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The holidays are around the corner, which usually means more spending rather than saving. Given how costly the holidays can be, though, you’ve got all the more reason to prioritize saving—and there’s no better way to do that than by opening an online savings account.
For those new to the concept, that begs the question: what is an online savings account? And, for that matter, what is an online bank?
Like any other bank, online banks are financial institutions where members can save, invest, and borrow money—with the exception that their financial transactions are done solely via computer or mobile device. Unlike traditional banks like Chase and Bank of America, online banks don’t have physical establishments.
From the outset, online banks may sound disadvantageous—and in fact, many people believe they are, according to a survey by GOBankingRates. But regardless of the time of the year, online banking, specifically with a high-yield savings account, has several major advantages. If you’re a skeptic, take a look at these five reasons why it’s worth opening an online savings account this holiday season.
Take a look at your latest bank statement. How much did you earn in interest?
With Wells Fargo, Capital One, or another traditional bank, chances are your savings account’s interest rate is less than 1%. In fact, according to the FDIC, the national average interest rate on savings accounts is currently a paltry 0.09% APY.
But compared to their brick-and-mortar counterparts, online banks typically offer more generous interest rates—as much as 20 times higher than the national average.
Because they don’t operate physical branches like traditional banks, online institutions have more room for higher interest rates; after all, without tellers, branch managers, and building maintenance, their overhead costs are significantly lower.
At face value, the difference between 0.09% and 2% may not seem so large—but over a long period of time, this difference can translate into hundreds, even thousands, of dollars, thanks to compound interest.
Traditional banks come with their fair share of fees—for instance, monthly service and withdrawal limit fees. These fees can range anywhere from $5 to $25, and when charged monthly, quickly add up.
To avoid these fees, your savings account is generally required to hold a minimum balance and avoid surpassing a set number of monthly withdrawals, a nuisance for any unforeseen expenses that come your way. These conditions, combined with any other miscellaneous fees and their policies, often make traditional savings accounts inconvenient when you actually need your money.
Meanwhile, online banks typically have zero or very few fees. For example, many digital institutions do not require a minimum balance. Thus, in addition to a higher interest rate, having fewer fees to worry about means you can boost your savings faster through an online savings account.
To clarify, an online savings account doesn’t make your money totally inaccessible. You can still transfer money to your checking account; however, the transfer period is slightly longer than that of a traditional savings account. Remember, by virtue of being an online savings account, there aren’t brick-and-mortar banks or ATMs that you can use to make a quick withdrawal.
While this may sound inconvenient, the extra time it takes to withdraw from an online savings account can actually benefit your financial goals. How so?
With an online savings account, you’ll be moving funds out of easy reach—so you’ll have no excuse to dip into your savings whenever temptation calls. Instead, you’ll need a good reason to justify withdrawing from your savings.
As a result, online savings accounts can keep you from casually indulging in expenses that don’t align with your larger money goals. In this way, they also help keep the big picture in mind and encourage you to make more intentional financial decisions.
Have you ever noticed a mediocre user experience when trying to make payments or view your funds online through your local bank? Traditional banks generally have lackluster websites, in large part because they’re more focused on in-person services at their local branches and ATMs.
Online banks are the opposite. Since they “live” on the internet, these online institutions make it a priority to serve their users digitally.
Of course, many traditional banks have taken note of the growing rate in digital banking among customers, and have subsequently improved their websites’ user interfaces. However, for the most part, they still pale in comparison to the websites and apps run by online banks—the heart and soul of which are web-based, after all.
Lastly, as if the previous four reasons weren’t enough, some online savings accounts offer a cash bonus for new members. That is, if you open an account and deposit enough to meet a minimum threshold, you’ll get some money for free. For starters, take a look at Discover’s online savings account, which currently offers a $150 or $200 bonus for qualifying new members.
Admittedly, not all online banks offer cash bonuses, but when combined with their high annual percentage yields, those that do are a steal. As you begin your savings journey with an online bank, you can think of these bonuses as extra encouragement for reaching your financial goals.
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