A savings account is a place where you put all your money that you don’t need to spend right away paying for utilities and other regular expenses such as rent or car fuel. In this article, you will learn how online savings accounts work, what are the differences and benefits of opening one over a traditional saving account.
Saving accounts are different than checking accounts because the money you deposit into your savings account is meant to be used in the future for specific plans like or for a rainy day fund. While a checking account is used to pay for regular things like gas, housing, groceries, and other bills.
How does a savings account work?
It’s pretty easy actually, you go to a bank or an online bank, you create an account, preferably a high-yield savings account, and then deposit funds into it to save it for another time.
You will also get to earn interest for keeping your money in a savings account.
If you didn’t know, banks will use the money that you deposit, to give loans to other people or businesses.
In return, they will give you interest so that you have an extra incentive to hold your money for a longer period of time into your saving account.
The interest rates are not that high (compared to other ways to invest your money into), but they also depend on the type of account you will choose to keep your money in. So for example, if you put your money into a high-yield savings account, you will earn a higher interest rate than if you were to deposit funds into a regular savings account.
Don’t worry though, you can access and withdraw your money from a savings account at any time, but there are some limits imposed by the Federal Reserve Regulation D.
For example, if you don’t want to get charged with excess withdrawal fees, you should not withdraw more than 6 times per month from your savings account.
In 2020 though, because of the global pandemic, the Federal Reserve gave banks the option to waive these restrictions so that they can withdraw more than 6 times per month without getting any additional withdrawal charges, but some banks might still apply an excess withdrawal fee though.
What is an online savings account?
An online savings account is basically the same as a traditional savings account with the main difference being that the financial institutions don’t have a physical place for you to go and conduct business.
So because of that, everything is done online, from opening the account to depositing and withdrawing funds.
Even if they operate online, these financial institutions still have to follow the same rules and regulations as traditional ones, including Regulation D, that we’ve talked about before.
But a great advantage of using online savings accounts is that online banks usually have a much higher interest rate and lower fees for their customers, since they don’t have to pay for things like rent, maintenance, etc.
How do online savings accounts work?
Online banking is more popular these days than ever, (in part due to recent events like the pandemic) and the industry is expected to boom over the next few years.
It’s very easy to open and operate a savings account. To get started you just have to open and fund your account with the financial institution of your choice.
After that, you can continue depositing funds into your savings account and the bank will pay you interest.
Since many people are opting for online bank accounts, some of them have serious concerns or questions about how they can deposit money into an online savings account and how to withdraw them.
A quick note: it’s way easier to deposit money than to withdraw, because if the online financial institutions don’t issue you a card linked to your savings account, then it will be a bit more difficult to withdraw cash on short notice.
Depositing money into your online savings account
- Use ACH (automated clearing house) to transfer money from your linked accounts
- Get direct deposits from your job for example
- Through check utilizing mobile check deposit or mail
- Wire transfer from any bank account
Withdrawing money from your online savings account
Usually, you get to withdraw money the same way you use to deposit them for example:
- Transfer funds to other linked accounts
- Online transfer to other accounts and banks
- Check Request (you will get it through the mail)
- Wire transfer
- Through a debit card at any ATM (if your online bank provides you with one)
How does interest work on an online savings account?
The same way it does on a regular savings account, but usually, you get to earn more interest from an online savings account than from a traditional one.
That’s because like I mentioned earlier, they don’t have too many costs to run the business so that translates into lower fees and higher interest rates for their customers.
It depends on the online financial institution that you choose to sign up with, so if a high interest is what you’re after, then make sure to “shop” around until you find one with higher rates.
So how much can you earn from interests? Well, it depends on the bank’s annual percentage yield.
But let’s go with an easy example if you deposit $1000 into your savings account, and the bank pays you an annual percentage yield of 1%, after one year of collecting interest on that $1000, you will get to have $1,010 in your balance, essentially you will become $10 richer.
Sure, it’s not a big amount, however, you have to take into consideration the amount of money you deposit in your savings account and also how many contributions you do each month, for instance, you could keep on adding $200 every month, and then your profit will be a bit higher.
Are online savings accounts safe?
Yes, online saving accounts are perfectly safe and insured by the FDIC (Federal Deposit Insurance Corporation). Exactly as with traditional accounts.
So you don’t need to worry about the bank going into insolvency and you losing all your cash.
The FDIC insurance protects your money up to $250,000 per account so if you want to sleep well at night knowing that your money is secure, you should only open an account with online banks and financial institutions that are covered by the FDIC insurance.
