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It’s possible to obtain some passive income with an online bank that’s also safe and FDIC insured.
The first thing I think about with online banking is convenience. But, there are also competitive interest rates and lower fees, sometimes better than with traditional banks.
Should you opt for an online bank or a traditional bank? That’s entirely up to your future goals. Some of the things you need to look at.
- High yield
- A place to put away money for a fixed term
- Ability to handle cash transactions
Online Banking vs traditional Banking
Online banks are financial institutions that don’t have physical locations for operation. Since, there are tremendous savings when a bank doesn’t operate physical locations, some of these are passed down to the consumers.
In some cases, online banks pay higher interest rates and charge lower fees for banking services. In addition, they offer convince, which is important for many consumers. Online banks are also insured by the FDIC, up to $250,000 per depositor, per institution.
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Online banking also has some disadvantages. These include; no physical branches, inconvenient cash transactions and narrow product offers. If you need any of these services, a traditional bank may work better for your needs.
Even though online banks don’t have physical locations, they offer ATM services for cash transactions.
According to this study conducted by the Federal Reserve Bank, online banking use has surged in proportion to the use of mobile phones. As mobile phone usage has gone up, so have online banking, online payments, online comparison shopping etc.
How to open an online bank account
Create an account – If you have decided that online banking works best for you, here is how it works. Do some comparison shopping and select your online bank. Visit the banks website. There find the “open a new account” option. Complete the online application forms.
Fund the account – most online banks offer these options to fund a new account. A wire transfer, funds transfer or using a paper check.
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Do your research – there are many online banks offering high yield savings, some free checking, certificate of deposits and money markets. Evaluate your needs and review the banks’ offering. One important feature is FDIC insurance, so make sure your selected bank does have this insurance.
A very popular strategy for using online banking is to chose a bank with high yield savings and free checking. Another strategy is to put away “emergency fund” money on high interest CD or a money market.
Here is a shortlist of the best online banks for high interest savings, CDs and Money Markets.
CIT Bank – Open a high yield savings builder account with CIT. This is currently one of the top online banks for obtaining higher interest on insured deposits. Rate offers may change with changes in the market.
CIT Savings builder – 2.30% APY – $100 minimum opening balance.
CIT Money Market – 1.85% APY – $100 minimum opening balance.
CIT Certificate of Deposit – 2.40% APY – Minimum $1,000 deposit.
Synchrony Bank – This bank is noted for being one of the best online banks by industry publications. It offers one of the highest CD rates in the market. Currently, these rates are at 2.80% APY for a 12-months CD. The bank’s savings account offers an attractive yield as well.
Barclays Online Bank – Barclays offers online deposits with no minimum to open and no monthly maintenance fees. Currently, Barclays is offering around 2.42 for a 12-months CD.
Marcus by Goldman Sack – This is the online banking arm of Goldman Sachs. Make a minimum deposit of $500 and receive a 2.50% APY for a 12-months CD.
SallieMae – This is the same company offering student loans. It also offers deposit products. Currently paying 2.55% APY on a 12-months CD (min. $2,500) and 2% APY on a high yield savings account.
Other online banks offering competitive rates on CDs and savings – Discover Bank, Ally Bank, First Internet Bank and American Express Bank.
Interest rates are always subject to change, since they move along with changes in the Federal Funds rate by the Federal Reserve Bank, the FED. As of right now, the FED is signaling to the market future interest rate declines. Online banks will adjust their rate offerings accordingly.
How to decide where to place your money
So, you managed to have money saved and ready to go into an online bank account. The next step is which saving product is best for your situation.
Here are some ideas you may consider.
Option 1 – you want a high rate on an account you can have access to your money easily. If this is your need, then a high-yield Saving account may work for you. This can work for your Emergency Fund money.
For some additional risks, you can go with a Money Market account or Treasury Bills.
Option 2 – You want the highest FDIC insured account. Then a high rate CD in one of the online banks may be best for your needs.
Option 3 – You want to be able to write checks and have the safety of overdraft protection. Then a package of free checking and high yield savings may work for you.
Online banking have been growing in popularity because of the higher interests and convenience offered. However, there are advantages and disadvantages to this banking. You have to take a look at your needs before putting your money away.
Before you transfer all your money to an online bank, you may want to consider keeping a traditional bank account as well. This way you get higher rates on some of your deposits and still have money on a traditional bank. Always do your research.