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Online Savings Accounts

Online savings accounts provide a way to receive significantly higher interest rates than traditional savings accounts while providing the same security and liquidity. Because banks can offer online accounts without the need for retail establishments and tellers, they can offer higher rates than traditional savings accounts.

Online vs. In Person

Online savings accounts work a little differently than traditional savings accounts. An online savings account usually requires a checking account that the savings account can attach itself to. Whereas a traditional account can be accessed by depositing cash or checks, an online savings account relies on transfers in and out of an existing checking account. Because most people will have a checking account with a local or different bank than their online savings account's bank, transfers into and out of the account may take several days. Users of direct deposit have often found out that their paycheck is inaccessible for several days because they are accustomed to instant transfers between their traditional accounts.

Like most traditional banks, online savings accounts from a reputable bank are FDIC insured for up to $100,000. Just like a traditional bank, the money in your online account is cash - not stocks or bonds that could potentially lose value. But unlike a local bank, it is unlikely an online bank will have a local branch you can go to for face to face interaction with customer service. If you are willing to exchange physical interaction with your bank and plan your transfers accordingly for much higher savings rates, an online savings account is just the thing for you!

Savings vs. Money Markets

Money Market accounts have historically offered higher rates than normal savings accounts. With the introduction of online savings accounts, the difference in rates has become very slim and the line between the two types of accounts may have blurred a little. In fact, several online savings accounts actually are money market accounts. With a money market, you are legally limited to 6 transfers from the account per month. Many money market accounts also offer checks. While both traditional and online savings accounts are based on the cash you put in, money markets are not technically based on cash. Instead, they use high quality investments such as CDs, municipal notes, or treasury bills. Depending on how important check writing and multiple transfers per month are to you, a money market may provide advantages over other savings accounts.

As a Part of Your Portfolio

The relatively lower yields and high liquidity of savings accounts make them ideal for short term savings or as a place to store an emergency fund. For people who are looking for long term investing options, savings accounts do not reach the average level of performance of other investment vehicles such as bonds, stocks, or mutual funds.


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Page last modified 7/20/2012