Tired of earning pennies in interest from your traditional savings account (“TSA”). Most of us are literally earning a few pennies if lucky, and when you factor in inflation, we are actually losing money. Let’s end this by opening an online savings account (“OSA”), and earn on average 20 times more than a TSA.
Meet the Players
Some of these banks listed below like Barclays and HSBC have physical branches, but these are only available for their traditional banking customers, in other words, not online banking customers. Here are some of the players and the interest rates they offer their online customers.
Marcus by Goldman Sachs – 2.25% APY
American Express National Bank – 2.10% APY
Ally Online Savings – 2.20% APY
Synchrony Bank – 2.20% APY
Barclays Bank – 2.20% APY
HSBC Direct – 2.22% APY
“APY” – Annual Percentage Yield is the rate of return you will receive compounded on a yearly basis, or simply the interest rate. These rates are subject to change.
Online Savings Account versus Online Bank
It’s important to understand the difference as many traditional banks such as Chase, Bank of America, Wells Fargo and others offer online banking and mobile apps, where you can deposit checks, transfer funds, and pay bills, in addition to banking at their physical branches. Online banks only offer banking services through the internet and/or mobile apps and have few or no physical locations. Since online banks do not have physical locations and tellers, they offer higher interest rates with little to no minimums or monthly fees. Of the online banks discussed in this post, only one (Synchrony Financial) offers a debit card to withdraw money from an ATM. Generally, if you want to withdraw cash from an ATM, you will need to first transfer the funds from your OSA to your TSA, and then once the funds settle you can withdraw it from any ATM.
Pros of an Online Bank
Significantly higher interest rate. The single largest advantage is the interest rates offered with online banks. TSA’s don’t even come close.
No minimums or monthly fees. Since online bankers have lower expenses (i.e., no physical branches, fewer employees and operating expenses), online banks can offer their products for free, and only require $1 in your account to earn interest. You can open an OSA with less than $1, but will only earn interest once you have more than $1 in your account.
24/7 customer service. Having access to a banking professional at any time is a nice advantage, but only a few online banks offer this service 24/7, while all offer this service during normal business hours. Also, many online banks have live chats, which can answer most of your questions.
FDIC insured. This means your money is protected by the U.S. Government for up to $250,000 should your bank lose your money somehow. All the online banks mentioned in this post are FDIC insured. Whatever bank you choose, make sure it is FDIC insured.
Security. While you may be concerned about a cyber-attack, online banks have some of the most complex security systems around, which are equal to the security traditional banks use.
Cons of an Online Bank
No physical locations (no personal relationship). This is what you sacrifice when using an online bank. While nothing can match the customer-teller/banker relationship, online banks still provide excellent customer service.
Lack of checking accounts and other banking products. Many online banks only offer savings accounts, personal loans and CD (Certificates of Deposits). While I believe they will slowly grow by adding products such as checking accounts, they have yet to do so.
Difficult to deposit cash. Depositing cash can be a little tricky since you can't deposit money through your phone. To deposit money with an online bank you must first deposit the money in your TSA, and then transfer the funds to your OSA.
Lack of ATM network. Online banks don't have the extensive ATM networks that traditional banks have. Some online banks allow you to withdraw money from an ATM and will provide you with a rebate. For example, Synchrony Bank will give you $5 per month in ATM rebates.
How to Maximize your Interest Earnings
So here’s my take: I would recommend you open both a TSA with any bank and an OSA. Fund your TSA as you normally do and then transfer the funds from your TSA into your OSA so you can take advantage of the higher interest rates offered by the OSA. Napkin Note: You can only make 6 transfers and or withdrawals per month according to federal law. So be sure to transfer a meaningful amount each time and not a few dollars. Whenever you need cash, just transfer monies from your OSA to your TSA and use your normal ATM. This process will enable you to be more efficient with interest income and over time allow you to earn significantly more, and grow your wealth.