Looks like I’m fielding the money question for this week. This week’s question is related to last week’s question regarding emergency fund accounts. A lot of people recommend a money market account for their emergency funds. The best rates for money market accounts are often found in online bank accounts.
Should interest rate be the only factor you should look for in an online bank account? This leads to the question:
What Do You Look For In An Online Bank Account?
I don’t use a physical bank. My main bank account is located online. I also use cash a lot of the time. In my particular case, it was important that I had an online bank that paid for my ATM fees. Checkwriting was a must for me as well.
I asked a couple of friends the same question of what they look for in online bank accounts and here’s what they said:
I don’t look for much in an online savings account overall. I have an ING Direct account that I’ve put about $150 in. It sits there earning decent interest, but not a lot. I have had this account for around 6 years now. At the start of the account, I had funded it with a severance pay from around the dot com bust, but I needed to draw down on the account over time.
I currently use my Home Equity Line of Credit for an emergency plan and since I have a balance on that from an engagement ring purchase and upcoming wedding costs, I’m focusing largely on paying that down. At the same time, I’m putting some money in Prosper.com. Lastly, a couple of thousand dollars went into a joint account with my fiancee so that we can pay expenses from that. By keeping an extra thousand in a couple of different accounts to protect against overdraft, I really don’t have the funds for conventional savings right now.
When I do, I will probably look into what USAA has. With my fiancee being military, it opens up options such as that. I know she makes around 5% interest with great customer support. They score major bonus points for me because they don’t ask me 16 questions and make me deal with typing in letters in distorted pictures to prove that I’m human. ING Direct has become more and more cumbersome like that. I realize it’s for my own security, but there’s a limit. I wish I could view my account simple log in, but transfering money could require the real security. Of course adding money should be easy as pie. If anyone wants to add money to my account, I’d be more than happy to let them do that.
My online savings account should:
1. be from a reputable bank or financial institution
2. incur no or low fees
3. earns decent rateIn my personal situation though, I don’t have a savings account but rather a money market cash account. This represents a combination of my rainy day fund and “opportunities” fund, which I would draw from in case of sudden expenses or if so required by business/investment opportunities that arise. What’s interesting is that I have it in a tax exempt fund because I actually get better returns here compared to other money market funds that are regularly taxed. The tax exempt rate I am receiving right now is the equivalent of an interest rate of 6% from a taxable savings or regular money market account.
I have only one reason to use an online savings account: rate! Therefore, when I choose an account, the first thing I look is its interest rate. It doesn’t have to be the highest, but should be higher enough as compared to the rates I currently earn from existing accounts to justify the shift. In addition to interest rates, there are a couple of items I will look as well:
1. FDIC insured: I won’t use any bank without FDIC insurance, no matter how high the rate could be. A savings account should guarantee the safety of the principal.
2. Support ACH fund transfer: If the only way to fund the account is by mailing a check, then it’s not worth the effort to get an account even if it offers a higher rate. The loss of interests could offset any gain from the rate.
3. No fee and low minimum requirement: Once the rate at the bank becomes unfavorable, I should be able to move my money out without having to maintain a high minimum to avoid fees. I usually don’t open an account the minimum is more than $1,000.
In addition, if the account has a cap on monthly transfer-out, then it could be a concern if the cap is low. For example, I have an account with IGoBanking which currently pays 5.30% APY. However, I can only transfer a maximum of $20,000 out of the account every month. If all the sudden I need more than $20,000, though unlikely, I will have to wait the maximum of 30 days before I can get all money out of the account. Because of this, I don’t put all my deposits with them.
Because of the simple use of online savings account, I really don’t care too much whether the bank has user-friendly interface, offers extra security features, or provides good customer service. I just want to deposit my money quickly, earn interests, and get out without penalty.
In addition to online savings accounts, I also like 4-week T-bills, which has been covered in the previous Money Question series.
Here is what I would look in an online savings account.
1. High Interest Rates - This is the juicy part of online savings account; without the high interest rates, there is nothing attractive about them.
2. Easy of synchronization with other bank accounts - the online account should easily (without any hassle) communicate with my brick- and-mortar banks and also with other online savings accounts. In my experience, HSBC Direct is the best in this matter.
3. Absolutely zero fees - I don’t have any tolerance for “low” fees so I would look for one that has absolutely no fees at all. I *hate* banks that have $X fees if you balance falls below $Y. All the above named banks don’t have any fees.
4. No minimums - This sort of ties in with “zero fees”. The account shouldn’t have any kind of a minimum balance requirement. Sometimes there is a “minimum account opening amount”. Ideally this should be $1, but anything below $250 is bearable.
5. A good *feel* for online security - Ok, I have to agree that the *feeling* is a bit vague, but if you visit the login page of an online bank account, it should feel solidly designed with sufficient security features. In my experience, ING Direct *feels* the safest followed by HSBC Direct and Emigrant Direct.
6. Goes without saying that any online savings account should be FDIC insured.
We keep our emergency fund in an ING Direct account. I wasn’t very scientific about the way I chose to go with ING over the other alternatives. A friend at work had a coupon that gave a $50 bonus for opening an account with ING Direct. I was sick of the 2% interest we were getting in our money market several years ago so I opened an account with ING Direct and moved the money over there.
It seems to me that the biggest differentiator between different online savings accounts is the interest rate they offer. I considered moving the money from ING Direct several times to different accounts but the small rate difference wasn’t worth the time and hassle in my opinion. Our finances are pretty much automated as far as direct deposit, online bill pay, and automatic investments so I don’t like to mess with it unless I stand to save or make a good sum of money. For now I’m happy with ING Direct but I am going to look into the 4-week T-bills and tax exempt money market funds that Sun and SVB suggest.
Leave a comment if you want to throw in your 2 cents.
