Having a savings account is pretty much taken as an article of faith among those in the personal finance world. You are supposed to have a savings account — and you are supposed to look for the highest yield or interest rate.
In many cases, the highest yield is likely to come from an online source because of their limited services and low overhead.
Before you decide to open an online savings account, it's important to research your options and understand the realities that come with online savings accounts.
Better Interest Rates
The main advantage to an online savings account is the higher yield. Traditional brick and mortar banks are paying yields of between 0.1% and 0.3% right now. But if you put your money in an online savings account, you could earn a yield of around 1%. While this is hardly “high yield” when compared with the 4% and 5% yields common prior to 2008, it is still better than what you will get at a brick and mortar bank.
Inconvenient Access to Funds
The biggest downside to an online savings account is your access to the funds.
While you can mail paper checks to some online banks for deposit, it’s more common to transfer money from your checking account into your online savings account. And, if you want to withdraw your money, chances are that you need to transfer it from your online savings account to your primary checking account. This can take three to four business days — which can problematic if you need your money immediately.
Some online savings accounts have ways around this, though. You might be able to link your online savings account with an online checking account with the same bank. You can then instantly transfer the money to the linked checking account and use the debit card to withdraw the money from the online checking account.
Finally, there are some banks that will send you an ATM card for use in withdrawing money from your account. You need to be careful in these cases, since you might end up paying ATM fees. Your bank might not charge you, but the bank that owns the ATM may. Some online banks reimburse consumers for all fees, though. This can be a way to access your money quickly and conveniently without worrying about ATM fees.
When deciding which online savings account is likely to work best for you, start out by looking at interest yields. You need to look beyond the Annual Percentage Yield (APY), though. Some of the items to consider include:
With an online savings account, it is also important to consider how you will manage your funds. An easy-to-navigate website is essential if you plan to do the bulk of your banking via the Internet. Many online banks provide live chat so that customers can contact support quickly and easily.
Here are five of the best online savings accounts, all of which are FDIC-insured.
Ally Bank offers a savings account with a yield of 0.95% annually. There is no minimum account balance required to receive that rate of interest, and you don’t need to maintain a particular balance to avoid fees. Ally offers a number of savings products, including options for high-yield CDs and IRAs.
This bank generally receives high marks for customer service. The website is easy to navigate, and you can call customer service anytime of the day, as well as access live chat.
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One of the banks gaining a little more exposure is CIT, which has been around for more than 100 years. CIT is a Small Business Administration Preferred Lender and offers a variety of online banking services, including an APY of 0.90% on balances of less than $25,000. If you have a balance of more than $25,000, your yield is 1.05%. CIT is known for its high yield Achiever CD, which offers a yield of 1.20% for a year term.
You do need $100 minimum to open a CIT savings account, but there is no monthly maintenance fee after that. You can call CIT Monday through Sunday, but there are set hours. You can also contact CIT via email.
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When we think of American Express, most of us think of credit cards. However, you can also open a personal savings account through American Express Bank, FSB. The current APY is 0.90%. There are no fees and no minimums with this savings account. American Express Bank also offers competitive CDs.
The website is fairly easy to use, and you can contact a customer service number 24 hours a day, seven days a week.
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This is yet another company better known for its credit offerings. However, Discover has a banking division, and you can open an online savings account with a yield of 0.80%. Discover also offers a money market account with a yield of 0.70%, and a five-year CD with competitive 1.70% APY.
In order to open an account, you do need $500. Other than that, there is no minimum balance to maintain, and no monthly maintenance fees. Finding the customer service information is a little more difficult on the Discover site, but you can call 24/7 or send an email.
Click here to open an account now
One of the more interesting banks right now is EverBank. If you are a serious saver, this might be the right fit for you. The Yield Pledge Money Market account comes with a very attractive introductory rate: 1.25% for first-time account holders for the first six months on balances of $50,000 or less. The first-year APY is as high as 1.01%. After that, EverBank promises that the yield will be in the top five nationally.
You need $1,500 to open this account. The rate you actually receive for various accounts, from an interest-bearing checking account to a jumbo CD to a savings account, is based on your balance. Many customers like EverBank, especially those with high balances.
The website is fairly intuitive, and you can find the phone number to call the bank, but there isn’t information about hours when the phone lines are staffed.
Click here to open an account now
In the end, you have to decide what you want from your online savings account. Consider your options and whether or not you will need immediate access to your money. Additionally, pay attention to minimums. It doesn’t do you much good to open a high yield account if you don’t have the balance to qualify you for the best rates.
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Ally doesn't coordinate well with Quicken -- you can't request transaction download through Quicken. You have to go to Ally site and push the download to Quicken. (Is this the Direct Connect? I forget what they call it.) Anyway, it's a pain, and it's the reason I closed my recently opened account with Ally.
Quicken has been around a long time, and works with many, many different banks and financial institutions, but Ally/GMAC hasn't invested a little time into making this work...? Ridiculous.
Everbank's website shows under "Rates & Fees" for this account an $8.95 "Monthly fee in any month when average daily balance is below $5,000". Which means one of two things:
1) The REAL minimum balance to open is $5000, not $1500.
2) Having a balance of $1500 with a 1.01% APY would earn only about $15/yr, but would cost you about $96/yr, meaning you're paying EverBank rougly $81/yr to hold your money.
You bring up a good point about the Yield Pledge account -- which is that even if a bank has a specific minimum to OPEN the account (in this case $1,500), you do need to read beyond the initial marketing materials to see what else is in store if you don't meet the other requirements. Thanks for bringing that up.
EverBank announced this week they will be dropping their fees. There will no longer be a minimum balance requirement.
Don't let a higher or the bank with the highest interest rate be your main decision maker. I remember back in the early 2000's when many online banks were competing for business they would out raise each other in terms of interest paid. But a lot of their other qualities (customer service, fees, etc.) were worse than a lower interest paying bank.
Also, many of those highest yielding banks then have horrible rates now. Find a bank with a decent interest rate that also excels in every other area. I would rather earn a few dollars less per year and not have to deal with any headaches than the other way around.
I created a spreadsheet that contains all the questions I need an answer to, to understand what a bank charges, min/max, other fees, rewards, and rates. I'm surprised these sites don't offer such a tool. I add to it as rules change, and have used it for years for comparison. Financial institutions have a lot of hoops to jump through, and EVERYONE should understand those rules. Personally, I abhor marketing gimmicks. To me, they are a red flag. A good sound financial institution doesn't need gimmicks. Treating customers professionally, easy to understand rules, nice assortment of products with good rates, sound management, and most important, security taken seriously, will go a long way than some 6 month gimmick. Who wants to spend all their free time institution hopping.
I personally have a handful of different online savings accounts. Since their rates fluctuate all the time, I can move my money around and ensure it is always earning a great rate.
