The Rise of Online Savings Accounts: How To Maximize Your Money

An online savings account is a convenient banking solution. Online-only banks typically offer these accounts, allowing you to manage your money easily and flexibly.

Unsurprisingly, more people turn to online banks to save and maximize their money. As of 2022, approximately 78 percent of Americans prefer to bank online. Learn how online savings accounts work and their benefits and drawbacks.

Online Savings Account, Defined

An online savings account is a financial instrument banks or other institutions offer. While some traditional banks with physical branches may offer this facility, most online savings accounts originate from online banks that operate entirely online.

While traditional banking has a loyal fanbase, it faces stiff competition. Online banking offers one of the most important things to consumers: convenience. You can manage your online savings accounts via phone, tablet, or computer anytime, anywhere.

Additionally, online banks often offer savings accounts with higher interest rates than traditional brick-and-mortar banks, especially when you open a high-yield savings account.

That is because online banks don’t have the same costs as conventional banks. They don’t need to pay overhead costs associated with physical branches. They can require no minimum balance and charge fewer fees. Sometimes, they may not even require an opening deposit.

Pros of online savings accounts

Online savings accounts have many features that make them attractive to many people. These include the following.

• Convenience: Since all your account interactions occur digitally, you can manage your savings whenever and wherever you like. Taking time out to visit a branch or wait in line is unnecessary.
• User-friendly websites: Online banks rely on their websites and apps to interact with their customers, so they ensure they work seamlessly. They devote significant resources to their “storefronts” to ensure they’re optimized.
• Lower fees: Having no physical branches means no overhead costs. Many online banks pass on the money they save to clients through lower interest rates, fewer fees, and lower or no maintenance fees. That gives customers more flexibility and freedom to do what they want with their money.

Cons of online savings accounts

However, it’s not all puppies and flowers. Online savings accounts have their cons compared to regular ones. They include the following:

• Cash takes more effort to deposit: Suppose you operate a cash business like a laundromat. In that case, you might not have an easy way to deposit into an online savings account because many don’t provide ATM cards. They might require a separate checking account to handle these sorts of transactions. That could be inconvenient if you want to keep all your money in one institution.
• ATM access fees: Online savings accounts could be linked to checking accounts within the same bank offering debit cards. However, if you use this debit card outside the bank’s ATM network, you may have to pay ATM fees. On a positive note, your online bank’s mobile app may provide cash-back rewards or tools to help you budget your finances.

You should see what each bank account offers and find the account that fits your banking needs.

Is online banking safe?

You can safely entrust your money to some banks. To find out which ones, check their websites to see if they have the words “member FDIC.” That indicates that the bank has coverage for Federal Deposit Insurance Corporation (FDIC). 

It is the government agency that insures your deposits with member banks. Suppose you deposit money at an FDIC-insured bank, and the bank later fails. In that case, the FDIC will cover your money up to a certain amount, typically $250,000.

However, banks are not mandated to be FDIC-insured, so don’t assume they are, even if the website says they are members. Head over to the FDIC BankFind page to find out for sure.

Even if the FDIC insures your online account, you should choose a bank with robust security to protect your money. The FDIC does not reimburse lost funds due to fraud.

Credit unions have similar coverage under the National Credit Union Administration (NCUA). If you are banking with a credit union, ensure the NCUA covers them.

Tips To Maximize Your Money

Online savings accounts are the first step for maximizing your money. These tips can bring you further down the right path. 

Choose the correct savings account

Getting the most out of your savings account starts with considering your financial goals and how soon you might need to access your savings. When choosing your savings account, you have a few options.

• High-yield savings account (HYSA): You can usually find these higher-earning savings accounts at online banks. However, some traditional financial institutions also provide them. High-yield savings accounts can earn up to 10 times more than traditional ones. However, make sure your bank also offers checking accounts (not all do) if you want the flexibility to make quick transfers between accounts.
• Traditional savings account: These standard savings accounts are offered by conventional banks and credit unions and often come with checking accounts, so you can quickly transfer money between the two accounts. The average savings account interest is 0.58 percent as of May 2024.
• Money market account: These accounts combine the main features of savings and checking accounts with the ability to cut checks and use a debit card. Moreover, rates typically exceed those of traditional savings accounts. Consider a money market account if you want greater access to your funds while still earning interest on your savings.
• Certificate of deposit (CD): Certificates of deposit (CDs) are a type of savings vehicle where you agree to leave your deposit untouched for a predetermined period in exchange for a high-earning, fixed-interest return. Generally, the longer the CD term, the higher the interest rate.

