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Heads Up!  You’re probably losing money on your savings!

A savings account is an important part of any personal finance picture.  It’s a separate, safe place to stash an emergency fund or save for a goal like a vacation or a downpayment on a house.

Like most people, you probably have a savings account at the same place you have your checking account.  And why not?  It’s convenient to have both accounts in one place, and in most cases you can transfer money instantly.  You may also be involved in an automatic savings program, like Keep the Change from Bank of America.  Or use it for overdraft protection for your checking account.

Take a moment and log in to your savings account, and see if you can find the interest rate, and how much you’ve earned in interest this year.

If you’ve earned more than a dollar, then chances are you have a healthy balance in that account, and you should pat yourself on the back.  Because chances are you’re earning around .1% at the most, and less in the majority of cases.  And not to be a downer, but once you factor in inflation ($1 will be worth less in a year than it is today), you’re losing money.

All Hope Is Not Lost

Don’t worry, there’s hope!  And they’re called Online Savings Accounts.

You may have heard of banks like Ally or Capital One, and assumed they’re just like every other bank.  And in most ways they are, except for a minor detail:

They don’t have physical locations.  That means they have less employees, no branches to maintain, and lower operating costs.

And they typically offer 1% interest on their savings accounts.  Some even offer interest on their Checking Accounts!

While 1% interest won’t completely protect your money from inflation, it’s going to do a lot better than a typical savings and even a money market account.

What’s the Catch?

There are a couple of “catches”, depending on how you look at them.

The first is that you can’t use a separate online savings account for overdraft protection.  The second is that it takes a bit longer to get your money out, and you can access it less often.  Most online banks take 3 business days to transfer money into a checking account, and you’re usually only allowed 6 withdrawals per billing cycle.  I suspect that for most people, that is more than enough.

You would even be better suited keeping a small amount in your regular savings account if you really need the overdraft protection and stashing the rest somewhere where you can actually earn some money.

For the regular savers, scheduling automatic transfers is a breeze.

One final benefit, psychologically, is that by having a separate savings account, especially for an emergency fund or long term goals, not being able to see your balance every time you log in to your checking takes away the temptation to access it.  When you can transfer money in an instant, $20 here or $40 there might not seem like a lot – but over time it will add up and your goals will sit untouched.

Where to Save Money Online

Below are the most popular online savings accounts, with current interest rates and account minimums (if any).  One final note, all accounts are FDIC insured up to $250,000.  These are legitimate financial institutions who just happen to be online.

Ally Bank – 1% APY – No minimum balance

Barclays Online Savings – 1% APY – No minimum balance

Capital One 360 Savings – 0.75% APY plus use this link to get a $25 bonus for opening an account.  No minimum balance

Discover Online Savings Account – 0.95% APY – $500 minimum balance

All accounts listed above have corresponding mobile apps.

Final Thoughts

A savings account is an important part of a healthy financial picture.  I’ve had an account with Ally for several years now, and earning more interest while keeping it separate from my checking account has helped me set up an emergency fund, pay for a couple of big purchases, and ultimately start saving for a house.

And remember, personal finance only works if it works for you personally.  Online savings accounts are great tools for some people and not so great for others.  But if you’ve never taken a look at them, I’d tell you it’s definitely worth a shot.  Your savings account probably isn’t going to beat inflation, but that doesn’t mean you shouldn’t try to make the most of it.