Do you always seem to be spinning your wheels in an attempt to get your savings off the ground? Do you have a tough time committing to saving each month? Then look no further than an online high-yield savings account to solve your problems. I know that many of you out there have them, but for those that don’t, you’ll see why the numbers make a big difference and why opening one will really help you boost your ability to save.
An online high-yield savings account is one that pays a much higher interest rate than a typical savings account at a bank. Each bank is different, but typically banks offer interest rates on a savings account between .01% and .15% (if you’re really lucky). Since one of my locally well-known banks is currently offering .01%, let’s use that as an example to crunch some numbers. If you put $5,000 in one of these accounts, what would you make in interest over a one year period? $.50. Yes, you read that right. If you give the bank $5,000 of your hard-earned money to sit in their bank for ONE FULL YEAR, they reward your generosity with TWO SHINY QUARTERS. Sounds like a great deal….for the bank. You're better off looking for extra change that fell in your couch.
Quite a few years ago, some people realized that there is a great opportunity to get you to put your money somewhere else and they’d reward you with a much higher interest rate. Therefore, online high-yield savings accounts became a hot item. With the banks running online accounts vs. a brick and mortar location, there is much less overhead, which frees them up to pay you more in interest. The rates have gotten lower in recent years, but you can find accounts that currently pay in the rage of .75%-1%. So what if we took that same $5,000 and put in in an online account that pays .75% interest? After one year, you’d have $37.50. Now, that may not be a ton of money, but it sure beats $.50, right? Every little bit adds up.
But the additional interest isn’t the only reason why these online banks make saving so much easier. I personally have found it to be incredibly useful for the following additional reasons:
1) Account Linking
You can easily connect your online savings account with your current bank account, even if though they are from separate banks. After taking a day or two to confirm your online account is correctly linked to your bank checking account, you’re on your way. Now, there may be some limitations as to the number of times you can transfer money out of your online account in a month, but the reality is that if you’re saving, you should be putting more money into your online account more times than you’re transferring out. Therefore, this makes it much easier to transfer money to your higher yielding online account to accrue more interest.
2) Having Multiple Side-Accounts Within Your One Account
Want to save for a vacation, car, and emergency fund all at the same time? Many of these accounts allow you to split up multiple accounts within your main account to save for separate goals. Having these broken out makes it much easier to separate out your goals and track your progress. All three of these examples (vacation, car, emergency fund) I have used to direct savings to over the years, in addition to a down payment on a house, and money for home improvements. Seeing the name of those specific accounts make your savings more real because you can see it going to the cause you want and can see it growing. It makes it so much more personal seeing “Vacation Savings - $526.45” instead of seeing “Checking Account #12345678 - $526.45.” In my opinion, it spurs excitement seeing this growth, which in turn spurs additional giving to hit your goals.
3) Out Of Sight, Out Of Mind
Keeping your savings in a checking account that you see the balance of all the time is not very helpful because, in my opinion, you’re more likely to spend it. You’re much more likely to spend more when you have more. I keep a pretty tight control on the balance of our checking account. If there is a little bit more in there than normal, I skim that excess money off into our online savings account so that I’m not tempted to buy something with it. It allows me to take control over my emotions when I might be vulnerable to make an unwise spending decision. It may not sound like a big deal, but these small frequent deposits over the last 7 years have really added up and have been a nice boost to our savings.
4) Automated Savings Plan
After developing our budget, I’m able to automatically withdraw the budgeted saving amounts I have each month into the appropriate account. I don’t have to touch it at all. The process is completely automated. Once again, it takes the temptation away to not save. I don’t have to look at my checking account and say, “do we REALLY have $XX.XX to save for XX this month?” It automatically does it for me. Because it does that, it forces me to stay on budget in other areas knowing that my savings budget is not up for debate each month. Let’s face it. If your savings budget was up for debate each month, there would always be a good excuse not to save as much as you’ve planned. You need this consistency to build your savings. In fact, if you set up your automatic savings withdrawal to happen the same day your direct deposit goes in, you don’t even have to see that additional money in your checking account.
I have been doing my online savings with Capital One 360 (formerly ING Direct) for over 7 years now, and have found it to be a life-saver. An additional benefit of using them is that there is no minimum to get their high-yield rate, as many other brick and mortar banks have. If you’d like to get an account started with them, feel free to use my affiliate link above. Otherwise, other popular online accounts are Ally Bank, EverBank, and FNBO Direct, if you would like to look into them further.
Best of luck, and happy saving! If you have additional thoughts or feedback, feel free to leave a comment in the comments section.