Given we are still in the midst of a stay-at-home order here in California, things have been pretty boring on the homefront. Arguably the most exciting event in April was me convincing Savannah to open a savings account with Capital One. For months, possibly years now, I had been telling her to move most of her savings out of her current savings account, and into one with an online bank. Her savings earned next to nothing in interest at that bank, and given the fact this was where the majority of her money was, she was earning almost no return on her savings. At last, she obliged and her “Rainy Day” fund was established. We decided upon Capital One due to the fact she has a credit card with them and setting up an account was super quick, but they aren’t the only online bank out there. See more on that below.
An online bank is essentially a bank that does not operate in physical locations, or a very small number (some have specialized locations, like “Capital One Cafes”). In general, online banks are legally the same as your traditional banks (Chase, BofA, Citi, etc.); in that deposits are FDIC insured, they report to the same regulators, and must the bank maintain a sound financial structure. The only real difference between an online bank and a traditional bank is you probably won’t find any physical locations, which is the exact reason why they are the great. Owning, staffing, and operating a bank branch is an expensive endeavor, no matter what part of the country you are in. Think about all of Wells Fargo or Chase branches across the county and all of the employees the banks must pay to staff those branches. The costs add up, and in turn, most banks with large physical footprints cannot offer competitive interest rates on savings accounts and provide the satisfactory earnings their shareholders desire. Online banks are able to derive significant savings from not operating branches and generally pass along those savings to customers in the form of higher interest rates on deposits. To compare interest rates, use this easy, but limited, comparison tool made by Discover.
Online banks are not perfect. You likely can’t drive to the nearest branch and talk to a teller or banker about your account (though most have good customer service call centers). Depositing cash can be difficult sometimes. Additionally, many online banks have different rules and limits when it pertains to ATMs and cash withdrawals. These reasons are why I would recommend using an online bank for savings accounts, rather than everyday checking accounts. I believe a traditional checking account, at a bank with a large ATM network in your area, is the best bank for holding the cash you need on a monthly basis. Think rent, bills, groceries, gas, etc. Keep enough cash on hand for these expenses, then keep your remaining cash savings at an online bank. Transferring from your online bank to your checking account shouldn’t be difficult, but it may take an extra day or two for the funds to clear, so keep that in mind.
Aside from higher interest rates, online banks have other advantages. One big advantage with online banks, is the ability to have multiple accounts for different purposes, all in one place. My accounts at Discover look like this.
I love having the ability to have multiple accounts in one place and can easily name the account to align it with my savings goal.
Another benefit is the ability to utilize the envelope savings method, but without having to use actual cash or envelopes. The envelope savings method has been tried and tested and is a great way to save money for various goals.
While I prefer Discover Bank for various reasons, they are not the only online bank out there. For a list of some good online banks, check out the article by nerdwallet linked below.
Once you find an online bank that suits your needs, open and fund the account and get to saving!