Online Savings vs. Traditional Savings: Which Should I Choose?


Over the past few years, online savings accounts have surged in popularity. Features like high interest rates and convenient deposit and withdrawal options have successfully enticed millions of savers to choose online-only banks instead of traditional brick-and-mortar savings accounts.

Having said that, online savings accounts aren’t for everyone. Here’s a rundown of the benefits and drawbacks of online and traditional savings accounts, some current examples of both account types, and how to decide which is best for you.

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Online savings accounts pay more and have some other key perks

Online savings accounts can be rather appealing for a few reasons. For one thing, they tend to pay significantly higher interest rates than savings accounts offered by traditional brick-and-mortar financial institutions. As of Sept. 17, 2018, the national average savings account APR is 0.08%, while online savings accounts with APRs of 1.85% or more are readily available.

In addition, many online savings accounts offer some type of ATM fee reimbursement, while others are members of nationwide ATM networks such as Allpoint. As we’ll get to in a bit, a key advantage of traditional savings accounts is convenience, and part of this is ATM access. Well, if an online bank is willing to reimburse account owners for any ATM fees they may be charged, it effectively makes every ATM a part of that bank’s network.

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Finally, because online banks don’t have as much overhead as traditional banks — they don’t have to pay for branches, they have fewer employees, etc. — they can pass some of this cost savings on to customers. The higher interest rates I mentioned are one way they do this, but many also do this by making their accounts’ fee structure significantly lower than their brick-and-mortar counterparts.

Traditional savings accounts have a few advantages as well

On the other hand, traditional bank accounts certainly have some of their own advantages.

The biggest difference is convenience. If you need to deposit $100 in cash, for example, you can simply drive to your local branch, or visit one of your bank’s ATMs, and deposit the cash directly into your savings account. With an online account, depositing cash can involve an extra step or two.

Also, if you’re having any type of problem with your account, you can walk into a branch and talk to a real-live human being.

It’s also easier to combine several different types of financial products. For example, there are few, if any, online banks that offer savings and checking accounts, auto loans, mortgages, brokerage accounts, insurance products, and credit cards. And if you need physical banking products like a safe deposit box, you have no choice but to go to a traditional bank.

Does a 2% interest rate really make a difference?

Many consumers are unwilling to give up the convenience of their traditional banks in favor of online banks, especially because the interest rate difference may not seem like a big deal.

However, consider this simplified example. Let’s say that you maintain a $10,000 emergency fund in a savings account. Based on the difference between the highest-paying online savings account and the national average APY, you can expect to earn about $177 more per year in interest. And, thanks to compounding, this translates into $920 after five years, $1,932 after 10 years, and $4,267 after 20 years. So while it may not seem like you’re giving up much by not taking advantage of a 1.8% APY, you may be surprised at how much of a difference it can make over time.

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Current examples of online and traditional savings accounts

To illustrate some of the financial differences between traditional and online savings accounts, here’s a quick rundown of some of the current savings accounts offered by major traditional and online financial institutions.

Data source: Each bank’s website. APY and fee structure as of December 27, 2018.

Questions to ask before opening either type of account

While you’re comparison-shopping for a savings account, here are some of the key questions you should ask yourself that can make your decision process easier:

  • What is the account’s monthly fee, and are there any ways to avoid it? For example, many banks charge a modest monthly fee, but you can avoid it by maintaining a certain balance in the account.
  • What is the APY associated with the account? I mentioned that the national average is extremely low, but credit unions and local banks often pay significantly higher-than-average rates, so be sure to compare rates across several different types of traditional banks.
  • What is the maximum number of withdrawals I can make per month, and what is the charge if I exceed this number?
  • Is online bill pay free, or is there a charge for this service? Some banks charge a small per-bill fee for online bill pay, so be aware of this expense if you plan to take advantage of this feature.
  • How can I get help with my account if I need it? I mentioned that most online banks don’t have physical branches, so be sure you know what you need to do if you have issues with your account. Reading reviews about prospective banks’ customer service can be a big help here.
  • What are the ways to deposit money into my account? This is especially important with online savings accounts, as many have come up with creative and more convenient ways to deposit, particularly when it comes to cash. For example, some online banks accept in-person cash deposits at certain locations.
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Who should go with an online savings account?

In a nutshell, an online savings account is best for people who don’t really care about the convenience factor of traditional banks, and who want to maximize the interest-generating potential of their money. If you don’t mind depositing money through a linked checking account or through another method allowed by your online bank, and don’t mind keeping up with accounts at more than one financial institution (most online bank customers maintain an account at a traditional bank as well), an online savings account could be right for you.

Who should stick with a traditional savings account?

On the other hand, the convenience of a traditional brick-and-mortar bank is extremely important to some people. Many people like having the ability to talk to a person about their account, to physically put a check in a teller’s hand, or to take advantage of some of the other services that are offered quickly and in-person at traditional banks. For example, if I need a cashier’s check drawn on the money in my savings account, I can drive five minutes to my local branch and get one.

Plus, many people like maintaining all of their financial accounts at a single institution. If any of these apply to you, it may be the best idea to stick with a traditional savings account. Just remember that you’re likely giving up a significant amount of interest by doing so.

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