If you’ve been considering making the jump to an online bank, here’s a reason to do it now: A recent Federal Reserve rate increase may prod banks to give their customers higher interest rates on their savings in 2019. Here, one man walks us through why he and his wife decided to take the plunge with a high-yield online savings account.
Paul, 33, writes tax regulations for a California government agency. (Due to the sensitive nature of his previous work as a tax collector, he prefers not to publicize his last name.) After selling a rental property in November, he and his wife, Jocelyn, 32, decided to search for a good place to park the proceeds. They decided a high-yield savings account at an online bank would be their best bet for high returns on their money.
» See NerdWallet's curated list of best high-yield online savings accounts right now
The goals: a college fund and diversification
The family’s savings goals are a bit nebulous at the moment, Paul says, but with a 2-year-old on the scene and the possibility of other children in the future, he and Jocelyn want to have savings socked away for college and diversify where they keep their money. As state employees, Paul and Jocelyn use a local credit union for their day-to-day checking accounts.
“Besides our checking and savings, we have a mutual fund, a retirement account and stocks we own ourselves. I’m a fan of not putting all my eggs in one basket,” Paul says.
Why online banks were appealing
“It’s as simple as: I wanted to make more money off of my money,” Paul says. “I wanted something secure, reliable and not as open to market fluctuations, as opposed to a money market account. I also didn’t want to have to worry about locking away my money in a bond.”
Online banks are typically able to offer higher interest rates than brick-and-mortar banks because they don’t have to pay to maintain branches. An annual percentage yield, or APY, of 0.01% — a typical rate at a traditional bank — versus the 2% or more currently available at an online bank might not sound like much. But over the years, it can mean a difference of thousands of dollars as your money collects compound interest.
Say you put away a $10,000 windfall and added $100 per month to a bank account with a 0.01% APY for 10 years. With compound interest, you’ll have earned just $17. In an account with an APY of 2%, however, that same money will have earned more than $3,500 in interest. That allure, combined with ever-improving technology for online customer service, has made online banking increasingly popular.
A compound interest calculator can show what your savings could earn in this sort of account.
But first, a few considerations
Paul and Jocelyn did have some initial concerns about online banking.
"I'm generally more distrustful of apps, and hacks make me nervous," Paul says.
When researching online banks, he not only considered a bank's website but also looked it up on the Better Business Bureau website, verified it was insured by the Federal Deposit Insurance Corp. and checked into whether the bank had ever been in the news for fraudulent behavior.
Pulling the trigger on an online account
After doing online research, Paul chose CIT Bank, an online-only financial institution that currently offers a higher-than-average 2.45% interest rate for customers who either have a $25,000 balance or who deposit $100 or more into their account monthly.
Paul says he’s not necessarily a brand loyalist, however; like many interest rate optimizers, he says he plans to go where any given bank will give him the best return on his money. He looks past promotional bonus offers on savings accounts — many of which come with strings attached, such as committing to stay with that bank for a certain length of time — in favor of more flexible arrangements that offer a greater return in the long run.
But for now, Paul plans to let his money do the work for him and his wife in their new online account.
Should you switch?
Online banking does have its drawbacks for some customers, especially those who enjoy face-to-face interactions with service reps or who aren’t as comfortable with the idea of using mobile technology to manage their money.
But for customers willing to take the plunge, the difference in the long-term returns of a high-yield interest rate can be well worth the effort of switching.