Oct
04
2024
Different Types of Banking Accounts, Explained

Understanding the Different Types of Bank Accounts

By | Budgeting & Goals, money | Comments Off on Understanding the Different Types of Bank Accounts

If you’re in the market for a bank account, you likely see a lot of different terms, such as checking, savings, checking and savings, money market, and more.

Having a bank account (or two or a few) typically provides the foundation of your daily financial life, so it’s important to choose wisely. Bank accounts can allow you to safely store your money; track your earnings, spending, and saving; and potentially earn some interest as well. In these ways, bank accounts can help you meet your goals, from socking away the down payment for a house to retiring early.

For instance, in SoFi’s April 2024 Banking Survey of 500 U.S. adults, 88% of people said they have a checking account and 71% have a savings account.

Different accounts can serve different purposes and have their own pros and cons. This guide will help you understand which account or mix of accounts can be best for your unique financial situation and aspirations.

Key Points

•   Different types of bank accounts can help you meet different goals, from saving in the shorter-term for a vacation to saving over the years for retirement.

•   Checking accounts are designed for daily transactions and short-term financial needs, while savings accounts can be better for longer-term savings goals, given their higher interest rates.

•   Money market accounts and CDs typically offer higher interest rates, but come with certain restrictions — money market accounts may limit transactions, for example, while CDs typically require funds to remain in the account for a period of time.  

•   Retirement accounts like IRAs and 401(k)s are tax-advantaged and designed to help individuals grow their savings, but come with restrictions, such as penalties for early withdrawals.

•   Brokerage accounts allow people to trade securities: While these come with higher risk and potential fees, they have the potential to provide higher returns.

7 Types of Bank Accounts Explained

Here’s a rundown of the different types of banking accounts, how they’re different, and how they could make achieving financial goals simpler.

1. Checking Account

Checking accounts can be the hub of your financial life, as money flows in and out as you earn and spend (or deposit and withdraw funds). Some points to consider:

•   It doesn’t take much time to open a checking account (often less than a half hour), and they are available through traditional banks, credit unions, and online financial institutions.

•   Accounts are typically insured by the Federal Deposit Insurance Corporate (FDIC) or National Credit Union Administration (NCUA) for $250,000 per account holder, per ownership category, per insured institution.

•   Some checking accounts may charge fees, while others allow opening checking accounts for free but may have some restrictions. It may be possible to have fees waived on a checking account by meeting certain minimum account balances or setting up direct deposits from your employer.

•   Checking accounts got their name from one of their prominent features — writing checks. While writing checks may be less common these days, a debit card typically enables you to tap and swipe as you spend.

•   Many checking accounts offer no interest, though some do pay an interest rate, usually well under the rate of inflation. This means that if a person chooses to park all their money in this account, their money wouldn’t keep pace with inflation and would end up losing value year over year. That’s why, while many Americans have a checking account, it’s typically not their only bank account.

2. Savings Account

Another type of deposit account is a savings account. Checking and savings accounts often form the foundation of a person’s banking life.

•   Savings accounts generally earn more interest than a checking account, and you are likely to find some of the best rates at online banks. You may see the terms “high-yield” or “high-interest” used to describe these. According to SoFi’s survey, 23% of respondents have a high-yield savings account.

•   In general, it’s not recommended to use a savings account for day-to-day spending. Instead, it’s better suited for short-term savings goals, so that you can earn interest as you save.

How People Use Their Savings Accounts

To save for emergencies

77%

To save for a specific goal such as a vacation

52%

To earn interest

48%

Source: SoFi’s April 2024 Banking Survey of 500 U.S. adults

•   As with checking, the usual age to open a bank account on your own is 18.

•     Unlike a checking account, the cash stored in savings accounts is typically less accessible — that’s why they call it a saving not a spending account. A savings account may not have an ATM or debit card and it is most likely not possible to write a check from it either.

•     Some savings accounts may require a minimum balance. If an account holder goes below the minimum required balance, some banks will charge a fee.

•     Savings accounts may also have limits on how many withdrawals can be made from the account each month. Regulation D may limit the number of withdrawals from your savings account that can be made each month. In the past, Regulation D limited the number of withdrawals from savings accounts to six per month. This limitation was suspended indefinitely in 2022, though financial institutions may still assess fees for more than a certain number of outgoing transactions.

