The secret to becoming wealthy is spending less than you earn, but what do you with that extra money? You can keep it under your mattress or a free checking account. However, you might not earn passive income with either of these two options so you can make money while sleep. Instead, you should consider parking your cash in an online savings account.
The best online savings accounts currently offer an annual interest rate of at least 1.00% APY so you can expect to earn $10 in annual interest for every $1,000 you deposit. As savings account interest rates continue to increase, you will earn more each month. For example, a 1.5% APY means you’ll earn $15 a year on the same $1,000 deposit compared to only $10 with a 1% APY.
You won’t be able to live off the savings account interest exclusively but keeping your extra cash in the bank is one of the necessary steps to become a millionaire.
Why You Need an Online Savings Account
Let’s be honest, savings accounts aren’t the most exciting things in life. Especially when interest rates are at historic lows and it feels like you only make pennies each month compared to a decade ago when you were making a few dollars on the same balance.
You need a savings account for the following reasons:
- Build an emergency fund
- Earn interest to grow your nest egg quicker
- Keep money outside your spending (checking) account
Earning a higher interest rate is one reason to keep a portion of your cash in a savings account, but you should also have a separate account so you don’t accidentally spend the money you need to save for the future. If it’s not in your checking account, you’re less likely to make as many purchases and this mental trick can help you get out of debt quicker.
How to Choose the Best Online Savings Account
There are dozens of online banks to choose from, but you should limit your search process to these two factors:
- Current annual percentage yield (APY)
- Minimum initial deposit requirement
You want to choose the bank that offers the highest interest rate on the lowest balance requirement possible. In many cases, you only need to keep $1 in your account to qualify for the highest interest rate.
After you find your banks of choice, you should see if they offer any additional benefits like mobile deposit or a high-quality checking account or money market account so you can keep all your cash at one bank.
If you keep your checking account at a different bank, that’s ok too.
When comparing the various online banks, remember that federal law only allows up to six savings account withdrawals each month. You might be able to make additional withdrawals, but you’ll have to pay a fee that’s almost always $10 to $15.
The Best Online Savings Accounts
Below are some of the best online savings accounts. All of them are FDIC-insured for your first $250,000 in deposits. If you currently bank with a local credit union or bank, your deposits are FDIC-insured there too, but you might only earn 0.10% on your deposit.
As you will quickly see, switching to an online-only bank can instantly help you earn 15 times more interest!
Live Oak Bank
Do you want to earn 1.85% APY on your cash? It’s possible with Live Oak Bank as long as you maintain at least $10.01 in your account.
Live Oak Bank has received a 5-star Safe & Sound rating from Bankrate.com, one of the most well-respected financial websites for researching and rating banks and credit unions.
There are no monthly maintenance fees to worry about. As long as you show some account activity at least once every two years by making a deposit, withdrawing cash, or logging into your account, you’ll never be charged an inactivity fee.
While some banks might “freeze” your withdrawals after you reach the six monthly withdrawals limit, you can make additional withdrawals from a Live Oak Bank savings account if you’re willing to pay a $10 transaction fee. Hey, it can still be cheaper than a late fee.
CIT Bank is probably the best all-around option as you can earn 1.75% APY with a minimum $100 opening deposit; the $100 account minimum is still very reasonable!
If you prefer to earn a slightly lower yield of 1.75%, CIT’s money market account is also FDIC-insured and you can use People Pay—think PayPal or Venmo for your bank account—to send money directly to your friends and family without having to transfer the cash to your checking account first. Money market accounts also have the six monthly transactions cap but with a few extra benefits.
Bonus Tip: Find out six ways to save $100 a month to watch your nest egg grow!
A Synchrony Bank high-yield savings account currently pays 1.70% APY with a $1 minimum account balance requirement. Synchrony will also issue an ATM card so you can make ATM withdrawals directly from your savings account, or you can always schedule a withdrawal online or over the phone.
If you accidentally make more than six withdrawals in a month, Synchrony won’t charge a fee for the additional transactions but they might close your account if it becomes a regular occurrence.
Discover Bank pays 1.60% APY on all deposits and there is no minimum balance requirement. You can also deposit a check using Discover’s mobile check deposit app.
If you have another Discover Bank account, like a checking account, you can link your accounts together for free overdraft protection. While you’ll hopefully never have to withdraw every penny from your savings account, this free protection benefit can prevent a $30 insufficient funds charge if you accidentally withdraw cash from the wrong bank account. Trust me, it happens ☹
Marcus by Goldman Sachs
You might associate Goldman Sachs with investing, but they now offer an online savings account called Marcus. Your Marcus savings account can earn 1.70% APY and you only need to deposit $1 within the first 60 days to begin earning the high-yield interest.
Although Marcus doesn’t offer checking accounts, you can also invest money you don’t need for the next 12 months into a certificate of deposit (CD) account to earn a slightly higher yield. A 12-month CD currently yields 2.10% APY, for example.
Barclays Savings offers 1.70% APY on all deposits and you only need to keep at least $0.01—that’s a single penny!—in your savings account to earn the highest APY possible. You might also appreciate the Barclays savings tool that can motivate you to save more for your money goals so you don’t have to borrow in the future.
Ally Bank pays 1.60% APY on all deposits and it’s also a good option if you want an interest-bearing checking account too. If you invest with Ally Invest, you can truly have all of your nest egg with one bank. There are zero monthly maintenance or account fees and zero account minimums.
Ally Bank also provides 24/7 customer service and mobile check deposit via the Ally Bank app.
Capital One 360
Capital One 360 pays 1.70 APY which is comparable to others mentioned on this list, and you might like to open an online savings account if you have a Capital One credit card or checking account already.
Another reason to consider Capital One 360 is that you can have 25 sub-accounts inside your savings account. If you like the envelope budget system, Capital One probably does the best job of all the banks to help you categorize and save for your various savings goals including the next exciting vacation or the more mundane such as paying your property taxes.
Should You Switch To An Online Bank?
Do you still bank at your local brick-and-mortar branch? It’s still a good idea to maintain a no-fee account at your local bank or credit union when you need money in a pinch or have to make a cash deposit.
Since physical banks barely pay a fraction of the interest as the online banks mentioned above, keep the cash you don’t need to pay this month’s bills in your online savings account to earn the most interest possible.
By choosing one of the online banks listed above, you won’t have to worry about any hidden fees and they all have very lenient minimum account balances that can be very helpful if you’re fighting hard to get out of debt and don’t have a lot of spare cash at the end of the month.
Some Important Facts About Online Savings Accounts
The thought of earning 1.50% on every penny you have in your bank account sounds very appealing, but you’re still going to need a checking account to pay your monthly bills like rent, utilities, and anything you charge to your credit or debit card.
Online savings accounts are able to offer a significantly higher yield than brick-and-mortar banks and checking accounts is because you’re limited to six withdrawals per month from an online savings account; this is federal law that every online savings bank must adhere to. Even transferring money from your savings account to your checking account counts as one of the six monthly transactions.
On the flipside, you can make unlimited deposits and earn the highest savings account interest rate possible! Making a deposit is easier than ever as many banks now support mobile check deposit, direct deposit, and the ability to mail-in deposits. If you go with a bank with local branches, you can also make in-person deposits too!
What are you waiting for? Are you going to open an online savings account today?