Online, High Yield Savings Account and Banking – Pros and Cons
Over the last couple of years, more and more online savings accounts have been popping up. These used to be something people had never seen before and the benefits they offered people were great, almost too great.
With these benefits came obvious criticism. How can they offer such high-interest rates? I don’t trust my money to an online bank and on, and on. People challenging whether these new options were legit or not weas well warranted because we are talking about money here. You can almost never be too careful or skeptical.
I can happily say that high yield, online savings accounts are a legit investment option for anyone and one you may want to explore. In this article, we’ll dive deep into the pros and cons of online savings account and banking in general. In the end, you should have a better idea of what they are and if they fit into your financial story.
What Is An Online, High Yield Savings Account?
An online savings account is just like any other savings account except it obviously only exists online. Most, if not all, banks offer some sort of online savings account but my favorite are Wealthfront, Ally, and Marcus. They operate the same way as any other bank where you deposit money and then that bank makes money by lending your money out to others. The bank then repays you for allowing them to lend your money by paying you interest.
Online, high yield savings accounts have forever changed how we bank and I foresee a future where brick and mortar banks cease to exists. Seriously, I think that period of time is much closer than you may think. The exponential saving they offer companies and superior products that we consumers can access from our couches is unstoppable.
This doesn’t mean that they don’t have their faults though, as we’ll see later on in this article.
The Pros Of An Online Savings Account
As someone who has an online savings account, I’m obviously biased towards them but I’m going to take a step back and give you an honest assessment. First off, most people choose to get an online savings account for the interest rate their account will earn. At a typical brick and mortar bank you are going to get anywhere from .1% to .25% interest annually.
When it comes to an online savings account, you will see rates from 1.80% to 2.25%. That is, on average, 10x higher. If you can tell me one investment as easy as switching to online that will get you ten times the return, I’ll listen. If you do find one, chances are it’s too good to be true or a scam, two things I despise.
Online savings accounts aren’t scams or too good to be true. Their ability to offer much higher interest rates is because they don’t have the overhead expenses of a physical location or employees to pay at said locations. This saves them millions of dollars and allows them to incentivize more people to join by offering a higher interest rate.
A majority of people, myself included, use this account to hold our emergency fund or other funds we may need to be able to access but not right at this moment. It’s earning us more money than it would be sitting under our mattress, but doesn’t have early withdraw penalties as some investment products do.
Another thing I like about an online savings account or online banking in general, is how fast it is. You can open up and fund an account in under 10 minutes. Seriously, if you are over the age of 18 and have a valid id or social security number then you can open an account.
From there, it is as simple as linking that account to your other bank accounts and transferring the funds. Being able to do it all online allows you to see everything that is going on with your account from your computer, phone, or tablet.
Most banks now offer an app that allows you to see the entirety of your banking profile in a simple snapshot. No navigating the internet or complicated logins. All you need to do now is click on the app, typically enter a username and password of your choosing, and you’re there. If your bank doesn’t offer an app or worse, it isn’t free, then I would HIGHLY suggest shopping around for a new bank. That’s a rant for another post though.
The Cons of An Online Savings Account
The biggest and most obvious con to having an online savings account is that there is no physical location and everything has to be done online. I’m aware that it makes people uneasy that their money only exists digitally and the fact they can’t access it immediately doesn’t sit well.
To combat this I recommend you never have all of your cash in an online savings account. Personally, I use mine to hold my 12-month emergency fund but I have another savings account at a local credit union. The money I hold locally could get me through a month or two and is just another safety net.
If you do need your money right now, you can’t just go to an ATM and pull it out like you normally would be able to. To withdraw money, it will take 3-5 business days for you to get a check in the mail. A workaround for this is transferring your money out instead of withdrawing it. This allows you to move the money (digitally) to a local bank where you could then go to an ATM and withdraw. This will cut down your wait time from days to minutes.
A downside to having an online savings account and not using a physical branch is customer service. I’m someone who values talking to a person face-to-face and I really hate playing phone tag. Press 1 for this, then 3 for that. You go through that for 10 minutes and you want to pull your hair out (side note just press 0 for the operator).
While this isn’t perfect, it isn’t a deal-breaker for me because I rarely call customer services and I’m sure you are in the same boat.
