A lot of you may already know about this, but you’ll be surprised by the number of people who do not. And that is why I think this topic deserves an entire post.
What are Online Savings accounts? They’re regular bank accounts, except for the fact that all the money handling is done online. The most important difference lies in the fact that you will never find a brick and mortar office for an online savings account banking service.
So what’s the big deal about these Online Savings accounts? 3 words: Higher Interest Rates !!! The difference between Online Savings and regular Savings account interest rates is usually at least 3%. To put things in perspective, let me give you an example. Imagine you had $10,000 kept aside to be saved for a rainy day. If you were to deposit those $10,000 in a regular Bank of America Savings Account for example (which typically has an interest rate of 0.2%), you would get back (0.002 * $10,000) = $20 in interest earnings at the end of the year. However, if you were to deposit the same $10,000 in an Online Savings Account (like ING Direct for example, which currently has an interest rate of 3%), you would get back (0.03 * $10,000) = $300 in interest earnings at the end of the year. That is a good $280 in extra income!
At this point, you’re probably thinking there’s a catch! The only catch here, if you can call it that, is convenience. Like all things in life, you always pay a premium for convenience, and the same applies here. The reason that these Online Savings Account can afford to offer such high interest rates is primarily because of the low overhead costs that they incur for their operations. As I mentioned earlier in this post, they do not have any brick and mortar branches, which significantly reduces their overhead. Additionally, all their customer service is handled over the phone or via the internet, which means that their customer service staff is not constrained by location. Their customer service resources can therefore be based out of common office locations and can still cater to the needs of customers across the nation via phone/internet, thereby saving on overhead costs. These benefits are thus passed along to the customer in the form of higher interest rates.
But the price that the customer has to pay for this is convenience. You can never actually walk into a physical branch location for this bank and deposit or withdraw your money. You always need to link it electronically with an existing checking account from a brick and mortar bank. This means that you must maintain a checking account (with a Bank of America, etc.) from which you can electronically transfer your money to and from your Online Savings account. Typically the transfer takes about 1-2 business days. So if you wanted to withdraw cash from your Online Savings Account, you would first have to transfer it to your Checking account, which may take about 2 business days, before finally withdrawing it from your checking account. This is only a minor drawback in my mind, since you can always maintain a small amount in your checking account to withdraw for emergencies.
To help you decide, the advantages and disadvantages of Online Savings accounts are summarized below:
Advantages:
Disadvantages:
As you can see, the benefits far outweigh the drawbacks. So if you do not already have an Online Savings account, I would advise that you start thinking about opening one. There are a multitude of online banks offering such accounts. Some trusted ones are:
I will not bother with posting the interest rates for each of the above accounts as they are subject to change as per the FED’s interest rate policy. I currently have an INGDirect and EmigrantDirect account. The reason for having the INGDirect account is because of the good interest rate and the ease of use of the account. The reason for the EmigrantDirect account is that if you can maintain a monthly balance of $10,000 in this account, you are eligible to get the EmigrantDirect Platinum credit card, which has a cash back of 1.4% on all purchases (which I think is a good deal as most other cards usually only offer a cash back of only 1% on all purchases).
After reading this, if you do decide to open an Online Savings account, I recommend that you go with ING Direct. Besides having a good interest rate (not necessarily the highest though), it has good customer satisfaction ratings and a very user-friendly interface. Besides, it was the first bank to introduce the concept of Online Savings accounts.
PLEASE NOTE: If you are interested in opening an ING Direct account, email me at: sudeepbapat@gmail.com and I will send you a referral link via email. If you use this referral link to open an account with a minimum of $250, you will get an additional $25 deposited to your account as a referral bonus. Additionally, I will receive $10 for referring you, so it’s a mutually beneficial situation.
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Nice site. There
This is good info. Thanks. How easy would it be to transfer money back to my regular checking from one of these accounts? Or is it easier to just withdraw directly from the online savings account?
It is as easy as setting up an ACH money transfer. All you need to do is log in to your Online Savings account and set up a money transfer relationship. To do this, you need to enter the Routing number and Account number for your checking account. This needs to be done only once. After setting this up, you can transfer money to your checking account which should typically take only about 1-2 business days.
To answer your second question, for most Online Savings accounts, you CANNOT withdraw cash directly from that account. You need to transfer it to a regular checking account first. Hope that answers your questions.
Here’s a link to a post on savingadvice.com that gives an extensive list comparing the interest rates at various online savings accounts. Very useful!
http://www.savingadvice.com/forums/investing-banking/19240-online-savings-accounts-current-rates.html#post50359