Online saving accounts pay much more interest compared to the normal brick and mortar banks.
The average savings account interest rate is 0.09% APY, but there are now a ton of online saving account options that currently go as high as 2.45% APY (as of 2/21/2019).
Who knows how long this will last, but why not take advantage of these rates and earn the most you can from your long-term savings?
Why I'm Interested in Saving Accounts
Earlier this month, we became 100% consumer debt free. Becoming debt free was a huge step for our family!
Our next phase is to save enough cash to fully fund our long-term rainy day stash of cash (aka emergency fund). We've decided to keep around four months worth of cash in a savings account.
I want to find an account that is easy to use, reliable and pays a high-interest rate. I will be connecting the account to YNAB, but the category will be at the very bottom of my budget. The idea is that I never want to have to touch this money unless it is necessary.
After we attain our goal balance, the plan is to set up a $100-$200/mo auto deposit into this account. I don't want our emergency fund to grow too large, but it would be great to have this fund grow to cover 6-months worth of expenses over time.
Onlive vs. Physical Saving Accounts
With how much the internet has taken off over the last few decades, online banks have become very popular. They offer a few advantages over physical banks:
- Higher APY (annual percentage yield): Your money will pay you more interest and grow faster just sitting in your account.
- Lower Fees: Not having to run and maintain physical locations means they can lower fees and increase rates.
- ATM's: The primary way you will withdraw cash from an online savings account is by transferring funds to your checking account. Most of these accounts do not provide an ATM card. You can usually request a check that some of them will send for free.
- Depositing Checks: Most online banks provide a method for depositing checks from your mobile device. However, this is also a common feature with most large physical banks.
As long as you have internet access (whether from your phone or home internet connection), online banks are an excellent option.
However, going with an online savings account has a few negatives:
- Depositing Cash: If you want to deposit cash into your savings account, you are usually out of luck. However, in most cases, you would transfer from your primary checking account.
- Face to Face Conversations: If you want to talk to someone physically, you are usually out of luck with an online bank. Some of them have branches in larger cities, but they are the exceptions.
- Security: Reputable online banks are just as secure as physical banks. However, if you aren't using a secure password and locking down your account, you could open yourself up to additional risks by banking online.
- ATM Card: The primary way you will withdraw cash from an online savings account is by transferring funds to your checking account. Most of these accounts do not provide an ATM card. You can also usually request a check that some of them will send for free.
In this digital age, I'm very comfortable using an online bank. We've been using USAA as our primary checking account for over a decade, and have found their service to be excellent (we are not near one of their physical locations).
Regardless of which savings account you end up going with, you will want to make sure they are FDIC Insured. FDIC will cover your account for up to $250,000 if the bank goes down. Seeing a bank go under is not fun, but seeing your entire cash savings get wiped out is horrendous.
Saving Accounts with the Best Rates
I scoured the internet to find the best online savings accounts. All of these are top rated and share most of the same features.
None of these saving accounts offer a debit/ATM card. But that shouldn't be a big deal as you can transfer funds to your checking account when you need cash.
Here are the things each of these saving accounts have in common:
- Highly rated across the internet
- None of them provide an ATM card
- You can deposit/withdraw from accounts at other banks
- Most of them either don't have a minimum deposit or balance amount to receive the highest APY, or the amount is $1. The exception is CIT Bank.
- From what I can find online, all of these saving accounts compound interest daily. Especially when you have a large balance and don't touch it for long periods, this means more growth from your cash.
$100 minimum to open an account + $100/mo deposit or a $25,000 balance
Marcus: By Goldman Sachs
$1 balance to earn APY.
Ally Online Savings
Discover Online Savings Account
New Account Cash Bonus: $150 (with $15k deposit) / $200 (with $25k deposit)
AMEX Personal Savings
What features to look for in an online savings account?
There are a few things to confirm before signing up for an account.
- Make sure the account is FDIC insured
- You should be able to deposit checks via a mobile app on your device.
- Avoid accounts that charge a monthly fee, unless it provides a feature you need.
- Make sure their site loads via “https,” which signifies a secure connection (load the site and check the URL in your browser). This is a huge red flag if they do not have an SSL setup.
- Confirm you understand how to qualify for the listed APY. Some accounts have a deposit or balance minimum to earn that rate.
- You will want to be able to transfer money to and from your primary checking account, so they will need to have this feature
- You should be able to find positive (or negative reviews online). If you can't find any info about the company and account after searching Google, that is a bad sign.
There are so many great options, it shouldn't be difficult to find an account that meets the list above.
What funds work best in saving accounts?
Regulation D stipulates that you can't make more than six withdrawals per month from a savings account. It appears the primary purpose in Reg D is to help protect bank reserves and to discourage people from using accounts intended for saving as a checking account.
However, there are withdrawal exceptions that will not go against your limit:
- Using your debit card to withdraw money from an ATM. This doesn't apply to online saving accounts since most do not provide a debit card.
- Transactions made directly at the physical bank
- Having a check mailed directly to you
Generally, if you are using the account for long-term savings, you hopefully won't hit that limit. You want to make sure if you do need to withdraw from the savings account, that you batch as many of the transactions as possible to avoid violating Reg D.
With that said, how each bank enforces Reg D varies. Some will charge you a fee when it happens. Others won't do anything unless it becomes a regular occurrence. Take a look at the fine print to figure out how your bank handles this.
Most of us are going to want to have at least one savings account to store cash as part of our emergency fund. The great news is there are many excellent online saving accounts out there, that it can sometimes feel overwhelming which one you should choose.
But don't feel like you are signing your life away when setting up a new savings account. You can always transfer your funds to a different account, and most of them do not lock your funds. Find a savings account that has the features you need with the best interest rate.
What bank do you use to store your long-term savings? Do you have any recommendations?