How to Save money with Online Banking: High Interest Online Savings Accounts Explained
Two words: Online banks. They’re amazing and they’re seriously making your brick and mortar bank look like a cheapskate.
I think everyone should, at the minimum, have a savings account with an online bank. After the initial setup (and even that can be very painless), it should barely take anymore of your time and effort and you have the potential to seriously earn more money every month without essentially doing anything extra.
Now, let me convince you…
If you have a bank account in a brick and mortar bank (like Wells Fargo) with their typical very low interest rates, then every month that your money is in that account, you’re essentially losing money when you include inflation. Wells Fargo (and other banks like them) typically have an APY (annual percentage yield) of anywhere from .01-.07%, whereas online banks you will see have a typical minimum APY of at least 1%.
Read more about APY, APR, and how to the difference here.
I have an online savings account that at the time I opened was 1.15% (and I believe at the time of me writing this post it is now 1.20%). Even if you typically do not have a lot of money just sitting in a bank account, these numbers still add up. I encourage you to crunch your own numbers just to see what a difference it can make. So do it. Make the switch!
Just to keep things honest….
Ok, ok, online banks aren’t perfect, and I do feel the need to discuss the fact that they have some drawbacks. The most obvious one would be that online only banks lack a physical location.
This means that, for me, the reviews discussing customer service were going to be very influential in my decision. You want someone to always be helpful when your money is involved, period, but especially if there is no physical location you can storm into and demand to speak to a manager when you’re not getting the help you need. No physical location also means accessing your money immediately is just not really going to happen. (Some online only banks offer the option of their customers using any ATM, or certain ATMs, etc., and then either covering at the time or reimbursing later any or some of the fees incurred by the banks who own the ATM.)
Another big issue is the wait time between when you decide you want your money and when you actually have that money available. Especially if the transfer is from a brick and mortar bank to an online only bank, or vice versa, it can take what seems like the end of time to get your money settled where you want it, sometimes 3-5 days (my transfers always take about 3 days)! (The transfers are so slow because banks are concerned about fraudulent transactions.)
Some obvious problems with this are you don’t have access to that money then, and/or the money is not earning its interest because its not in any account you want it in, its earning neither its high interest at the online bank nor its low interest at the brick and mortar bank. Yet another issue with this is sometimes these transfers can incur fees, so then you’re not earning any interest AND you’re paying a fee.
Now an online bank account appealed to me, but I go to the ATM at least twice a week to withdraw cash, deposit checks, etc. Many online only banks have an app where you can do a mobile check deposit, but that doesn’t solve my cash dilemma. So…
I have an account with TWO banks: one brick and mortar, and one online only. The brick and mortar bank account is split between a checking account and a savings account (not my ideal setup but that was the way to eliminate fees). The savings account I like to keep a little bit of money in and I use it for “short term” savings. The checking account I also like to keep a little money in at all times. I keep almost all of my savings (and definitely all of my “long term” savings) in my online savings accounts, because that is where the majority of my money lies anyway.
Every paycheck, I transfer some money to my long term online only savings account, and then I pay my credit card bill (I charge almost every expense to my credit card), and then whatever money is left I split about 70/30 between the brick and mortar checking and saving accounts, respectively. That money is then reserved for the cash I’ll need to withdraw that month, making small payments on my credit card (which I do a couple times a month and right before my statement in order to keep the credit utilization low), and a little for emergencies.
You’ll want to do this because if you have an emergency that needs to be paid right away and you can’t put it on your credit card, you probably don’t want to or may not even be allowed to wait 3+ days to make that payment (like vet bills, your son forgot to tell you he needs a $300 textbook for school, etc.).
Anyways, you probably want to have some of your cash immediately available to you at all times, so the best option I’ve found is simply having two different bank accounts in order to maximize your savings. This can also make opening the online bank even easier because pretty much all the big issues with the online bank are alleviated if you also have a brick and mortar bank. Important to note here is you should check and make sure your brick and mortar bank isn’t going to be charging you any fees for transferring money.
(And yes, I am acknowledging that I have been totally bashing brick and mortar banks and then I just admitted I have an account. But, as much as I love online banking, I really need to have some of my money available immediately to be withdrawn as physical cash.)
So I’ve convinced you! But which online bank do you call your own?
I always encourage everyone, in anything I discuss, to do their own research and make a decision that’s the right fit for them. But, I think if you do a little research on what you’re currently making in interest annually vs what you could be making with basically any high interest online only bank, you’ll see that any step towards any online bank is a step in the right direction.
Online banks are worth it, even if you’re like me and constantly need to use an ATM. My online bank was free and very simple to set up and has already earned me money!
How to Save Money with Online Banking Summary:
- Online banks rock and you should have at least a savings account with one.
- Don’t necessarily pick a bank with the highest APY at that moment in time, their rates are always changing. Instead, look for consistency of having rates near the top of their competition over the years.
- An APY of 1.10%-1.25% will probably be the typical range (and even on the low end of that range will make it worth it for you)
- Cons of online only banks include: lack of physical location and thus, lack of ATMS, but many will reimburse you for any fees incurred; time delay between when you schedule transfers and when the money actually arrives.
- One solution I have found is having a brick and mortar bank so that I can have immediate access to my cash and then a couple savings account with my online bank.
If you are looking to save money with investing instead, then check out my article on stocks and basic investing here and my article on my invested retirement savings account here .