If you’re looking for a place to stash your cash and earn a higher interest rate than a traditional savings account, you might consider a high interest online savings account, also known as a high yield savings account. These accounts typically offer interest rates that are significantly higher than brick-and-mortar banks, which can be appealing to savers who want to earn more on their money.
But what exactly is a high interest online savings account, and how do they work? Let’s take a closer look.
What is a High Interest Online Savings Account?
A high interest online savings account (high yield savings account) is a type of savings account that is offered by online banks or financial institutions. As the name suggests, these accounts typically offer higher interest rates than traditional savings accounts.
Online banks don’t have the overhead costs associated with physical branches, so they can pass those savings onto their customers in the form of higher interest rates. Because these banks don’t have to pay for rent, utilities, and other expenses associated with maintaining a brick-and-mortar location, they can afford to offer more attractive interest rates on their savings accounts.
How Do High Interest Online Savings Accounts Work?
When you open a high interest online savings account, you’ll typically do so through the bank’s website. You’ll provide personal information like your name, address, and Social Security number, and you may need to provide documentation like a driver’s license or passport.
Once your account is open, you can deposit money into it just like you would with a traditional savings account. Many high interest online savings accounts have no minimum balance requirements, which means you can open an account with just a few dollars. You can typically transfer money into and out of the account via electronic transfer or wire transfer.
One key difference between high interest online savings accounts and traditional savings accounts is that the online accounts may have limitations on the number of withdrawals you can make per month. Federal regulations limit the number of “convenient” withdrawals and transfers to six per month. Convenient withdrawals are those made via check, debit card, or electronic transfer, which includes online banking transfers. If you exceed this limit, you may be charged a fee or your account could be closed.
Benefits of High Interest Online Savings Accounts
One of the biggest benefits of high interest online savings accounts is the higher interest rate. With traditional savings accounts, you might earn just 0.01% or 0.05% interest. But with a high interest online savings account, you could earn 1% or more on your savings. (At the time of this writing in 2023, my online high yield savings account and many others are over 4.0%!)
Another benefit is that many online banks offer no-fee accounts. That means you won’t have to worry about monthly maintenance fees eating into your interest earnings.
High interest online savings accounts also offer easy access to your money. You can typically transfer money in and out of the account quickly and easily via electronic transfer, which makes it easy to manage your cash flow. And because many online banks have mobile apps and online banking platforms, you can manage your account from anywhere.
Drawbacks of High Interest Online Savings Accounts
While high interest online savings accounts offer some compelling benefits, there are also some potential drawbacks to consider.
One downside is that you won’t have access to in-person customer service. If you have a question or concern about your account, you’ll need to reach out to the bank via phone, email, or online chat. While many online banks offer robust customer service options, some people may prefer the face-to-face interaction that comes with traditional banking.
Another potential drawback is that you won’t be able to access ATMs associated with the bank. Some online banks partner with ATM networks, so you can still withdraw cash fee-free. But if you need to deposit cash or want access to a wider network of ATMs, you may need to open an account with a traditional bank in addition to your online savings account.
Finally, interest rates on high interest online savings accounts are not guaranteed. While many online banks offer high interest rates, those rates can fluctuate over time. That means you could earn less on your savings if interest rates drop.
It’s also worth noting that the higher interest rates on high interest online savings accounts may come with some restrictions. For example, you may need to maintain a minimum balance in order to earn the advertised rate, or the rate may only be available for a limited time. Be sure to read the fine print carefully before opening an account.
Is a High Interest Online Savings Account Right for You?
So, is a high interest online savings account the right choice for you? It depends on your personal financial goals and needs.
If you’re looking for a safe place to stash your cash and earn a higher interest rate than a traditional savings account, a high interest online savings account could be a good option. But if you prefer in-person banking or need access to a wide network of ATMs, you may want to consider a traditional bank.
Because you are limited to 6 withdrawals per month, you won’t be able to treat it like a checking account with a debit card. I like keeping our emergency fund in an online savings account for this reason. I have access to the money if I need it, but not too much access. It forces me to only make meaningful withdrawals, and it earns more interest per month than a brick and mortar location.
Before opening an account, be sure to research the bank thoroughly and compare interest rates and fees across multiple banks. Look for a bank with strong customer service and a history of stability.
I’ve been using a high yield savings account/high interest online savings account for almost a decade with zero problems. I’ve found the customer service to be stellar when I’ve needed to make large withdrawals or transfers. Plus, I like knowing I’m earning as high of an interest rate as possible on a savings account.
Here are some great comparison options for high yield savings accounts: Bankrate.
Final Thoughts
A high interest online savings account can be a great tool for saving money and earning more on your savings. By taking the time to compare options and find the right bank for your needs, you can maximize your savings potential and reach your financial goals faster.
Good luck!
-Chris