What You Didn't Know About Online Banks

If you have ever heard me speak or teach about saving money, then you have undoubtedly been introduced to online banks. I’m not talking about banks that have websites but about banks that have little to zero physical “bricks & mortar” locations.

I’m talking about banks like Capital One 360 (formerly ING Direct) and Ally Bank (built on the base of GMAC).

Here’s why I use online banks (over a local bank) for my savings accounts:

1. Better interest rate Online banks pay interest that is generally 5 to 8 times more than a local bank savings account (somewhere near that of a 2 to 3 year CD) – but it doesn’t affect the liquidity of my money

2. Sub-Accounts If you have a regular savings account, all you can see is the total amount of the money the account currently contains. With online banks, you can create something called “buckets” or “sub-accounts” to give every dollar a designated name! This means you can create sub-accounts like “Christmas”, “Emergency Savings”, “Vacation”, “Life Insurance”, etc. 

3. Automatic Savings You can establish automatic transfers from another existing bank account. I have set up automatic transfers for my emergency fund, YMCA annual membership, House taxes and insurance, Christmas, and life insurance premiums. It is a “set it and forget it” approach to savings that is awesome!

4. Customer Service  Because these banks only have an online presence, they have to be INCREDIBLE at customer service, or people would not even know about them. Every interaction I have had with my online banks has been an incredibly positive experience.

5. FDIC-insured  These banks are insured by the FDIC – just like any other bank. That means your deposits are protected. I like that!

6. No fees  There are no fees unless you exceed the monthly allowable transactions (or something extraordinary like that)

7. No MINIMUM balance  This makes it perfect for any and every saver.

I encourage you to check them out: Capital One 360  and Ally Bank.

Set a savings goal. Then establish an automatic savings plan to help you accomplish it!

Are Your Savings Working For You?

You cannot prosper if you do not save. Saved money plays a crucial role in not just financial stability but being able to accomplish your plans, hopes, and dreams.

However, the traditional savings accounts offered by many brick-and-mortar banks often fall short in terms of helping your savings grow. The culprit? Low interest rates.

Let me ask you this: ‘Are your savings working for you?’ They should be!

High-yield online savings accounts, as the name suggests, offer a higher yield or interest rate compared to traditional accounts. These accounts are typically offered by online banks or financial institutions and are designed to make your money work harder for you.

Competitive Rates

• These rates are notably higher than what you'd find with traditional brick-and-mortar banks. While the exact rates may vary depending on the financial institution and market conditions, it's not uncommon to find online savings accounts with rates around 4%!!

Safety

• Just like traditional banks, many online banks are FDIC-insured. The Federal Deposit Insurance Corporation (FDIC) provides insurance coverage for up to $250,000 per depositor, per insured bank. This means that even if the bank were to face financial difficulties, your deposits are protected!

Financial Event Update: The Banking Crisis

Let’s talk about the banking crisis, what happened, and what it means for you. 

What Happened:

Interest rates are so low for so long, that the government sells their debt at the prevailing interest rates and they sell US treasuries.

SVB Bank was putting their depositor's money into these two-year, five-year, and ten-year treasuries. Well, that means they have to hold them for two years, five years, or ten years, or they have to sell them on a secondary market.

With the economic decline, some of SVB Bank's depositors came in and started taking more of their money out than the bank had readily available, some of what was in these treasury bonds.

These treasury bonds had declined in value. Why? Because the Federal Reserve had increased interest rates, making the bonds less valuable. So SVB Bank went to the secondary market and was auctioning several billion dollars worth of these treasuries to be able to get cash to give to their depositors.

When several billion dollars worth of US treasuries hit the secondary market, people begin to talk. And, quickly found out SVB Bank was doing this. Word ran really fast in a digital age and many people raced to the bank to get their money!

And the next thing you know, SVB Bank was on the verge of collapse and ended up going into receivership. As a result, the bank’s depositors would have lost their money if it was outside of FDIC insurance.  With FDIC insurance, the federal government stepped in and made sure all depositors’ money was backed up.

Here is the lesson:

The lesson is that everybody, including very smart bankers, got stuck on low-interest rates and didn't keep themselves with enough margin or enough liquidity to be able to think about what could happen if rates started going up and they couldn't transfer fast enough when the rates increased so greatly.

What could you do personally?

Well, make sure that your deposits, if you have the issue of a lot of cash, don't exceed the FDIC insurance amount. Maybe have your deposits at multiple banks. That's one way that you can secure your money, so that when you need it, when you demand it, you can go get it, get fired up, and have a fully funded life!