Understanding the benefits of online bank accounts
Published: Tuesday, October 8, 2013
Updated: Tuesday, October 8, 2013 02:10
Saving can be a pain. This is even more true when you think about the fact that the inflation rate is roughly 1.5 percent. In other words, money sitting idly in a bank account is technically losing that much value per year. While this may seem like a good reason to justify letting that money burn a hole in your pocket, it is an even better idea to hold on to that money, and let it grow while limiting the effects of inflation.
To that end, I am a big fan of online banks. These institutions are able to offer higher growth interest rates partially due to not needing to maintain traditional brick-and-mortar bank buildings. For example, let us take a look at the bank that has the current partnership with the university—PNC Bank. The Pittsburgh-based bank has over 3,000 branches and is the sixth-largest bank in the United States, based on the total deposits. However, its popular virtual wallet service offers a miniscule 0.01 percent growth rate per year by default. If you are a spender with more than five debit card purchases per month, you get your growth rate bumped up to 0.2 percent for the following month.
When you compare this number to inflation, you realize it is seven and a half times smaller. The “growth” account is not actually growing your money — it is only very slightly lessening the rate at which you lose it. This is where online savings accounts can help out in two ways. First is the obvious higher growth rate. Today, several high-rated banks offer a growth rate of over 0.8 percent, with several options also approaching the 1 percent mark. Furthermore, this money is also somewhat less liquid than what is stored in traditional savings accounts.
This can be a pro or a con, but I certainly view it as a benefit. The money is still accessible and easily transferred to a checking account in roughly three days. However, that lack of immediate movement from one account to another is enough of a deferent to stop you from moving it on a whim and making a purchase you do not need. Most online banks allow bill payments and other large purchases to be made directly, up to a certain number of transactions per month (typically six). This further eliminates the fear of running into a money emergency and not having the money available for those three days.
There are other options for reducing the effects of inflation and preventing you from spending frivolously. Certificates of deposit are a popular choice and offer a simple way of letting your money grow, at the expense of you not being able to touch it for a set amount of years. If you find yourself with a significant sum of cash and wish to make that investment, online banks likewise give you excellent rates with no fees and generally a smaller minimum amount. If you decide to commit to five years, for example, you can find several banks with growth interest rates on certificates of deposit that approach 2 percent. The more flexible two-year options currently give roughly 1.2 percent, but the extra 0.2 percent increase might not be worth the flexibility tradeoff from a savings account.
Regardless of your situation, my advice is always to research. I will not list any specific suggestions because there are so many online banks, each with their own perks, rate and conditions. Finding a suitable one is not challenging, but it can be somewhat time consuming. Look for some current critic favorites by Googling "top online savings accounts" and do some light reading. It will certainly benefit you in the long run.