What is an online savings account?
Last week, the Federal Reserve implemented a 0.25% increase in interest rates, marking the 10th consecutive rate hike since March 2022. This adjustment establishes the Fed's benchmark rate at 5% to 5.25%, its highest level since 2007. At the same time, stock market uncertainty amid numerous bank failures leaves Americans wondering where to protect and grow their savings.
The answer may lie in high-yield savings accounts, which offer higher interest rates than you'll typically find with traditional savings accounts. You can open a high-yield savings account with an online savings provider. Before you start the process, it's essential to understand how online savings accounts work and their distinct advantages.
See how much more you could be earning with an online savings account here.
What is an online savings account?
Financial institutions usually offer online savings accounts that don't have brick-and-mortar branch offices. These accounts allow you to conduct your banking entirely online without visiting a physical bank or credit union location. As such, more features may be available to you, such as higher interest rates, low or no fees and lower minimum balances than a traditional savings account.
An online savings account excels as a utility for saving money. The funds you deposit are separate from your bill-paying checking account, where they can accumulate and earn interest. By consistently stashing money in your savings account and allowing interest to work its magic, you can achieve your savings goals, like building an emergency fund or a down payment on a house.
How is it different from a regular savings account?
Consider the following differences between online savings accounts and traditional savings accounts to better understand the unique features and benefits each type offers, such as:
- Physical locations: Online savings accounts are provided by financial institutions as "internet-only" options, while traditional banks and credit unions offer standard accounts you can manage online or at physical branches and offices.
- Interest rates: Online savings accounts generally offer higher interest rates than regular savings accounts.
- Lower fees: Online accounts typically have lower overhead costs, which may lead to reduced fees and minimum balance requirements.
- Customer service: If you prefer conducting business face-to-face, you can enjoy in-person banking with a traditional bank. But if you're comfortable with online, chat and phone support, an online bank may be a suitable option.
- Opening an account: Online banks offer a relatively straightforward process to open your account in minutes. By comparison, a traditional account may require you to visit a branch location and complete an application.
What are the benefits of using an online savings account?
The most significant advantage of an online savings account—higher interest rates—directly benefits you where it matters most: your wallet. According to April 2023 data from the Federal Deposit Insurance Corporation (FDIC), the average interest rate, or yield, on savings accounts is a paltry 0.39%.
By contrast, you can find several high-yield savings accounts with interest rates ranging from 4.00% to 5.10%, roughly 10 to 13 times higher than a traditional savings account. That means if you invest $100 a month in a traditional savings account with a 0.39% yield that compounds annually, you'll have $12,316.77 after 10 years. By contrast, if you invest the same amount in a top high-yield savings account with a 4.00% yield, you'll have $14,555.35 over the same period. In this scenario, the high-yield savings account would earn an additional $2,238.58 compared to a traditional savings account.
Additionally, online savings accounts allow you to manage your account from anywhere you can connect to the internet. These tech-centric institutions often have feature-rich apps, and you can get customer service with a few clicks or a phone call, with no in-person visit required.
Check your online savings account options here and start earning more today.
How can you open an online savings account?
When comparing online savings accounts, a high interest rate is an important consideration, but not your only one. "You want to make sure the other features and terms of the account work for you, too," says Sonia Fraher, senior director of product management at Ally Bank. "Compare things like whether the account has tools to help you organize your money, minimum balance requirements and fees, along with customer service options."
Opening the account is a relatively simple process involving the following steps:
- Complete the application. You'll need to provide some personal information such as your name, address, Social Security number and a driver's license or other government-issued identification.
- Select your account type. You may be given options for the type of online account you wish to open, such as an individual, joint or business account.
- Appoint your beneficiaries. You may designate a person or persons who will receive the account assets if you pass.
- Make your initial deposit. You can fund your account by depositing a check online, at an ATM affiliated with your online bank or by using your mobile app.
- Create your account login. Complete the process by creating a unique username and password. Whenever possible, add an additional layer of security by activating two-factor authentication, or two-step verification. This process requires you to provide two different authentication factors to verify your account.
The bottom line
Online savings accounts may be better suited for those who don't regularly handle cash since depositing it into your account may be inconvenient. In that case, make sure the online bank you choose issues ATM cards so you can deposit funds at an ATM within your bank's network. Additionally, many online banks don't offer financial products, such as auto and mortgage loans, which you may be accustomed to seeing at a traditional bank. However, if you value higher interest rates, lower fees and convenience, an online savings account may be worth considering.
