If you are like most people, you probably bank at an institution close to where you live. Understandably, convenience is a crucial factor when deciding where you should bank. The ability to be able to talk to a person face-to-face provides a much-needed level of comfort and peace of mind when you have questions about your money or services that a particular bank offers. However, when it comes to opening a savings account, it may be financially beneficial to consider alternatives to saving money with your local institution. Why?
Some people think that you must have your savings and checking accounts with the same bank. This reasoning is faulty. There are many reasons why you should consider opening a savings account with an online-only institution instead of your current bank. The most obvious reason is that online institutions offer a much higher interest rate on savings accounts than brick-and-mortar storefront banks.
Some banks don’t offer an interest rate on savings or even charge you to have a savings account. You should never save with a bank that does not provide a return on your savings or that charges you a monthly fee. Remember, banks make money just by keeping your money for you. When you open a savings account, the bank pays you interest on the money you deposit and leave in the account. The bank then loans your money to other people or institutions and charge a higher interest rate than what they are paying you. So, never let a bank use your money for free or for a minimal interest rate.
Online-Only Banks Offer Higher Interest Rates
Online banks usually have lower overhead and can offer higher interest rates because of this. When you use a brick-and-mortar bank, you will pay for that convenience and their building. With online institutions, there are no branches to maintain, no branch managers, and no tellers to pay. Since they do not have to pay for these things, banks can pass the savings on to you in the form of higher interest rates. For instance, as of the writing of this article, Discover Bank (online bank) offered a rate of 1.50% on savings accounts. The conveniently accessible and local Wells Fargo (brick-and-mortar bank) paid at a rate of 0.01%. That would be a difference of a few hundred dollars if you had $10,000 in your savings account for two years. Every little bit earned or saved counts!
Savings account convenience is not as necessary as a checking account convenience because you do not need to access your savings account as often. Additionally, for some people, when they frequently see their balance in a savings account, the tendency is to want to use that money for things other than emergencies. Easy access can influence one’s prudent thinking. Because of this characteristic of human nature, it may be beneficial to have a savings account with an online banking institution because you are less likely to see and focus on that money. Out of sight, out of mind, …and, you’ll make more money in the form of interest.
It is always essential to have cash reserves relatively accessible in case of an emergency. While gaining access to your money from an online-only bank may be a little slower than your local bank, that slight delay is inconsequential. You can link different banks and types of accounts and then transfer money from one to the other in a matter of hours or days.
Smart financial management includes saving for a rainy day and understanding that emergencies happen. Things do not always go as planned, so when you save, make sure the bank you use offers the best interest rate possible.