My Financial Money Map shows the different accounts we use as part of our financial plan; however, today, I would like to make the case for using an online savings account. Online Savings Accounts (OSAs) have been out there for quite a while. According to Wikipedia, more than 8.5 million customers signed up for OSAs with leading U.S. banks in 2005 alone; however, they are still fairly new to some people. In my case, it wasn’t until 2016 that I decided to do some research after hearing about it on the doughroller podcast. A simple search of “best online savings account” on Google revealed several options to choose from. Ultimately, I decided to open an account with MySavingsDirect which at the time was paying 1.05% APY making it the most competitive rate available in the market.
In general, going from a brick and mortar bank to an OSA was fairly easy; however, MySavingsDirect required a copy of my driver’s license and a voided check of the account I was planning to use for funding. I went ahead and provided all the information and a few days later I received notification that my account was now active. I immediately moved my emergency fund to MySavingsDirect and started enjoying the benefits of higher interest on my balance.
The Experience at MySavingsDirect
Overall, I can’t complain about the bank and the interest rate. The user interface wasn’t the prettiest but as long as they were paying a competitive rate life was good. One thing all OSAs will tell you is the rate can be lowered at any time, and there is no guarantee the advertised rate will last. Well, who would have thought that just after a month, the rate would experience a decrease from 1.05% to 1.00% APY. I wasn’t thrilled by the -0.05% adjustment but I thought it wasn’t the end of the world. I decided to suck it up and stay the course.
A few months later they went ahead and dropped the rate one more time from 1.00% to 0.85%. At this point, the future didn’t seem promising so instead of dealing with frustration and playing games with this bank I decided to go back to the drawing board to start evaluating other options. Looking back it was pretty obvious MySavingsDirect was offering the highest interest rate in the market to attract customers to then lower the rate. Their parent company is Emigrant Bank and currently, they have another division called Dollar Savings Direct offering 1.50% APY. No way I’m falling for that one again.
The Switch to Ally Bank
I had made up my mind about leaving MySavingsDirect and knew exactly where I wanted to go. During the course of my initial research, Ally Bank ranked 2nd on my list offering 1.00% APY. Ally had one of the best savings accounts when it came to the overall digital experience. The website was easy to use, and the bank’s mobile app was compatible with Apple (also compatible with Android and Windows). It also offered real-time chat support and a 24/7 call center.
Setting up an account was extremely easy. I opened 2 checkings that earned 0.1% APY and 3 savings accounts earning 1.00%. A few days later, I received a lot of stuff in the mail that included debit cards, checkbooks, and the typical paperwork you get when opening a bank account. Since making the switch, Ally has gradually increased their interest rate on their standard savings account from 1.00% up to 1.25% APY. This happens to be among the best on the market as of November of 2017. Below is a snapshot of my accounts.
Today, there are many options out there and the competition is fierce. This is pushing all online banks to up their game to see who can get their hands on more money. As far as I know, the highest number out there is 1.35% APY offered by CIT Bank and 1.30% APY by Synchrony and GS bank. As mentioned previously, dollar savings direct is offering 1.50% APY, but I suspect is just a strategy to attract money and then drop rates as was the case for MySavingsDirect.
With all these options, I’ve been tempted to leave Ally; however, their slick interface, customer service and their on-going increases in rates have made it difficult for me to part ways. I know I’m missing 0.05-0.1% or maybe more but I would hate to go through the hassle of opening an account at a different bank to then realize that Ally went ahead and increased rates as they’ve done in the past few months. For now, I plan to ride it out and stay still until I see something worth chasing.
The Advantages of an OSA
I think the main advantage is pretty obvious. OSAs are characterized by a higher interest rate compared with traditional savings accounts. The first table shows a comparison between interest rates for some popular names in the industry compared to current options in the market for OSAs. The second table shows the result of saving $100,000 at each bank and the estimated annual returns for each option.
Many of these high-yield accounts have no minimum balance, i.e. no monthly maintenance fee. You can link your OSAs to an existing external bank account for easy transfer of funds between multiple accounts. Some also offer ATM cards just like Ally does, so customers can directly access the funds. As long as you don’t do anything stupid like a return deposit or overdraft then you should be fine.
The Disadvantages of an OSA
I find it difficult to come up with cons for opening an online savings account. Some people complain about easiness to make deposits having no branches at your convenience. In this case, you need to find an ATM that accepts deposits, buy a money order or have someone deposit the cash in their account and write you a check that you can deposit. In the case of Ally, they don’t allow cash deposits but their eCheck deposits feature works great for me.
Like I said, if you choose an online-only savings account, you won’t be able to walk up to a teller to make a deposit or sit down with a personal banker to explore savings options. But let me ask you something why would you want to do that anyways? Perhaps, I’m extremely biased because I’m somewhat of a DIY investor so could see how this one could be a downer for somebody else.
For transfers, It typically takes anywhere from three to five days to move money from your online bank to another institution. If you don’t want to wait this long, an online-only account might not work for you. Again not a deal breaker for me. If I need to put a transfer, I plan ahead of time and schedule it accordingly.
An online-only account doesn’t give you the opportunity to build a relationship with a banker or the bank even if it’s the best online savings account available. I realize bank relationships can be important if you’re planning to apply for a mortgage or other type of loan but at the same time, I don’t think you have to make it an either-or situation.
Just because you go ahead and open an OSA doesn’t mean you have to automatically cancel all your accounts with any given institution. As a matter of fact, that’s not what I’m suggesting at all. Instead, my accounts at Ally are a complementary solution to accounts I still keep at a brick and mortar bank, that’s designed to provide more attractive returns for short terms financial goals such as an emergency fund.
What Else is Out There?
I was catching up on several posts about FinCon 2017 and for some reason, I ended up landing on the Financial Panther blog. I was reading Kevin’s take on the conference and couldn’t avoid seeing a couple of posts he had on a savings account paying 5% APY. I was skeptical and started reading. The two posts were very thorough and explained the strategy that one must follow; however, I will tell give you a heads up it requires a little bit of work but not enough to discourage you from pursuing. Feel free to follow the 4 links listed below: the first two are for the accounts you need to open [if you use my link we’ll both get $20] and the other two are links to Kevin’s posts that walk you step-by-step on how to execute this awesome strategy.
- Netspend Account: referral code 
- Insight Card: referral code
- Financial Panther: Netspend Account
- Financial Panther: Insight Card
- You should consider opening an Online Savings Account and parking your emergency fund in this type of account.
- I totally recommend Ally Bank; however, do your due diligence and choose an option that works for you.
- You really can’t beat making 125x+ more on your money compared to a brick and mortar bank.
- Who cares about branches and relationships as long as you’re letting your money work smarter for you.
- You don’t have to make it an either-or. Just because you open an OSA doesn’t mean you have to drop other accounts.
- I have already requested my Netspend and Insight cards to explore the 5% APY they advertise on their accounts.
- Stay tuned for an update to this post or a separate one about the Netspend and Insight experience.
What about you? do you have an OSA? if not, where do you park your emergency fun?