Should I Bank Online?

August 17, 2018 10:15 am

Christine H. Canapari, ChFC®

Senior Financial Advisor & Manager of Client Services

Emergency reserves are a vital part of every good financial plan.  Having extra savings that can be accessed to cover an unexpected expense enables you to avoid charging up credit cards and taking withdrawals from retirement savings.  So where should you keep those reserves and how should they be invested?  Or should they be invested at all?  Since you want to be able to access these funds quickly and without incurring taxes or penalties, your best bet is savings accounts, money markets and CDs.  Emergency reserves should be held in highly liquid investment vehicles and banks, both traditional and online, offer such options.  Online banks have become very popular over the past decade and offer consumers convenience and currently significantly higher interest rates.  If you are wondering how online banks can offer these higher rates, it’s twofold.  First, because online banks don’t have physical branch buildings, their overhead is lower which allows them to pay you more in interest.  Another reason is that once you become an online bank customer, the bank can cross-sell you on other products and services that they offer.  Just like traditional banks, online banks offer savings, checking and money market accounts.  Debit card services and CDs are also available.

FDIC Insured
Be sure that your online bank account is FDIC insured.  Most of them are, but you should check to be sure.  Usually checking and savings accounts and CDs will be FDIC insured, but online banks may also offer products that are not.  If investing in a money market online, you should again confirm that it is FDIC insured.  Generally, money market deposit accounts or MMDAs are FDIC insured and money market funds are not.  Money market funds are mutual funds.  While they still offer low volatility compared to other equity or even fixed income mutual funds, they are not guaranteed or insured.  The normal FDIC insurance per depositor limit is $250K and applies to online bank accounts.  https://www.fdic.gov/deposit/covered/notinsured.html

Read the Fine Print
When you establish any type of account, you should read the full contract of the service you are signing up for to familiarize yourself with the terms.  With online banks, the main way I have found that they differ from traditional banks is that they will sometimes put a longer hold times on deposits.  For example, if you were to walk into your local bank branch and deposit $500 in cash, that deposit would be available immediately.  This will likely not be the case with your online account.  Your online banking agreement will specify when you can expect the funds to be available after deposit.  The online bank I use starts crediting interest on the same day they receive a deposit into my account, however the funds are not available for withdrawal for four days after a deposit.  When making a withdrawal from an online account, it usually takes two to three business days to process.

What I Love About Online Banking
I opened my first online savings account over fifteen years ago, and it has served me well.  I have consistently earned more interest than I do at my local bank, where I continue to keep my checking and a very small savings account for immediate cash needs.  I know that deposits and withdrawals take a few extra days than at my local bank, but that has never been a problem.  I can easily make deposits and withdrawals with a few keystrokes and without leaving home.  With interest rates on the rise, there are many online banking institutions that are currently paying close to 2% interest.  If you are comfortable banking online, there are definitely opportunities to earn extra dollars on your emergency reserve funds.  For more information on recommended online banking sites, please contact Chrissy Canapari at ccanapari@strategicpoint.com.

Chrissy Canapari serves as Senior Financial Advisor and Manager of Client Services at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at ccanapari@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm or of our parent company, Focus Financial Partners. LLC. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.