Why are interest rates up for online savings accounts? Here’s how it happens and what it means for your money.
As the Federal Reserve has finally started raising interest rates, times are finally changing at banks. Sure, increased interest rates from the Fed means a mortgage could be more expensive. But it also means your emergency savings might actually keep pace with inflation.
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About Online Savings Accounts
Online banks have long led the market in yields for savings accounts. They have much lower overhead than branch banks, so they can offer higher yields to their customers. And now they’re competing fiercely against each other for those customers. These banks are now offering yields up to–and some even above–2%.
That may not sound like much. But compared to the .03% you’ll get on your savings at some brick-and-mortar banks, it’s a fortune. This is especially true if you have a fairly large chunk of change, like a growing down payment fund or emergency fund, to put into savings.
Right now, Capital One is offering a high-yield online savings account with a 1.85% APY. Salem Five Direct is offering a whopping 2.05%. And the well-known Ally bank is offering 1.90% APY.
Those are big numbers, even compared to where online bank yields were last year or two years ago. However, moving to an online bank isn’t for everyone. Not being able to run to the bank branch when you have questions can be problematic. And you may have trouble easily getting money into and out of the account. Plus, some of these high yields are only available if you have a large minimum deposit.
So should you move your savings to a high-yield online bank account? Here are some things to consider ahead of time.
Of course, any time you’re moving money to a new bank, you’ll want to be sure your money is FDIC insured. But so long as your online bank does have this insurance and your balance is under $250,000, your money will be safe.
Some of the accounts mentioned above have high minimum deposits to get the higher APY. For instance, you’ll have to deposit $10,000 to get Capital One’s 1.85% APY. And some banks offer a lower APY for lower deposits, but could increase your yield as your account balance grows.
If you’re just starting to save, look for the best deal you can find with a low minimum deposit. Many are available with a minimum deposit of $1 to a few hundred bucks. But if you’ve already got a big chunk of savings available to move over, be sure to look for programs that offer an even better APY for a larger opening deposit.
Additional Monthly Fees
Online banks have always been known for their low-fee and no-fee accounts. Many banks with high APYs have no monthly maintenance fees, including HSBC, Synchrony Bank, and Barclays Bank. Some banks have no monthly maintenance fees, but only if you maintain a certain minimum balance.
Bottom line: Be sure you check the fine print for any monthly maintenance fees or additional fees the bank account may carry. These can quickly erode any additional benefit you get from the higher APY.
Federal rules already limit you to six withdrawals a month on a savings account. However, some withdrawals, like those made at an ATM or in person (which you cannot do with an online-only bank) may not count towards that limit. Some online banks charge fees for excessive withdrawals or limit the total amount of the withdrawal that you can make. This is just something to pay attention to when choosing an online savings account.
Ease of Access
You’ll want to be sure that you can easily get money into and out of the account in question. Many online banks have a robust ATM network nationwide, which makes withdrawing cash simple. Others will refund a couple of ATM fees per month if you use out of network machines.
However, some of these accounts don’t come with an ATM or debit card at all. So the only way to get your money out of the account is to transfer it to another bank account. And this can take a couple of days. In short, these options may not be best for an emergency fund. But this lack of quick access is not likely a problem if you’re storing a down payment for your home in the account.
One good option to check for is mobile check deposit. Most online banks offer apps that let you manage your accounts. And you can also take photos of checks to deposit into the account. This makes it easy to get money into your online savings account, versus depositing it into your brick-and-mortar bank’s checking account and then transferring it over.
Finally, be sure to check out any available bonuses, especially if you have a large deposit to put into the online bank. Some of these banks offer cash bonuses just for opening an account. Others require a minimum deposit amount–sometimes thousands of dollars–to get the bonus. And still others require you to set up a recurring monthly deposit into the account to get a bonus.
Don’t base your whole decision on bonus offers. They’re usually only $100 to $150. But if you find an account that checks off all the other boxes and offers a bonus, well, don’t pass up free money.
What About CDs?
As with high-yield savings accounts, so go certificates of deposit. Rates on CDs are also up these days, again, especially for online banks. However, you may not want to lock yourself into a long-term CD right now unless it has a rate bump. The Fed has hinted that it will continue raising rates. So if you lock yourself into a 3-year CD right now, you’ll likely miss out on higher rates in the future.
Should You Move Your Cash?
So if you have some money in savings at a traditional bank or credit union, should you move it to one of these high-yield accounts at an online bank? Maybe or maybe not.
If you don’t keep much money in your savings account right now (maybe because you’re working on other financial goals), you may not get a huge benefit from a move. But if you have a large balance, the benefit will be immediately apparent. You can do the math with a calculator like this one to see how much more you’ll earn with a move.
Say you have a $1,000 account balance. At .03% interest compounded daily, you’d have a whopping $1,000.30 at the end of the year. Earning 1.85% interest, you’d have $1,018.67 at the end of the year. That’s a big difference, but $18 may not be worth the inconvenience of moving to an online bank.
But let’s say you have $12,000 in your account as you save up for a new home. At .03% interest, you’d have $12,003.60 at the end of a year. Earning 1.85% interest, you’d have $12,224.06. That’s more than $200 over the course of the year, which is not too shabby.
Plus, moving to a high-yield online savings account typically isn’t too difficult. Just be sure to think through the logistics of getting cash out of the account when you need it, and then jump into those higher interest rates.