If you have a sizable emergency reserve (or a chunk of cash you’re setting aside for a near-term goal) sitting in your savings account, you’ve probably had the thought that you wish it was actually doing something for you besides earning next to nothing.
I get it. Most brick-and-mortar banks offer a 0.01% interest rate on their savings accounts. That translates to earning $5 per year on a $50,000 account balance.
While it may be tempting to invest the money, that’s the last thing you want to do. There is a risk of having a considerable decline when your money is in the market, which could be when you need the money the most.
Fortunately, many online banks are offering high(er)-yield savings accounts that earn more interest than brick-and-mortar banks and still ensures that your money is there when you need it.
Below are a few tips to finding the online savings account that is right for you.
shop the rates
I would start by comparing the current online savings account yields at http://www.bankrate.com/banking/savings/rates/.
As of writing this, the most well-known institutions (Synchrony, Ally, American Express, and Capital One) are paying about 0.60% interest which equates to roughly $300 in interest paid for a year. A whole lot better than $5 on a $50,000 account, that is for sure!
Speaking of rates, you’ll want to make sure you are using the Annual Percentage Yield (APY) when comparing them.
The APY indicates the total amount of interest you earn on a deposit account over one year, assuming you do not add or withdraw funds for the entire year. APY includes your interest rate and the frequency of compounding interest, which is the interest you earn on your principal plus the interest on your earnings.
APY gives you the most accurate idea of what your money could earn in a year.
insure the risk
The next thing you’ll want to do is look for banks whose deposits are backed by the Federal Deposit Insurance Corp. or credit unions whose deposits are secured by the National Credit Union Administration. Both federal agencies
Read the fine print
After you’ve narrowed down the list to a few possible contenders, you’ll want to make sure you read the fine print for each.
The most common ruse I see institutions use is advertising a higher rate than their peers, but it’s only an introductory rate for the first year. Afterward, it drops below what the other institutions were offering in the first place.
Another thing I always look for
You’ll also want to see if there is a minimum balance required to obtain and maintain the rate. If the minimum balance isn’t kept, the rate could dramatically decrease. If you don’t think you’ll be able to stay above the minimum balance, it’s probably worth looking at a bank that
Ease and accessibility
Once you’ve made your choice, you’ll follow the institution’s instructions to open the account. Depending on the bank, this could take less than 10 minutes.
After your online savings account is opened, I would suggest linking it to your regular bank’s checking or savings account.
This link will allow you to sweep money between the accounts as needed. Just be aware that the transfer can take a few days so keep some money in your regular savings for immediate emergencies.