In addition, websites can go down causing a delay in your ability to get to your money. I have never personally seen this happen but it would be naive to not assume the possibility. In the past, this would be a huge issue and cause something called a ‘bank run’. But most of these online institutions are FDIC or similarily insured so for me, there is not much to worry about.
Should You Use An Online Savings Account?
Like everything in the money world, there is no one size fit all solution for your banking needs. In this case though, I think everyone can use the benefits of online savings account to fill a need in their financial story. The best and easiest way to do this is to add it as a part of the automation that is already happening on pay day.
That means that a percentage of your paycheck automatically deposits into your online savings account. There are a lot of ways to optimize automation from your paycheck that makes your life easier. I did a full write up on automating your finances which you can find here: Automate Your Bank Accounts To Make Money – A Helpful Guide. Or if you’d rather you can watch the YouTube video linked below.
Most people have most of their cash sitting in a checking account. What they don’t realize is that this account is earning little to no interest. Seriously, many checking accounts pay zero interest. By doing this, you are loaning your money to the bank at 0% interest while they turn around and make 3-6%. That’s not a fair trade and one I’m not willing to make.
What I would suggest to you, is look at all of your accounts and balances and see if an account paying 1.5%+ could fit for you. Your current interest rates may surprise you. More money does not equal more problems here.
Even though the popularity of these types of accounts is rising, there still seems to be the mysterious shroud that surrounds them. I’ve heard comments that your money doesn’t even exist since it is moved digitally. Or my favorite, those banks are going to crash and you are going to lose everything. These claims obviously ignore the fact that each one is FDIC insured.
To help clear up some of these misconceptions here are some related questions about online saving accounts.
1) Are Online Bank Accounts Safe?
The belief that just because you aren’t depositing a check or cold hard cash, your money isn’t safe is ridiculous. I’d make the argument that money in an online savings account is safer than in a traditional bank. I’m not saying this because a burglar can’t walk into an online bank and rob it (which is true) but because the technology is far superior.
Let’s use a local credit union for example. This bank started out as a brick and mortar business many, many years before the internet even existed. They then moved certain abilities to the web which you now use, but this bank didn’t start out as a technology company.
On the other hand, you have a company like Wealthfront who started out with everything web-based. Their focus was, and still is, making the best, most secure product possible. They put a much larger percentage of their capital towards investing in security than your local credit union ever would.
Because of this simple fact, online banks are much safer than people believe.
2) What is the best online savings account?
The answer to this question is going to rely 100% on your needs as a consumer. Let’s be honest, most of the banks that offer online saving accounts have the same stuff. Their websites flow well, great customer service, and all the interest rates are around the same.
If you are purely chasing the highest interest rate then your decision will be easy. This will come with quite a bit of effort over the years to move your money to the next place with the highest interest rate. For most people, that doesn’t sound appealing. As someone who has hopped from bank to bank, I can say that it has never been easier than it is today, but it’s definitely still a pain.
What you should do is look more closely into each bank and see what other products they offer. Specifically, I’m talking about investment accounts like a Roth IRA. If you find online savings account with a high-interest rate and they also offer other investment products, why not get them both in the same place?
3) Can you lose money in a high yield savings account?
You can lose money in any investment, even an online savings account. Like I stated above, no one is going to rob you or hack the system so how can you lose money?
This is all going to depend on the interest rate that you are getting on that account. If you use Wealthfront, for example, you will be getting 1.9% APY (this number varies). The U.S. Trading Economics site has stated that inflation is currently around 1.6% so this account is netting you .3% interest yearly.
The inflation rate is the increase in the cost of goods and services over time. What that means is that goods and services in the U.S. are getting 1.6% more expensive every year, thus making your dollar less valuable.
This answer isn’t a full economic lesson though. Just understand if your online savings account is giving you an interest rate of less than 1% you are most likely losing money.
The Bottom Line
Online saving accounts and other online banking is here to stay, whether you like it or not. The fear that your money isn’t safe is a concern that is quickly fading away since these companies are built with security online as one of their first priorities.
The high-interest rates these banks are able to offer make them almost too good to not use and will always beat the low-interest rates you find at a local brick and mortar bank.
As I described above, they may not fit into everyone’s financial story but you should still be aware of them and the benefits they offer.
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