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Online vs. Traditional Savings Accounts
You stored your cash in a traditional since you can remember. It was safer than hiding the money in your mattress. Because the only banks logically accessible to you were within 20 miles of home, you really didn't take the time to even look at rates. We all just accepted that a savings account with our local bank was safe and really not worth much. Banks really owned their customers.
In the 1990s online banks came of age. In few clicks, you could place your money in a bank 10,000 miles away just as easy as down the street. To get your money banks started to compete on rates like you would not believe. The entire market changed. The clients now owned the bank.
While this is a simple explanation here are some major differences between Online Savings Accounts vs. Traditional Savings Accounts:
1. Interest Rates
Rates of online savings accounts are 5-15 times higher than traditional Savings Accounts on on average. What's the catch? That's what we have been taught since day one of our lives. The truth is that online savings accounts are much better products and interest bearers than off-line savings accounts. The main reasons being:
FDIC insurance provides protection for your account in case the bank cannot cover its accounts. Up to $100,000 per account holder. This is true of both online and traditional banks. Identity theft is a hot topic these days more and more people are having their information stolen and sold. If you use your computer, you obviously you are increasing your risk. If have to be honest though, if your follow basic safety guidelines and practice good judgment online, this is really a non-issue.
3. Customer Service
Traditional Banks usually provide great customer service. Even if you do not go to the bank, you can usually get someone on the phone during normal business hours. You cannot beat traditional banks on this one. Online banks are built to use a little paper and as much automation as possible. In most cases, you talk to someone from a far off land on the telephone or via email only. While the customer service of online banks is rather poor in comparison, it usually achieves the same results.
The cost of supporting an online customer is a fraction of the cost of traditional bank products. They don't have to pay a person to sit in a branch that has 1000 accounts to see you twice a month. Instead they create a call center that can manage millions of accounts, from one or several satellite facilities. Not to mention the fact that most of these jobs are outsourced overseas. So on top of the facility costing nothing in comparison, the workers are making pennies on the dollar.
4. Account Withdrawals
Actually withdrawals are one of the big draw backs of online bank. Sometimes fees for ATM withdrawals can cancel out the interest rate difference. Most online savings account work by linking to a checking account. You transfer your money between the two accounts in order to Deposit and Withdraw your money. If you are transferring money using this method, you're usually without the money for about 3 business days. Remember every time you transfer money, you lose 3 days interest on that money. Traditional banks usually allow you to make withdraws in person or via an ATM card. Online savings accounts on the other hand don't allow for in person withdrawals. Many do offer an ATM withdrawal. Right the now the most attractive features are ATM rebates. Since there are fees for using an out-of-network ATM, many banks are refunding all of those fees on a month basis. If you use an ATM card often, ATM rebates may actually make an online bank more attractive to you than a traditional bank.
One thing to be aware of when you have an online savings accounts is not only the methods you are allowed to us to withdraw your money, but also the number of times per month you are allowed to withdraw money.
Most banks hide the fact that in common terms an online savings account is treated as a money market account if used a certain way and a traditional savings account at times. For instance when you withdraw money from your account and transfer it to another bank, you are only allowed to do that a maximum of six times per month. This is usually only true for Money Market Accounts. On the other hand, if your account has an ATM card attached to it you are allowed unlimited withdrawals. Most banks offer you two options for getting your cash back from them:
ATM- You can withdraw money using any ATM card. Many banks are even offering ATM rebates, so you can basically use any ATM without any fees. Honestly, ATM rebates alone makes an online account worth its weight in gold.
Transferring the Money to another account within the same bank or an outside bank-
Most the banks break this down into two segments:
You can start a transfer online or over the phone.
This is simply the middleman technique for banks. Since everything is electronic their fees are minimal.
One of the things to be aware of is that these transfers are not instantly processed. I have some transfers that take 1 day and some that take 3 days. For some odd reason, I find that if I start a transfer on Wednesdays, they happen the fastest. I'm assuming Mondays are slowed due to volume of people setting up transfers over the weekend, because Mondays take 2 days on a good transfer and as much as 4 days on bad transfers.
Although you would think that this is the banks fault, I have used over online savings account providers all with the same results.