Apart from that, banks utilize strong encryption and security networks to ensure that no malicious third-party attacker can steal crucial financial information from your accounts.
However, even with strong security systems and encryption methods, attackers could still access your online accounts if your device like your mobile phone or laptop gets infected with malware.
This will make it easier for identity thieves and hackers to get into your accounts. So make sure your banking data is kept safe by maintaining a clean device with up to date antivirus programs.
Benefits of using online savings accounts
There are many reasons to keep your money in a savings account, the first one being to earn a passive income from the much higher interest rate.
It’s also much easier to access your money from a savings account than for example from a CD (certificate of deposit).
They also allow you to easily stash money for the future, without risking losing them by investing in stocks for example.
On top of everything else, saving accounts are also insured by the FDIC, unlike other investment options.
Online savings accounts are very convenient since you don’t need to go to a bank every time, and instead, you get to chat with support staff online and get the issues fixed as soon as possible.
With an online savings account, it’s much easier to automate your money savings, especially if you always forget to do it.
How to open an online savings account
Ok, now that you learned about how online savings accounts work, here’s what you need to do in order to open one:
1. Do some research
Like I said previously, you will need to go and “shop” around for an online bank that works best for you.
Look into the following:
- The interest rate that you will get on your deposits
- Minimum deposit required to open an account
- Fees and penalties that you might have to pay
- Banking features like easy money transfer via different devices
- FDIC Insurance is a must if you want to have your money protected
- Debit Card Linking is important if you want to withdraw cash from ATMs
- Customer Service should be reliable and have good reviews in case you need help
Alright, so after you’re done with the research, proceed to step two.
2. Submit an application
To sign up for an online banking account you will need to fill out an application with some basic details such as your name, address, date of birth, and social security number. Of course, depending on the bank, they can also ask for additional information from you.
After that’s done, it would take a few minutes (usually 15), before your account is opened up and move to the next step.
3. Designate beneficiaries
This is a dark one, but such is life. You will have to choose who will get access to the money from your account in the unfortunate event that something happens to you. So take some time and think about this carefully.
4. Fund your account
Some banks have minimum deposit requirements in order to open an account so it depends, there are banks that only require $1 and there are others that require more than that.
Luckily, you have already made your research before opening your account, and you know what to expect here, right?
Anyway, you can either deposit the minimum requirements or decide to fund it with an even larger amount, it’s up to you.
Conclusion: How online savings accounts work
As you can see, there are quite a few benefits of opening an online savings account. Hopefully, this article was able to clear some of the questions that you might’ve had about how online savings accounts work.
And if it did, then it would be great if you could share it with your friends and family.
[sc_fs_multi_faq headline-0=”h3″ question-0=”What is an Online Savings Account Typical Interest Rate?” answer-0=”The US average interest rate is 0.05%, but one great benefit of using online savings accounts is that you can get a much higher interest rate, usually, you can expect a 0.50% APY for a high-yield savings account.” image-0=”” headline-1=”h3″ question-1=”What is the Minimum Balance For Online Savings Account” answer-1=”There are banks that require $0 or even $1 minimum deposit to open an online savings account, but there are also some that require a bit more like for example $5,000. It all depends on the bank you choose.” image-1=”” headline-2=”h3″ question-2=”Are Online Savings Accounts FDIC Insured?” answer-2=”This depends if the online bank is insured by FDIC, if they are, then yes your online savings accounts are covered the same way as a traditional savings account is. However, make sure to check properly if the financial institution that you choose is insured by FDIC.” image-2=”” headline-3=”h3″ question-3=”Can You Add to an Online Savings Account Regularly?” answer-3=”Absolutely, you can put money into your online savings account every time you want. Some even prefer to automate the process and make this process as smooth as possible.” image-3=”” headline-4=”h3″ question-4=”How Do You Withdraw Money from an Online Savings Account?” answer-4=”The easiest way is through a debit card that’s linked to your online savings account. Most online banks will issue you a card, but just to be sure always research that before you choose your financial institution.” image-4=”” headline-5=”h3″ question-5=”What is a Disadvantage of Online Banking?” answer-5=”The main issue is security, identity theft, and data protection. All online banks and financial institutions strive for the best security measure since they know how important safety is for them and their clients. However since nothing in this world is perfect, accounts can be hacked into, and you can get your identity and data stolen. Especially if you download malware and visit shady sites.” image-5=”” count=”6″ html=”true” css_class=””]