages, even in ways that you might not have considered.
Take banking, for instance, and online savings accounts, in particular. You might be thinking: “I already have a savings account. Why do I need another?” I’m about to tell you why and to make the case for setting up an online savings account.
Online Savings Account Basics
Let’s start with what an online savings account is. Like a traditional savings account at a bank, it’s an account that your bank borrows from to lend money to someone else, and pays you interest. However, an online savings account typically pays a higher interest rate than traditional bank savings accounts because they don’t have the overhead costs associated with a brick-and-mortar location.
It’s only logical that you’d want to earn as much interest as possible while keeping your money secure. While traditional banks generally offer returns from .01% to .2%, online savings accounts can offer high-yield returns of nearly 2% – as of this writing. When you multiply that difference by the amount in your savings account, over several years, you get the idea quite quickly: online savings accounts are well worth it.
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Online Savings Accounts Pay More
Let’s get specific. Typically, a savings account at a large national bank might pay you .02%. If you have a savings account with $50,000 in it, the interest you receive over the first year would be $10 – enough to maybe get you lunch at a fast food joint. In other words, they’re pretty much paying you nothing for you to lend them your money.
On the other hand, if you put your $50,000 into an online savings account that offers a 1.85% return (which you can certainly find right now), the interest you receive over the first year would be $925. That’s right: the difference between .02% and 1.85% is $915 annually! Crazy, isn’t it?
I know you’re wondering what the catch is. Well, believe it or not, there isn’t one. Let’s look at a few more details.
Easy Set Up, Easy Access
Online savings accounts are easy to set up. You can establish one in about 15 minutes by linking your checking account to move money back and forth; some online accounts also offer checking accounts. Many online savings accounts have a simple $1 minimum, with no minimum deposit amount, no minimum number of debit card transactions, and so on. In case you were wondering, there also 100% FDIC approved.
Easy access is one of the biggest selling points for online savings accounts. You can access your account, process money transfers and make deposits at any time – no more scheduling around a bank’s holiday hours. However, you may need to wait a day or two longer to access your funds after you’ve transferred them to another institution. The online bank uses your money longer and pays you more to do so.
How to Know if Online Savings is Right for You
If you’re at ease with online transactions and don’t really need a local bank branch, you’ll likely love the convenience of an online savings account. If you prefer to conduct transactions in cash, an online savings account may not be for you, because online banks generally do not deal in cash; you’d have to find another way to make a deposit, such as a wire transfer or snail mail.
Some people love online savings accounts because they can designate the account for a special occasion, such as “Trip to Morocco.” When you nickname an account, you’re much more likely to stay on track with your savings goals. Or, bottom line, you might simply be attracted to the idea of higher interest rates. In that case, online savings will suit you.
Earn More on Your Hard-Earned Money
The best way to look at an online savings account is as a way to earn some extra money on a deposit account or emergency fund. If you tend to put money away in savings and not touch it, you should think about an online savings account. You’ll earn more money – which is precisely what you’ve worked so hard to do. And that, by any account, simply makes sense.