Online savings accounts offer the benefits of higher interest and delayed access - they may prove to be key tools for a successful financial life
Online savings accounts have been around for about a decade and provide a solid alternative to traditional savings accounts. You should have a 3 to 6 month emergency fund at minimum and you need to keep that emergency fund liquid and readily accessible. Traditionally, such an emergency fund would be placed in a bank savings account. Today, however, excellent alternatives exist: an online savings accounts. There are 2 primary benefits to having and using an online savings account for your emergency fund or for whatever else you're saving up for.
Online savings accounts generally pay a higher rate of interest, compared to traditional brick and mortar savings accounts
As of this writing, interest rates are at historic lows. The Fed might raise rates soon, but it will likely be years before rates reach historically normal levels. Big banks today offer rates that are almost insulting. Some banks offer rates as low as 0.01% in the United States and in Europe negative interest rates exist in places.
Although the purpose of your emergency fund or your liquid savings (eg. down payment savings or imminent college payments) isn't to make a large return, you would likely prefer something better if it was possible with the same amount of risk. Online savings accounts don't have the expenses traditional bank accounts have because no branch network is needed. This can be seen in the graphic above and should make complete sense. This savings is passed on to the saver in most cases as a way of attracting people to use an online savings account instead of a traditional brick and mortar bank.
If rates were the same regardless, most would prefer a brick and mortar bank due to the added ability to walk in if needed. Even if you do most of your banking online, this would add some sort of convenience and given equal interest rates, you would likely choose the brick and mortar option. The rates aren't equal, however, because online banks offer much higher rates than traditional brick and mortar banks.
Online savings accounts delay access to your money, helping you determine if it's really a need or a want
We've stated that an emergency fund should be easily accessible and that liquid savings that will be used soon should also be very easily accessible and not invested in the various markets (eg. equities, bond, real estate, etc.). Keeping this in mind, online savings accounts create a slight but beneficial barrier between you and your money by requiring (usually) a transfer into your traditional checking account at a brick and mortar branch before a large purchase or withdrawal can be made. This is a very slight barrier that doesn’t stand in the way of allowing quick accessibility to your liquid funds.
If there is an emergency, a two-day delay will likely cause any problems because you will likely have some money in your checking account to withdraw, you will have credit cards to use if needed, or two days will be enough time to get your hands on your funds. Most financial emergencies are not of the nature that require absolute immediate obtainment of funds (although some are – so you should probably keep some cash in your checking account and some cash in your wallet and at home for those time sensitive emergencies).
Although I wouldn’t keep all of my liquid cash in an online savings account, I would keep a majority of it there. Always be wise and prudent with your money and make sure the online savings account is with a reputable firm and that it is FDIC insured. Additionally, shop around for rates and online experience. It’s the 21st century and your online bank should have a high quality website and mobile app experience.
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