How Online Savings Accounts Work
While bank branches and passbooks still have their place, personal banking is increasingly moving online. As a result, it’s now possible to open and use a savings account without ever setting foot in a bank.
Technological advancement has also created an entirely new industry of online-only banks. These offer a multitude of different savings accounts, which offer variable features that appeal to people in specific situations.
In this guide, we’ll look at the major types of online savings accounts and their various features. We’ll also offer guidance on when to consider particular options.
What Is a Savings Account?
A savings account is an interest-bearing account designed to hold deposits. Most savings accounts pay variable interest rates. This means the amount of interest paid to the account holder can change over time. If the Federal Open Market Committee elects to raise interest rates in response to market conditions, banks will increase the interest paid out on savings accounts. Conversely, banks will pay out less interest if the Fed chooses to lower rates.
Savings accounts offer several distinct advantages:
- They balance ease of access with meaningful interest, which makes them an excellent option for short-term cash holdings
- Savings accounts are among the safest ways to store money
- Funds are protected for up to $250,000 by the Federal Deposit Insurance Corporation
- Consumers can easily link them to other personal accounts, making it easy to shift money around
Historically, savings accounts have been subject to Federal Reserve Regulation D requirements. As a result, this meant that account holders were limited to six transactions per month on their savings accounts.
However, in April 2020, the Fed suspended Regulation D’s applicability to savings accounts in response to the COVID-19 economic fallout. As of May 2021, the suspension remains in place, and the Fed has not commented on whether the change is permanent.
Types of Savings Accounts
Banks offer many types of savings accounts. Some are designed for general use, while others help customers save for specific goals.
Standard savings account options include:
- Traditional savings accounts: These simple, straightforward accounts are as easy as they come. Most institutions impose few if any limits on initial deposits or minimum balances. Interest is modest, and is calculated on a set, specified timeline (daily, monthly, or quarterly).
- High-interest savings accounts: Also known as high-yield savings accounts, these accounts offer better interest rates than traditional savings accounts. However, customers must usually meet initial deposit requirements and maintain a minimum monthly balance to avoid penalty fees.
- Specialized savings accounts: Banks also offer specialized accounts that help customers save for specific goals, like paying for college or setting up a savings fund for their children.
Most people opt for traditional or high-interest accounts. While specialized savings accounts also have niche appeal, they usually carry additional terms and conditions which can be quite restrictive.
Comparing Terms and Features
Four key points of comparison help you understand your options:
- Interest rates: This is the amount of interest you will receive on your savings account balance annually. For example, a rate of 0.1% would pay out $10 per year on a $10,000 balance. Savings interest compounds, meaning you’ll earn interest on the total account balance including previous interest payments. So, the more you save and the longer you keep your money deposited, the more you earn.
- Initial deposit requirements: Some accounts require that customers deposit a minimum amount of principal upon opening the account. These amounts vary widely among banks and range from $1 to $1,000 or more.
- Minimum monthly balance requirements: Some savings accounts also ask customers to maintain minimum balances. If the balance ever dips below the minimum level, penalty charges usually apply.
- Transaction or withdrawal limits: Some banks place their own limits on the number of monthly transactions and withdrawals customers can make. These are usually soft limits: account holders exceeding the maximum are usually subject to extra charges.
As you compare your options, keep the following rule of thumb in mind: the more interest the account pays, the more restrictive its conditions tend to be. As a result, a few pieces of general advice apply:
- Traditional savings accounts are usually best for people who may need to access the money in the near term
- High-interest accounts usually make a better option for those looking to park cash without dipping into it
- Specialized accounts are designed for long-term savings goals
Spend time comparing offers, and use consumer reviews to research the bank. The fintech landscape has created unprecedented choices, making this more important than ever.
How to Open an Online Savings Account
Opening an online savings account is easy. After finding an offer you want, simply visit the bank’s website and follow the sign-up steps. You will need to provide:
- Your home address
- Contact information (email and/or telephone number)
- Date of birth
- A copy of your personal, government-issued identification (usually a driver’s license, passport, or equivalent)
- Your Social Security Number (SSN) or Tax Identification Number (TIN)
You will create a login protected by a secure password. Many banks include extra security steps, such as challenge questions to verify your identity. They may also confirm your phone number by sending a text message with a special multi-digit passcode, then ask you to enter that passcode back into the system.
Using Your Online Savings Account
Most banks ask new customers to make a small initial deposit, which can be as low as $1. Others do not require an initial deposit at all, but instead request that you make your first deposit within a specified period of time.
You can use your choice of three main methods to deposit funds into your online savings account:
- Doing a bank-to-bank transfer from an existing account
- Completing a wire transfer from an existing account into a new account
- Mailing or e-depositing a paper or digital check
Many banks also work with major online payment processors like PayPal, allowing you to link the account and move funds back and forth as needed.
From there, simply add and withdraw funds as needed. Online banks usually maintain multiple customer service options, including telephone, email, and chat-based support. Finally, if you need assistance with your account, a representative will always be available to help you.