A lister of the show, Laurie, called in and asked an important question:
“My husband and I got our stimulus checks and we’re planning to save it for our emergency fund. I’ve heard a lot about online banks and I’ve even heard you mentioned a high yield savings account on the show. Are online banks just as safe as regular banks. What makes the high yield savings account better than a regular savings account?”
The first thing I want to do is let you know that even though the best high yield savings accounts are often at online banks, every account with an online bank isn’t a high yield savings account.
Online banks are becoming popular for not just savings, but checking accounts as well.
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HYSA vs. ‘Traditional’ Savings Accounts
A high yield savings account is a savings account with a higher interest rate than a traditional savings account.
With a high yield savings account, you’re gonna make more money. One big reason these online high yield savings accounts offer higher interest rates is that their overhead is much lower than the traditional brick and mortar banks. There aren’t typical expenses that come with operating when you have a physical location.
When it comes to saving money, a higher interest rate is exactly what you want. The interest rate is what the bank is going to pay you for the privilege of holding on to your money. A higher interest rate means you’re gonna earn more money on your money every single month.
My everyday brick and mortar bank has a savings account that pays .01% interest. However, my Capital One 360 savings account, which is an online high yield savings account, currently pays out 1.5%.
When we’re talking about differences, that’s definitely a big one to the tune of a few hundred dollars every year in interest.
What should you look for in an online bank account?
For me, the most important thing is to make sure that the bank is FDIC insured.
FDIC stands for Federal Deposit Insurance Corporation. The FDIC makes sure that your money is safe should something happen to your bank. The FDIC covers up to $250,000. I would not open an account with a bank that isn’t FDIC insured, no matter how much interest they promised me.
Another thing to make note of when comparing online banks and high yield savings accounts is the interest rate. These interest rates can and do fluctuate and I want my interest rate to be competitive, which is why I skipped the savings account with my traditional brick and mortar bank and opened up my Capital One 360 savings account. The key here is to be mindful of where the rates are, in general, and make a choice.
Be mindful of fees and/or minimum balance requirements
There are entirely too many online banks offering no fee options for you to settle for an account with fees, or some ridiculously high minimum balance requirement that could lead to you losing interest or more fees down the road.
If you’re paying fees for these accounts, then you’re wiping out any interest that you’re going to earn. You might as well just be doing business at a traditional savings account.
Are their ATMs convenient for you?
A fee that you need to be mindful of with online banks are potential ATM fees. It’s always a smart idea to see how extensive their network of ATMs is. What you want to see are locations that are in convenient spots for you. Near your home, your job, your grocery store– locations that are convenient to your everyday life.
It doesn’t matter if they have 30 or 40,000 ATMs if 0 of them are on your daily commute. Check out their map, check out their online locator and see for yourself where those ATMs are. If that isn’t the case, then you should be sure the bank that you’re considering offers reimbursement for any foreign ATM fees. Otherwise, again, you’re going to get hit with surcharge after surcharge every single time you need to physically get your money out of the bank.
The drawbacks to online banks
Online banks aren’t perfect. They don’t have physical branches, so depositing cash can be a nightmare. Because of this, I keep my traditional brick and mortar checking account.
Transferring money from my checking to my online savings account, or transferring money from my savings to my checking account takes three business days. That can be a good thing if you have a habit of constantly withdrawing money from your savings, but if you find yourself needing cash quickly, it can put you in a tough spot, which is why we opted to keep this small buffer in our checking account.
Overall opinion of online banks
I love my high yield savings account. I’ve literally never had a problem with it being an online bank. Who do you bank with? Have you had a positive experience with them? Let me know!
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