Feb 26 2012
An online savings account is an important tool to have in your financial arsenal as it can help you be prepared for an emergency expense or unexpected income loss, as well as allow you to save for a holiday, a household purchase, kids’ schooling or your own dreams, all without having to resort to using your credit card.
Spending within your means is the foundation of financial security and if more people had been living within their means, there would be less financial devastation in the wake of the Global Financial Crisis. One parent in a two income family losing their job shouldn’t mean that the family loses their home too, however, when you are spending everything you earn to pay the mortgage one a big house and fill that house with new and expensive things, and park new and expensive things in the driveway, then losing one income leaves you strapped for cash.
Therefore, instead of living beyond your means, you should be looking for ways you can cement your financial security through carefully invested savings. To do this, you need to make sure you choose the best high interest savings account, so look for the following features as you compare accounts:
The right interest rate
The interest rate will be one of the most important factors in growing your online savings, but choosing the right interest rate is about more than simply choosing the highest rate at the time you are applying. The interest rate paid by an online savings account is variable, meaning it is set by the financial institution and adjusted when they make changes to their standard interest rates in response to official interest rate changes. This means your savings interest rate can go up if the bank raises their rate, but it can also go down and earn you less interest.
In some cases there are additional conditions on your savings interest rate, which can be made to work in your favour if you know what you are looking for:
- Minimum balance interest rate. Some online savings accounts will require you to maintain a minimum balance in your account just to earn interest in a month, and these are accounts you want to steer away from. In other cases you can be paid bonus interest for keeping a certain balance amount in your account, which could benefit the way you save. For example, if the bonus balance amount is $2,000 and your aim is to keep that amount and keep adding to it, you could choose an online savings account with a 5% interest rate and a bonus 0.5% for maintaining the minimum balance. This also acts as an incentive to keep your savings in your account until you’ve reached your goal.
- Interest based on withdrawals. Another way to enforce your savings and encourage you from not taking your savings from your account is a bonus interest rate paid on a month you don’t make any withdrawals. This works in a similar way to the minimum balance bonus interest and can be a way for you to earn more interest and stick to your savings goals.
- Promotional interest rate. Banks will run specials to attract customers in the same way department stores do, so you have the opportunity to earn a higher rate of interest if you shop around for the best special. Promotional interest rates on online savings accounts typically run for six to 12 months, where you can either earn a fixed higher interest rate – for example 6.5% for 12 months – or a promotional bonus amount – for example an extra 1% for 12 months. The fixed promotional rate is a preferred option if it looks like interest rates are going to go down in the near future, however the bonus amount will be able to keep you ahead even with a few rate rises.
The right accessibility
With most bank accounts you are looking for one which is easy to access, however, with an online high interest savings account you want almost the opposite. If the money in your savings account is too easy to access you may be tempted to spend it when you’re out at the pub, or when you walk past a shoe sale, instead of holding onto that money which is supposed to be your emergency fund or your holiday fund. At the same time, the benefit of an online savings account is that your money is at call. At call means your money is not locked away as it would be with a term deposit, and can be accessed in a matter of days.
An online savings account works by linking to one of your existing transaction accounts. This means you can make transfers into your savings account from this transaction account using online banking, and you don’t need to visit a branch; this also saves you on fees. You also don’t want an online savings account with an ATM card, instead, you withdraw your money the same way you deposit it – through your transaction account.
When you reach your savings goal or need some emergency funds to repair the car, you transfer the money out of your online savings account and into your transaction account. If your linked transaction account is with the same financial institution as your online savings account, the transfer is likely to be instant. If you think that will be too tempting and easy to access for you, choose an online savings account from a different bank, as the transfer will take several days – enough time to pay for an emergency expense, but too long to pay for a shoe sale fix.
Your choice of online savings account may also come down to your existing banking relationships. Approach your existing bank and ask them about the best interest rate they can offer you as an existing customer. If you already have transaction accounts, credit cards, personal loans or a home loan then you may be able to negotiate a great deal, and enjoy easy access at the same time.
By going online with your savings you are going fee free. This is possible because an online savings account is very easy for the bank to manage as they don’t need to spend teller hours or branch time helping you open the account, make deposits or withdrawals or check your balance – you can do all of that online yourself.
As a result, online savings accounts can be entirely fee free, with no application fees, no monthly fee and no transaction fees. If your online savings account and linked transaction account are from the same institution you can even make free deposits to your online savings account without them counting towards your transactions. There also shouldn’t be any fees for closing down your account, when you reach your savings goal, or if you find a better offer or want to follow high promotional interest rates.
Therefore, when you are comparing online savings accounts and you come across an account with any sort of fees, keep looking because there is a better deal out there.
No minimum deposit
As we’ve already discovered, an online savings account with a minimum deposit requirement can earn you bonus interest. However, if you are shopping around for your first high interest savings account, and you’re not sure how you will be using your account yet, it is best to look for an account which doesn’t require a minimum deposit to earn interest. There may however, be a minimum deposit required to open an account, but this will usually be a nominal amount such as $1 and is arranged as part of the online application process to establish the link between your transaction account and new savings account.
Ease of use and access
Saving money is hard enough without adding obstacles to your account, so it is important you choose an online high interest savings account which is easy to use and access when you need it. This means looking for the following features:
- Easy periodic deposits. The easiest way to keep to your savings goals is not to think about them. Instead, make sure you can set up an automatic deposit from your transaction account to your savings account each pay day. In this way you pay yourself first, you won’t miss the money and you don’t have to remember to make the transfer.
- Spending penalties. While it is important to put some sort of barrier between you and your savings to protect them from being impulsively spent, you also need to make sure that you know how to easily access the funds when you need them. This could be in an emergency, or you may simply be ready to book your holiday flights or pick up your new TV and you don’t want your savings efforts to be cancelled out by withdrawal fees or angst.
- Customer service. Many online banks are offered by direct banks, which don’t actually have any branches. However, many direct banks make up for this by having a 24 hour, seven day a week call centre, so you can contact them at any time, with any question.
These are the five most important things to look for when you are choosing an online savings account. The order of their priority and how much weight you place on each feature will depend on your savings goals and financial situation, so compare the features and the accounts, and don’t forget to turn the comparison back on yourself too.
Alban has been reviewing savings accounts at www.finder.com for the last 3 years. He also contributed to several personal finance blogs.