Some people jump at new rates and transfer money like crazy. You should remember that during the transfer period you are not receiving interest from either account. So if you constantly jump your money around without taking into consideration the interest you will lose during the transfer period, you'll actually be losing money.
5. Account Deposits
Traditional Banks allow you to deposit in the following ways:
Online Banks offer much of the same ways to deposit:
-Via an ATM
Why Are Banks Pushing For More Online Business?
Electronic Funds are much more scalable for any financial institution. They can hold more money, assuming they can cover the liabilities. They can accommodate more customers. All of this with less overhead and less fuss on their end. Banks pass this savings on to you by offering you a better rate. Based on the size of the bank they can only accept X number of accounts. Basically a financial institution must have cash on hand to cover all of the accounts it has. This is in addition to paying for insurance on the account volume. As they gain more accounts, they gain more money. This means more cash they have to keep on hand and a higher premium to their insurance. This also means more loans that they have to close, so that they can make money off of your money. So in affect, banks try to find a sweet spot as far as the number of accounts they provide for consumers. They try to find a nice margin for themselves.
When a bank first offers an online savings account, they'll give a great rate. As a result of the great rate, thousands of new accounts will be opened. The bank will then come close to its margin and try to slow people down from signing up. To do this, they will decrease the rate of return to consumers. The signups will slow down and they'll stay close to their margin. This works like clockwork in off-line accounts.
But, in the online world; banks are starting to see that people are not loyal to brands. People are loyal to rates. When a rate drops and stays low, current account holders withdraw their account and move to a better rate at another bank. Online banks are now forced to try to keep better and more stable rates. In fact, this is why I have created this site.
How To Manage Your Online Savings Account
Managing an online savings account is actually easier than managing an off-line account. Here are the basics:
When you want to transfer money into your account based on the bank you have chosen, you can mail in a deposit, make a deposit through your checking account by transferring money, or make a deposit through your ATM. The biggest misunderstanding that people seem to have when first getting a savings account online is that they do not understand why you can not make deposits at your local branch. This is simple; the point of giving you the higher interest is rate is because banks are trying to cut down on paperwork. If you need that feature, do as I do and go for a bank that allows you to make deposits via an ATM.
Some banks give you many choices with this one. I find that banks with the highest rates often provide you less access to your money. Almost all banks allow you to make electronic withdrawals to your linked checking account. But, remember every time you do this you are losing about 2-3 days interest. The money from your online savings account is not instantly transferred to your checking account. This is why I never deposit money into my savings account unless I know it will be there for more than a month.
Another feature they offer that I would caution you on, because we are all human, is automatic transfers. You can setup your account up to transfer money to or from your checking out ahead of time. This is great, if you know for certain the money is going to be in each account.
Banks also allow you to setup an automatic savings plans where they will removed a fixed amount of money from your checking on a regular basis. If you are undisciplined and you are taking out a small amount of money, this may be a good idea. I'm turned off to this feature. Honestly, if you are disciplined enough to take your money out of a traditional savings and place it into an online savings, I'm sure you can decide when your money should be moved.
I have to say that this is a great way to save for my kids. I always forget to give them their allowances, this way I can't. Of course, I'm sure ING is not loving the one and dollar transfer I have setup for them every week.
Breaking Up Your Account
A very cool feature that you will only find with online banks is that you can subdivide your account other accounts. For example, I have 2 children instead of opening an account for each of them I have taking one of my online savings accounts and added two subdivisions one for my 4 year old and one for my 2 year old. So on paper, it looks like 3 accounts. When in fact the bank counts it as one, but I now know exactly how much of that money is for each child.
This feature is great for goal oriented savers. You can name projects or purchases and put a little bit of money to them every so often.
This is the time of the month when banks actually pay up. Statement periods differ, you'll get accustom to each bank as time goes on. The banks bases the interest they give on the length of time of the period (usually 29-31) and the average amount you had in the account for that period.
One thing to be aware of is that all banks usually send you an email letting you know your statement has posted with a link to click to login. As always, I would delete these emails and never follow the links. If I want to see my account I'll visit the site myself. It is only a matter of time before Phishing gets so good that they time the account statement emails with their scam emails.
Because we all can be smarter with our money.