SHORT ANSWER: No, money in an online savings account is not stuck, but it may not be growing as quickly as it could be if it were invested in other vehicles.
A savings account is a safe and accessible way to store money, but it does not mean that the money is stuck. It can still be withdrawn or transferred to other accounts or investments as needed. Though the value of these funds doesn’t swing dramatically like stocks and real estate, some people save for long-term purchases with their savings accounts. An online savings account is great, but diversifying your money across assets can speed up your path to financial freedom. It is important to consider your financial goals and explore various investment opportunities to make your money work harder for you.
Understanding How an Online Savings Account Works
An online savings account is a type of bank account that allows individuals to deposit and withdraw funds electronically through the internet. These accounts typically offer higher interest rates compared to traditional savings accounts, making them an attractive option for those looking to grow their money over time.
When you deposit money into an online savings account, the bank will use those funds to invest in various financial products such as loans and securities. In return, you will receive interest on your deposit.
Is It Bad to Leave Money in Savings?
An online savings account usually has a higher interest rate than a traditional savings account. You might also get lower maintenance fees because online banks have lower overhead costs. With any online banking experience, you can access your financials from the web or through your bank’s mobile app.
In general, money in an online savings account is safe as long as the bank is FDIC-insured. Most online banks are insured by the Federal Deposit Insurance Corporation (FDIC), and you should only deposit your money in banks that are FDIC-insured. FDIC-insured savings accounts give you financial stability, but you don’t get to earn high returns from most of them.
The Federal Deposit Insurance Corporation insures deposits up to $250,000 per depositor, per insured bank. However, it's always important to do your research and choose a reputable and well-established online bank to ensure the safety of your money.
What Are the Benefits of Online Savings Accounts?
Here are some of the key benefits of opening an online savings account:
- Higher Interest Rates: Online savings accounts has higher interest rates compared to traditional brick-and-mortar banks. Online banks have lower overhead costs, which allows them to pass on higher interest rates to their customers.
- Convenience: With an online savings account, you can manage your finances from anywhere at any time. You can easily transfer money, set up automatic deposits, and track your savings goals all from the comfort of your own home. There's no need to visit a physical branch during banking hours.
- Lower Fees: Online savings accounts typically have lower fees than traditional banks, which can help you save money in the long run. Many online banks also offer fee-free accounts, so you can keep more of your hard-earned cash.
- Security: Online banks use the same security measures as traditional banks to protect your information and funds. Plus, online accounts are often backed by the Federal Deposit Insurance Corporation (FDIC).
- Automatic Savings Tools: Online savings accounts often come with automatic savings tools, such as recurring transfers or round-up programs, that help you save money effortlessly.
What Is the Downside to Online Savings Account?
Here are the downsides to using an online savings account that you should be aware of before opening one.
- Limited Services: Online savings accounts may offer limited services compared to traditional banks. For example, some online accounts may not offer features such as cashier's checks, safe deposit boxes, or in-person financial advice. If you anticipate needing these types of bank financial services, you may want to consider sticking with a traditional bank.
- Security Concerns: While online banking is generally secure, there is always a risk of cyber attacks or identity theft. It's important to make sure that the online bank you choose has strong security measures in place to protect your personal information and funds.
- Lack of Personal Interaction: If you prefer face-to-face interactions with bank tellers or customer service representatives, an online account may not be the best option for you. While most online banks do offer customer support through phone or online chat, it may not be the same as having a physical location to visit.
- Technology Dependence: With an online savings account, you rely heavily on technology to manage your finances. If there are ever technical issues with the bank's website or mobile app, it could potentially disrupt your ability to access your account or make transactions.
Top Online Savings Accounts
- Best For:Optimizing Interest EarningsVIEW PROS & CONS:securely through Cove Capital Liquid Income's website
- Best For:Online bankingVIEW PROS & CONS:securely through Chime's website
*Early access to direct deposit funds depends on the timing of payer’s submission of deposits. Chime generally posts such deposits on the day they are received which may be up to 2 days earlier than the payer’s scheduled payment date.
- Best For:Best for Checking Account VarietyVIEW PROS & CONS:securely through Chase Bank's website
*With Chase Overdraft AssistSM, we won’t charge an Overdraft Fee if you’re overdrawn by $50 or less at the end of the business day OR if you’re overdrawn by more than $50 and you bring your account balance to overdrawn by $50 or less at the end of the next business day (you have until 11 PM ET (8 PM PT) to make a deposit or transfer). Chase Overdraft Assist does not require enrollment and comes with eligible Chase checking accounts.
Grow Your Wealth with Many Assets
A savings account is your risk-free home base. Allocating some of your money to riskier assets can increase your total returns and assist you on the path to a smooth retirement. Not every choice outside of your savings account means assuming a high level of risk. Bonds and CDs can help risk-averse investors earn stable returns that exceed the annual percentage yields (APYs) on their savings accounts.
Frequently Asked Questions
Can you earn interest on savings in an online savings account?
Yes! In fact, earning interest is one of the main benefits of a savings account and online savings account.
What is the best alternative to an online savings account?
The best alternative to an online savings account depends on your risk tolerance and financial goals. Bonds and CDs can help risk-averse investors who want stable cash flow. Growth stocks make more sense for investors who are willing to incur more risk for a higher potential reward.
How much money should you allocate to your savings and investments?
The amount of money you should allocate to your savings and investments depends on your monthly budget and financial goals.
Is money in a traditional savings account stuck?
Money in a traditional savings account is not necessarily stuck, but it may not be growing as quickly as it could be if it were invested in other vehicles such as stocks, bonds, or mutual funds. Traditional savings accounts typically offer low interest rates, so the growth of your money may be slow compared to other investment options.
About Marc Guberti
Marc Guberti is a personal finance writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.