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Online savings accounts work just like their brick-and-mortar counterparts, which means you can deposit money into the account, withdraw your funds and earn interest. The difference is that you can only manage the account online, through a mobile app or at an ATM, and not at a physical branch location. This type of account can be convenient, but it may come with some drawbacks.
What Is an Online Savings Account?
An online savings account is a type of bank account that separates your savings from money for everyday expenses, and you manage the account exclusively online. These accounts are usually offered by online banks and credit unions, and you won't be able to visit a branch to make deposits, withdraw money or get help in person.
Instead, you typically conduct all of your banking business through an online portal, a mobile app and an ATM network. Many online savings accounts also provide 24/7 customer service over the phone or by online chat.
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How Does an Online Savings Account Work?
Most online savings accounts must be opened online at a bank or credit union's website. The process usually involves providing your personal details, setting up login credentials and funding the account. From there, you'll manage the account using an array of digital tools. Here are some of the main features of an online savings account:
- Deposits: You can usually add money to your online savings account by receiving direct deposit, electronically transferring funds from another account, mailing a check to the bank, depositing cash or a check at an ATM, or using the mobile app to upload a check image.
- Withdrawals: To take money out of your online savings account, you can usually initiate a wire transfer or ACH transfer from another account. Some online savings accounts also come with an ATM card that allows you to withdraw money at an ATM or make purchases in a store or online.
- Customer service: While online savings accounts lack in-person customer service, you may be able to get help over the phone, via 24/7 live chat, by email or on the bank's social media pages.
- Digital tools: In addition to an online banking portal and mobile app, some banks may offer budgeting tools such as special buckets to separate your savings by goals and a round-up feature to help you save more.
You may need to follow rules on the number of transactions you can make each month. Some accounts limit you to six or fewer transfers made online, over the phone, using a linked card or by a preauthorized bill payment or recurring withdrawal. If you initiate more than the allowed transactions in a statement cycle, the institution may charge a fee, convert the account or close it altogether. Check the rules before opening the account.
Pros and Cons of Online Savings Accounts
Online savings accounts come with a variety of pros and cons to consider.
Pros of Online Savings Accounts
- Minimal fees: Online banks have lower overhead costs, and they may pass those savings to customers in the form of lower (or no) fees. So you typically won't need to pay a monthly maintenance fee, make a minimum opening deposit or maintain a certain balance.
- Higher yields: Savers often earn higher interest rates with online savings accounts, thanks to those lower overhead costs. In some cases, you may find yields up to 10 times higher than traditional savings accounts (for high-yield savings accounts).
- Deposit insurance: Federally insured banks offer up to $250,000 in Federal Deposit Insurance Corp. (FDIC) insurance per depositor, per insured bank, for each account ownership category. The coverage financially protects you against bank failure. The National Credit Union Administration (NCUA) provides similar insurance for credit unions.
Cons of Online Savings Accounts
- Potentially limited services: Some online banks have a smaller range of products and services—usually to help keep costs low. That means you might not be able to do things like apply for a loan, request a money order or use financial consulting services. The menu varies with each institution.
- Issues with handling cash: With some online savings accounts, the only way to deposit cash is at an ATM or through third-party services that charge fees. This can be inconvenient if you typically get paid in cash and need to make frequent deposits.
- Limited customer service: When you have an online savings account, you won't be able to get help in person. This can be a deal-breaker for some people, especially if you want to use certain in-person services or need to deposit a lot of cash into the account.
- Vulnerable to connection issues: You lose access to your online savings account if the bank's website goes down or needs maintenance.
How to Choose an Online Savings Account
There are plenty of options when it comes to opening an online savings account, but making a decision may feel overwhelming. One way to choose the best online savings account for you is to research various banks and credit unions and collect your information in one place. Here are some features you can compare:
- Fees and requirements: The best online savings accounts don't charge monthly fees, won't require a minimum monthly balance and don't ask for a minimum upfront deposit.
- Annual percentage yield (APY): Look for a savings account that will pay a high yield, which helps your money grow over time.
- ATM network: You may need an ATM to deposit and withdraw cash, so check whether the bank has enough of these machines near you.
- Cash deposits: If you think you'll need to deposit cash frequently, check whether the savings account provides this option and whether it comes with fees.
- Other financial offerings: Check whether the financial institution offers other financial products like certificates of deposit (CDs), money market accounts, loans, investment options and personalized services. Doing all of your banking in one place can be convenient and may help you qualify for discounts.
- Customer service: Check your options for contacting the bank when you need help with your online account, and whether you feel comfortable with those options.
Alternatives to Online Savings Account
If you think you may want different features in your bank account, like the option of banking in person, consider these alternatives to online savings accounts:
- Certificate of deposit: A CD is a type of savings account that allows you to make one initial deposit and earn interest on the funds for a specified term.
- Money market account: A money market account is another type of bank account that often pays a higher rate than traditional savings accounts. You may be able to write checks on the account and use a debit card to withdraw funds.
- Cash management account: A cash management account is an investment account you open at nonbank institutions, like a brokerage firm. It acts as a checking account and savings account, so you can typically make payments from the account and earn interest on your balance.
The Bottom Line
An online savings account is a place where you can save money and earn interest. Its defining feature is where you can manage the account, which is through an online portal, via a mobile app or at an ATM.