If you’re unsure what you need to reach your goals, here are some factors to consider:

• You have a lot of cash. Suppose you received a large lump sum in a personal injury settlement or trust fund. You should consider depositing it in a high-yield savings account or starting a CD ladder. If you have $100, consider buying an I-bond.
• You want unlimited access to funds. Suppose you want to withdraw your money at any time. In that case, you want to open a money market or high-yield savings account instead of a five-year CD. A CD imposes penalties if you withdraw it before the term ends.
• You have a specific purpose. Your goals for the money will determine the type of account you’ll open. Suppose you’re saving for the down payment for a house. You’ll want to consider a longer-term account paying higher interest over a longer period than a shorter-term money market account.
• Find a customer-friendly bank with easy sign-up and simple mobile apps. Also, check various options and financial institutions, such as local banks and credit unions. They might offer higher rates and lower fees.

Set your savings goals

It is much easier to hit your target when you have one. Setting financial goals keeps you motivated to stick to your savings plan. When you have a clear goal you’re saving for, like a home down payment, vacation, or emergency fund, it’s easier to resist the temptation to spend.

Once you’ve set your goals, you can create a time-specific plan. For example, if you want $2,000 for a cruise in one year, you can set up monthly automatic deposits of $167. After a year, you’ll reach your goal, plus any additional interest your account accumulates.

Follow a budget

You must be disciplined and consistently deposit funds into your accounts to achieve your savings goals. Two simple budget strategies are the pay-yourself-first plan and the 50/30/20 plan. These can help you prioritize savings and divide your income into necessities, wants, and savings. By saving at least 20 percent of your income, you can develop a consistent habit of saving and ensure steady growth over time.

Use a budgeting app

Your bank likely has an app to help you manage your account. However, tracking savings could be more complicated and time-consuming if you have multiple accounts. Connecting your savings accounts to a budgeting app can simplify monitoring your spending, savings, and net worth across various accounts.

Budgeting apps allow you to set savings goals and monitor your progress. These apps can also import balances and transactions from any linked account to give you a quick snapshot of where your money is going and how much you have available. Most budgeting apps provide spending reports, which can help you identify spending you can cut and redirect toward your savings.

Don’t touch your savings

Only dip into your savings as a last resort and aim to use your accounts for their intended purpose. For example, tap into your emergency fund only for a genuine emergency. It is also smart to refrain from using savings to pay off debt, especially if you don’t have a fully funded emergency account or are behind on your long-term savings goals, such as retirement.

Instead, trim expenses or take on a side hustle to create extra funds to pay down debt. Repayment strategies like the debt avalanche and debt snowball can also help you get debt-free.

Set automatic deposits

Setting up automatic savings deposits is one way to simplify your savings efforts and grow your account. If your employer allows it, you can set up transfers from your paycheck or checking account directly into your savings account. Ideally, schedule these deposits each payday or at regular intervals like weekly, bi-weekly, or monthly.

Paying yourself first with automatic savings deposits means you are prioritizing your savings. Instead of saving whatever amount is left over after you pay your bills, you allocate funds to your savings account before spending on anything else.

Open multiple accounts

You can organize your money better when you set up one account for one goal. For example, you could designate one account for emergency funds, another for a vacation, and a third to purchase a car. Creating dedicated accounts for your goals allows you to monitor your progress toward each goal easily.

Additionally, opening new accounts allows you to take advantage of new bank account bonuses and any higher interest rates that may be available. However, some banks charge monthly maintenance fees, so find out first.

Online Savings Accounts Make It Easy To Save Money

Developing the habit of saving money is essential to progress toward your financial goals. Managing your savings account more effectively can help you save more money. Use all available tools, including automatic deposits, multiple savings accounts, and budgeting apps. Taking steps to manage your savings better will help you achieve your savings goals and grow your wealth over time.