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Online Savings Accounts
Everyone is familiar with traditional savings accounts offered through brick and mortar banking institutions. In recent years, online savings accounts have emerged as a premier way to earn higher interest rates on an account that is managed through a website interface. Prior to 2009, the yield on savings in an online savings account could reach 6% per year, but as the financial markets have lost value, interest rates have been affected and now hover around 3% per year. For those who would rather perform banking tasks over the internet, the online savings account offers convenience and financial management advantages with few limitations.
Convenient Attributes
Every positive attribute associated with a traditional savings account has been included in the creation of online savings accounts to prevent monetary loss for the saver. Risk is very low for these accounts because only the method for managing the movement of money has changed. Online savings institutions are comparable to one another in these ways:
• FDIC insured – Funds placed in online savings accounts are insured through the same federal institution that insures all bank accounts. Every depositor can rest assured their money is protected from bank failure.
• Web interface – User-friendly websites are prevalent for those who wish to manage their savings online. Minimal computer skills are required to utilize every aspect of the web pages because great care has been invested to design a friendly interface.
• Yield – Interest rates paid on fund balances in online savings accounts are substantially higher than those associated with traditional savings. Each bank publishes the projected interest rates. Changes in the rates are tied to the market and the value of the dollar. Most savers will choose a bank strictly on the yield paid because every other bank offering is very similar.
• Institution history – Some of the most trustworthy banks have been offering online bank accounts for years. Investigating the track record of these banks is easy and will provide peace of mind for the uncertain, first-time online saver. Understanding how the chosen institution has changed interest rates in the past will aid in future planning.
Advantages
Measurable differences exist between a savings account offered by a brick and mortar institution and the online account option. Online savings accounts have unique advantages that include:
• Convenient application - Instead of walking into a bank and having to wait for the next available employee to type client information into a computer screen, the saver can simply visit the bank’s website and fill out the application. Approval is relatively simple as long as the entered information is accurate for automatic verification.
• Higher Yield – When the financial markets are growing, the interest rates paid from online savings accounts will recover and rise to the levels paid prior to the recession. All funds in the account earn the current rate, so saving now will yield dividends as the rates rise in the future.
• Not easily accessible – Because the funds in an online savings account cannot be spent directly from the account, the balance will remain consistent over time. Many experienced online savers state that purchases are considered more carefully because funds require time to access.
• Free transfers between accounts – When the balance in the online account is being saved for a specific goal, the funds can be transferred to the brick and mortar bank without paying fees. Additional deposits are simply transferred from the checking or savings account free of charge.
• Direct deposit – Banks that offer online savings accounts, accept direct deposits from employers. The saver must simply provide the ICH routing and account information to the payroll department at work. Money saved automatically is rarely missed in the family’s monthly budget.
Limitations
Saving money has always been a challenge, but with the availability of the funds even when the bank is closed, money seems to disappear more quickly. An online savings account will prevent easy access to funds and benefit the saver through some limitations. Knowledge of these specific limitations will prevent mistakes and frustration.
• Application process – Inaccurate information can prevent approval of the account. Carefully enter personal information and initial deposit amounts to ensure that all confirmations can be completed without human intervention. All mistakes must be corrected manually and confirmed over the phone with the new depositor prior to opening the account successfully.
• Withdrawal limits – The number of times the account can be accessed within the calendar month is limited to six. Banks must comply with the federal regulation so the saver must exercise some restraint. Minimum withdrawal amounts apply to online savings accounts.
• Initial deposit freeze – After the account is opened, the bank will hold the initial deposit until the funds have been received. This period can be as long as ten business days. During this waiting period, the deposit amount may not be visible on the bank’s website.
• Transfer delay – Four business days are required to transfer funds from the online savings account to the brick and mortar checking or savings account. Emergency needs should be covered from the traditional bank accounts.
• Minimum balance requirement – Banks that pay higher yields will also require higher minimum balances in the online savings account. Some banks have a one-dollar minimum, but others do require a substantial balance. Know the requirements to avoid paying fees for dropping below the require minimum balance.
• Monthly contribution requirement – Many of the banks that offer online savings accounts require monthly deposits into the account. Consistent deposits increase the balance in the account and keep the saver encouraged by the growth in the savings balance. Know the minimum requirements prior to opening the account.
Conclusion
Saving money over time through an online savings account is similar to saving in a traditional account, but there are some differences. Most notably the savings account must be maintained using online transactions without face-to-face interaction with bank personnel. Customer service is offered by all banks that offer online bank accounts, but all interaction happens over the phone, through the website, or via email. Another notable difference is the movement of funds. At least one traditional account must exist so that funds can be transferred into and out of the online account. When the saver follows the rules regarding the online savings account, savings goals can be reached and fees are avoided.
