It sometimes seems like savers can’t get a break these days, at least not at their local brick and mortar bank. Interest rates have been low for quite some time. And while that might be great news if you’re in the market for a loan, it’s not so great news if you’re looking to squirrel away some of your hard-earned cash in a safe place that earns you some decent interest.
And that’s why you might be happy to discover some of the high-yield savings accounts offered by online banks.
Online banking has come a long way
A high-yield savings account is exactly what the name implies. These online accounts typically pay you 20 times more interest than the standard savings account you get from a traditional brick and mortar bank. The arrival of online banking has been a boon to many savers who were frustrated at seeing their money languishing in accounts earning an annual percentage yield (APY) of a measly 0.10% or less.
Compare this to the current APY of about 2.0% offered by online banks, and you can see why high-yield savings accounts are appealing to many savers.
Online banks can offer savers these higher rates because they don’t have the overhead costs of a physical bank with a building, employees, and maintenance costs.
You could say online banking is streamlined banking. You won’t get a lot of frills, special features, or additional products that generally come with traditional banking. However, you might find this an acceptable trade-off if your primary goal is to park your extra cash someplace safe while earning as much interest as possible.
Despite its potential for a better yield, a high-yield savings account isn’t for everyone. In some cases, depending on what your long-term plans are for your money and the kinds of banking services you require, a traditional savings account might be your better option. Let’s take a closer look at some of the pros and cons.
High-yield savings account pros
Better interest rates: We’ve already discussed the fact you’ll get a better interest rate, but let’s see an example of how this really impacts the money you’ll earn.
Say you had $10,000 in a traditional savings account yielding a 0.10% APY. After one year, you’d have earned $10 in interest. On the other hand, if you earn 2.0% APY from a high-yield savings account, your interest after one year would be $200.
That’s 20 times more interest from a high-yield savings account.
Low or no fees: While many traditional banks tack on a monthly fee for their services, you shouldn’t have any trouble finding a high-yield savings account that offers you low or no maintenance fees.
FDIC insured: Before opening an account, make sure the online bank you’re considering is a member of the Federal Deposit Insurance Corporation (FDIC). That way you’ll receive the same protection you’d get from a traditional bank in the case of bank failure.
Convenient online access: Online banks generally make it easy to set up and fund your account whenever you’re ready. You can set up electronic transfers to and from your other bank accounts, plus you can access your account from your favorite device.
Some people say their banking experience is better with banks that exist only online. This might be because these companies realize their entire business is dependent upon their customers’ online experience. Therefore, they devote their attention and resources to making their transactions convenient and user-friendly.
High-yield savings account cons
Limited features and few additional products: One trade-off for high-yield savings accounts is the lack of additional features that you might be accustomed to when you have a traditional bank account. This might include things like ATM access and the availability of a checking account. If your goal is to have one banking service that meets all your needs, you might not get everything you need with an online bank.
No branch to visit: For some savers, this is a sticking point. They like going down to their local branch, developing a personal relationship with their banker, and having their questions answered in person.
Transactions and access to your money takes time: In many cases, you’ll need to wait a few days for transfers to and from your high-yield savings account to complete. If it’s critical you have immediate access to your cash or for your transactions to complete quickly, this can be a downside to online banking.
Online bank sites can go down: Because you don’t have a physical branch to visit, you’ll be dependent on your online site to be up and running when you need it. There have been instances where online bank sites have gone down unexpectedly or are unavailable due to maintenance.
You’ll also be dependent upon the reliability of your own Internet connection to make transactions. In a worst case scenario, you could make your transactions by phone. But then again, you’ll be dependent upon the online bank’s customer service being available to help you.
The Bottom Line
Life is full of good reasons to save money.
For example, if you’re worried about another stock market crash, you might want to pull some cash out of your brokerage account and keep it someplace safe.
If you’re concerned about having funds to pay for life’s little emergencies, then you might want to set up a rainy day fund.
Or if you’re anxious about the potential of a job loss, you’ll want to have enough cash to cover three to six months’ worth of living expenses.
These are all good reasons to have a high-yield savings account that keeps your money safe and pays you interest along the way. If you’re really eager to get ahead financially, you need to pay attention to every dollar you make and save. You need to safeguard your money and that means taking the time to find the right home for it that meets your specific needs.
If you’re interested in finding a high-yield savings account, check out Bankrate’s comparison of online savings accounts.
(Disclaimer: This article is intended for informational purposes only and should not be considered financial or legal advice. Not all information may be accurate. You should consult a financial professional before making any major financial decisions.)
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