Today’s post is from Emily Guy Birken. Read more about Emily at the end of this post.
About four years ago, as my husband and I were planning our wedding, we decided to get serious about taking care of our finances. Our first step was starting an emergency fund, since we had very different views going into the marriage about how to handle a financial crisis: he preferred to keep a large balance in his (non-interest bearing) checking account in case of a problem, while I sent all of my extra cash to retirement, my student loan, and a small savings account, and I planned on using credit if I ever encountered a financial emergency. But neither of us really wanted to use our “emergency” money, so a $500 car repair and a $1000 new water heater still caused us stress.
So we opened an online savings account with ING Direct. For those who are used to traditional banking with friendly neighborhood branches complete with tellers, ATMs, and free coffee, internet banking can be a little intimidating. Here are some basic criteria you can use to choose your internet bank wisely:
One of the benefits to putting your money in a virtual bank is that online savings accounts tend to have higher yields than their brick-and-mortar counterparts. It’s important to note, however, that higher yields do not mean that you will be getting rich from the interest. The rates are constantly changing, but in 2011 online savings rates have not topped 1.1%. This can be frustrating when we see good rates overseas – in Australia a normal savings account pays over 4%!
If you are simply looking for a safe place to stash your emergency fund, as we were, then an online savings account is the perfect solution. But if you are hoping to grow your money and can accept the risk that comes with higher rates, then you might be interested in a peer-to-peer lending site like Prosper or Lending Club, where you can invest in others and earn a return as high as 9% or more. It all depends on what you want your money to do.
Minimum Balance Requirements
Since we were seeding our emergency fund with a paltry $100 plus a $100 biweekly transfer, we knew it would be some time before we hit the minimum required by some banks. Choosing the ING Direct savings account meant that we did not have any minimum balance requirements—which made it easy to then start a vacation fund and a new car fund with whatever we could spare to send to them—but it also meant that we were missing out on higher interest rates elsewhere.
If you plan to open your online savings account with $10,000 or more and let it stay there, then it makes sense to find an account that offers incentives for higher balances. If you’re just starting to save, then a no-minimum account is perfect for you.
Internet banks are like their traditional brethren in that the legitimate ones are FDIC insured. As long as you do not deposit more than the maximum—currently $250,000—in any one institution, your money is guaranteed to be safe.
However, there is more to internet banking security than the security of your deposit. As with any internet activity, there is a risk of hacking. Most online banks offer a number of security measures, including password protection, image authentication, and PIN/TAN (Transaction Authentication Number) systems to ensure that you are the only person accessing your account. Before you commit to an online account, browse through their security information to find out what they are doing to protect your information.
It’s also important to note that most attacks on bank security come from phishing, malware, and other user-deception strategies that get you to give up your information. Make sure that you always know where any strange requests are coming from, and when in doubt, contact your bank directly.
A crucial aspect of good customer service in internet banking is the user interface. If it’s well designed, you may be able bank happily for years without ever having to contact a real human being. However, you do want to be able to get a customer service rep on the phone should you have problem. The best online banks offer easy-to-navigate websites as well as 1-800 customer lines that are staffed for at least 12 hours a day. (With 24-hour banking possible in the online world, it can be frustrating to deal with banker’s hours in a different area of the country). Many online banks have 24-hour phone lines, which is an extra perk.
While you’re surfing through different bank websites to determine their ease-of-use, make sure you also check to see how long banking transfers take. Some banks offer a zippy 2-day transfer, while others will sit on your funds for the better part of a workweek. If you need to access your money quickly, this can be a pretty big issue.
The Bottom Line
Internet banking offers a safe and high interest alternative to your local bank’s savings account. Add to that the fact that it is harder to access your money in a moment of spending temptation, and it’s clear that internet banks offer one of the best options for stashing your savings.
Emily Guy Birken is a freelance writer and regular contributor to PTMoney: Personal Finance. She lives in Lafayette, Indiana, with her mechanical engineer husband and infant son. Her musings on life, parenting and money can be found at The SAHMnambulist and Live Like a Mensch.