by Matt Frankel, CFP | Feb. 11, 2019
There are certainly some valid reasons to maintain a savings account at a traditional banking institution. For example, someone might prefer the convenience of a brick-and-mortar location, especially if they want to be able to drive to the bank and deposit their money.
On the other hand, online savings accounts offer some pretty valuable advantages over traditional banks. With that in mind, here are three good reasons why you might want to open an online savings account to park your cash.
While there are some brick-and-mortar banks that are starting to become more competitive with online banks -- particularly smaller institutions and credit unions -- the majority of traditional banks pay very little interest on savings deposits. In fact, as of Dec. 10, 2018, the national average interest rate for a savings account is just 0.09%.
In contrast, online banks pay significantly higher interest rates on savings accounts. As I write this, there are several reputable banks that offer interest rates of 2% or more on online savings accounts. You can check our list of the best online savings accounts for the latest available rates, but it's safe to assume that you can get more interest from your savings by choosing an online savings account.
Most financial planners, myself included, often suggest that you should aim to have at least a few months' worth of expenses set aside as an emergency fund.
Your emergency fund needs to be in a readily-accessible place, so it's not a good idea to put it in a brokerage account and invest it in, say, mutual funds. A better place would be something like a checking or savings account where you could access your money the same day you needed it.
While it's not a smart idea to invest your emergency fund, that doesn't mean that it can't generate a decent return for you, and an online savings account allows you to do just that. For example, let's say that you have a $10,000 emergency fund in an online savings account. As of this writing, you can readily find online savings accounts that come with interest rates of over 2%, so this would translate to an annual yield of $200. That isn't going to make you rich, but it's certainly better than nothing. And, this type of return can help your emergency fund keep up with inflation over time as well.
Traditional bank savings accounts often have relatively high fees. Just to name one example, Wells Fargo's Way2Save® Savings account charges a $5 monthly fee unless you maintain a $300 minimum daily balance or agree to a recurring deposit -- and this is on the lower end of the fee spectrum. On the other hand, many online savings accounts have no monthly service fees, no matter what your balance is.
Also bear in mind that with most traditional savings accounts, you'll pay a fee to use an ATM that is outside your bank's network. Meanwhile, you can find an online savings account that refunds ATM fees. Synchrony Bank's High Yield Savings Account will reimburse up to $5 in ATM fees charged by other financial institutions per statement cycle.
There are a few factors you should consider when choosing an online savings account. I've already mentioned interest rates and fees, but you should also consider things like convenience of deposits and withdrawals, as well as any other features or perks each bank offers. Check out our updated list of the best online savings accounts to compare some of the current options, and decide which makes the most sense for you.
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2021.
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