- The most attractive aspect of online savings banks is the high interest they pay. By not switching to an online savings account, you could be leaving money on the table.
- Online savings accounts pay on average 1.70% interest, compared to brick and mortar banks which pay 0.09%
Like me, you probably have your money saved with one of the large banks. However, it wasn’t until I learned about online savings accounts and switched to one, that I went from earning $3.51 in interest a year to earning $216.53 in six months.
For the longest time, I never paid attention to how much interest your savings account pays, every month or so, I’d get a notification that I earned a couple of cents (usually less than 20 cents) in interest. All this changed when I spoke to some colleagues and realized that I could be getting a lot more money than what I got simply by switching from one my traditional bank to an online savings account. To start, what exactly is interest and how does it work?
What is Interest?
Simply put, interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal. In this case, a bank pays you interest for keeping your money with them. More specifically, banks pay you compound interest, which is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan.
How Compound Interest Works
Here’s a quick example. Imagine you deposit $100 in a bank account which has an interest rate of 2%. At the end of the first year, you will have $102. After two years, this amount grows to $104.04 because interest was calculated on $102. After three years, the initial amount becomes $106.12 because interest was calculated on $104.04. Still following along? Great, after 20 years, the initial $100 would become $148.59, almost one and a half times the money you initially put in the account! So basically compound interest allows your money to grow at a faster pace.
Online Savings Accounts Have No Fees or Minimum Balance Requirements
I did a bit of research and it turns out that there are a number of online bank accounts that offer way more interest than the traditional brick and mortar banks. And guess what? Signing up is easy, too.
Because these banks are online, you will need to link the account to your current existing one in order to transfer money from one to the other. The best part? As opposed to brick and mortar banks which penalize you by charging fees, online savings accounts usually don’t charge any fees and most don’t have a minimum balance requirement.
Higher Interest Rates
Probably the most attractive aspect of online savings banks is the high interest they pay. At present, the most popular of these banks pay 1.50 – 1.85% interest, that is more than 0.09%, the amount you typically earn with your current bank.
I went from earning $3.51 in interest a year to earning $216.53 in six months when I switched accounts!
From $3.51 to $216.53
Well, you might ask, what does it matter if I get paid 0.09% or 2%? A lot! To put this in monetary terms, between April 2018 and May 2019, I held some of my money in a savings account with a big brick and mortar bank. During this period, I earned $3.51 TOTAL in interest, which was usually paid out in small monthly increments of less than 20 cents.
However, in last year this year, a colleague told me about online savings accounts which pay way more in interest and tbh, I haven’t looked back since then. I switched accounts to an online savings one and from May 2019 to October 2019, I received $216.53 in interest payments on the same amount!
That is over 60x what the old account paid me. And do you know what the best part is? I didn’t have to do anything! All I did was transfer it from one account to another.
Now watch that extra $216.63 come in handy now. Better yet, I’ll probably keep it. You know the power of compound interest (more of this coming soon).
You Could Be Leaving Money On The Table
I used this interest rate calculator on the U.S. Securities and Exchange Commission website to compare how much interest I can gain by putting my money in different bank savings account.
Imagine you start out with $5000 in your account. If you keep it in your current brick and mortar bank, on average, you get paid 0.09% of interest. Meaning that after one year, you will have a total of $5004.50. In two years, assuming you don’t withdraw any money, that amount would increase to $5009, meaning that you gained a total of $9 banking with your current bank. Maybe you think money is money, and imagine that $9 can maybe buy you a breakfast or a small lunch.
However, what if I told you that you could make almost 10 times that amount? Or, in my case, 60 times more. Imagine putting that same amount in an online savings account, which pay on average 1.70% interest. How much money would you now have at the end of two years? Well, using the same calculator, at the end of the first year, you will have $5085! Now we’re talking. An extra $85 can literally buy gifts for two people during the holiday season. Now imagine if you keep it for two years, you’ll have a cool $5171.45.
Beware Of Articles That Promote One Online Bank Over Another
While researching content for this piece, I was appalled by some misleading headlines such as this one by a popular money blogging site. What the article fails to disclose is that you can earn higher rates from other banks (see below), and this bank requires a minimum deposit whereas most other don’t.
Moral of the story, when deciding which online savings account to open, make sure you visit sites that give you a comparison of different options, as opposed to just promoting one as this can be quite misleading.
Compare How Much Interest You Can Earn
I recently compiled a list of different online banks with the different interest rates they offer. This is just a select list and there are more that aren’t included. Hope you will find it useful!
|American Express National Bank Personal Savings||1.60%||No minimum balance|
|Goldman Sachs Bank USA Online Savings||1.70%||No minimum balance|
|CIBC Bank USA Agility™ Savings||1.45%||Minimum $1,000 deposit|
|Barclays Online Savings Account||1.60%||No minimum balance|
|Citizens Access Online Savings Account||1.70%||Minimum $5000 deposit|
|Alliant Credit Union High-Rate Savings||1.35%||Minimum $5 deposit|
|CIT Bank Savings Builder||1.75%||Minimum $25,000 or $100 monthly deposit|
|Discover Bank Online Savings||1.50%||No minimum balance|
|PurePoint® Financial Online Savings||1.50%||Minimum $10,000 deposit|
|Ally Bank Online Savings Account||1.50%||No minimum balance|