Tag Archives: money

Why You Need an Online Savings Account

In case you somehow missed it, interest rates have fallen to almost zero. That’s bad news if you’re parking money in interest-bearing savings or money market accounts. At Wells Fargo, for example, the best rate you can get right now—if you open a savings account with at least $10,000 and maintain a balance of at least $25,000—is a paltry 0.65%. If you have less than $25,000 and don’t link your savings account to a checking account, you’ll earn a truly pathetic 0.05%. As turbulent as the stock market is these days, you could do better than 0.05% by randomly picking stocks. In fact, if you play the stock market with just a little bit of forethought, in most cases you could beat the 0.05% you’d make in a year at Wells Fargo within one hour.

CDs (Certificates of Deposit) pay only a tad more than bank savings accounts. But most require large minimum investments, and CDs tie up your money for anywhere from six months to several years. The best you can do at Wells Fargo right now: 3.0% if you invest at least $5,000 and keep it there for 39 months. In this economy, who wants to tie up their money for over three years?

If you don’t want to lock up your money, don’t want to take risks in the stock market, and still want a good return, you can have your cake and eat it, too, with an online savings account (OSA). My account with Shore Bank Direct (https://www.shorebankdirect.com) currently pays 3.15%, with a $1 (yes, just one dollar) minimum investment, and no bizarre maintenance fees.

The OSA concept is about a decade old now. These accounts pay much higher interest rates because small banks can leverage the reach of the Internet to attract capital from all over the country, giving them more money to loan out at higher rates, and because banks have little costs associated with supporting these accounts. These accounts are established and managed entirely online and through email—there are no brick-and-mortar branches, no teller salaries to pay for, no paperwork, and no mailings.

These accounts are backed by “real” banks, and your money is FDIC-insured up to $250,000. ShoreBank, for instance, is a regional bank based in Chicago that was founded in 1973. (ShoreBank has retail branches for a certain type of customer, but not for OSA customers.) It’s not taking TARP money and is not in financial trouble. In fact, the big banks like Wells Fargo and Bank of America don’t even offer an OSA, and why would they? It would cannibalize their traditional savings accounts business, on which they make billions (and then lose it all on bad loans, hence the need for TARP money. But I digress.).

There are about a hundred OSAs out there, and they all essentially work the same way. You apply online, which takes 10 minutes, and you get approved immediately. You link the online account to your traditional checking account, which you use to make deposits and withdraw cash. Then, you go to the OSA website to withdraw funds from your checking account or transfer money back into it. Transfers take 1-4 days, depending on the OSA provider. Most OSAs limit the number of withdrawals you can make per month to something reasonable, like six, though none will place limits on the number of deposits. You can check your balance and make transfers 24 hours a day, and elect to have all notices and such sent to you by email. It’s all very simple.

Many people use an OSA as a secondary, backup savings account, or as a “goal” account (i.e., they put money into it every month until they have, say, the $2,500 they need to buy a new plasma TV). I say, forget that—use an OSA as your only savings account to maximize interest income.

Since all OSAs work the same way, you should shop primarily for the one that pays the highest interest rate (this is about making money, after all). However, you also need to judge the quality of the OSA’s website for ease of use (ShoreBank’s isn’t great, but it works), and be sure to read the fine print about fees, if there are any.

Keep in mind that interest rates paid by OSAs can vary at ANY time, without notice. ShoreBank is paying 3.15% today, but tomorrow it could be 2.50% or less. In fact, ShoreBank is the fourth OSA I’ve signed up for. The first three were all the highest yielders at the time I registered, but for various reasons their rates have fallen, and when they fell too much relative to their peers, I pulled my money out and put it in a new OSA that paid more. There are no fees for applying or transferring funds, so this money-shifting game costs nothing to play. My advice is to check competing rates every few months to make sure you’re earning the most you can.

A good place to start for comparing rates is the continuously-updated MoneyRates website (http://www.money-rates.com/savings.htm). Again, be sure to read the fine print of the sites you consider.

I hate to sound like a cheesy ad, but go start making more money today!