•     Additionally, some banks may charge maintenance fees for keeping a savings account open. Fees and policies will vary bank to bank, so it can be beneficial to account holders to shop around to different banks instead of settling with the first one they find.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


3. Checking and Savings Account

Another bank account type to consider: a checking and savings account, which is a hybrid that allows account holders to save and spend from one account. Often offered by online banks, these accounts may pay competitive interest rates, be more convenient, and have tech tools that can make tracking spending and saving very simple.

Another way to go is to open both a checking and a savings account at a single financial institution or different banks. While there’s no one “perfect” bank account, people can mix and match, some people may find that opening a number of bank accounts can help them meet both their daily needs and may be suitable for some short to mid-term goals. In fact, 31% of respondents in SoFi’s survey said they had two checking or savings accounts, and 20% had three accounts or more. Thirty-seven percent had just one checking or savings account.

Some factors to consider are the annual percentage yield (APY) or other perks available from the account.

4. Certificate of Deposit

A CD, or certificate of deposit, is sort of like a savings account, but more hands-off. Both types of accounts are meant for saving, but while an account holder can withdraw money from a savings account within the limits set by Regulation D, outlined above, money deposited in a CD is considered untouchable for a predetermined amount of time.

•   Length of CDs can range from a few months to several years or longer. The benefit of a longer CD term is generally a higher interest rate — that is, unless banks expect the federal funds rate to drop. In that case, a shorter-term CD may pay more than a longer-term CD. According to the FDIC , the national deposit rate cap for a three-month CD was 1.53% and for a 60-month CD is 1.43% as of mid-July 2024. You may find higher rates when shopping around.

•   But with that boost in interest rates comes a few caveats. In addition to its “no touch” policy (no early withdrawal) some CDs also have a minimum deposit, typically starting at $500 and up.

•   There is the option of no-penalty/early withdrawal CDs. However, be wary when signing up for these, as they often include specifics on how and when an account holder can withdraw early without fees and penalties.They may not earn more interest on your money either when compared with standard savings accounts.

•   CDs are usually insured and considered a safe place to store funds.

•   Another alternative is CD-laddering. That means buying CDs of varying intervals, so access to savings will be staggered as CDs expire.

5. Money Market Account

A money market account is another type of FDIC-insured account.

•   Money market accounts generally have a higher interest rate than a traditional savings account, but may have more restrictions.

•   These accounts are typically insured.

•   Additionally, taking funds out of a money market account can be relatively easy — many come with checks or the ability to execute online electronic transfers.

•   Money market accounts may also be restricted as under previous Regulation D guidelines and have monthly limits on transactions. That means withdrawals and transfers could be limited, making it not a good fit for day-to-day transactions.

•   Like savings accounts, money market accounts may have balance minimums. In some cases, these minimums are higher than a savings account. If an account holder doesn’t maintain the balance minimum, it’s likely they’ll be charged a monthly fee.

•   Money market accounts might be the right choice for people who want high-yield savings, but don’t need to access the capital too often and can meet the deposit minimums.

6. Brokerage Accounts

A brokerage account is a type of investment account that allows account holders to trade securities.

•   It’s important to note that while the return on these accounts could be positive, there is risk involved. Your money is not insured, and the value of your account could dip.

•   Depending on the service level of the brokerage, a brokerage account can come with fees. Typically, the more “full-service” firm, the more the firm does the work for the customer, the more fees. On the other hand, automated investing and DIY brokerages may have fewer fees associated with them.

•   To open a brokerage account, a person needs cash and an idea of what they’d like to purchase. Some accounts do not have a minimum deposit amount but others require a minimum deposit which may range depending on the account type.

•   In order to withdraw funds from a brokerage account, securities need to be sold first. After settlement, the money can be withdrawn from the account.

•   Withdrawn investments may be taxable, and investing is often thought of as a long-term savings strategy. A brokerage account is less liquid than a savings, checking, or money market account.

7. Retirement Accounts

Retirement accounts, like IRAs, 401(k)s, and SEPs, are designed to help individuals save for retirement. Deciding what kind of retirement account to open will depend on a number of factors:

•   Employer benefits. Some employers offer a 401(k) and may have a 401(k) matching program or other perks with their retirement plans. Taking advantage of those benefits can be worthwhile, especially up to the employer match.

•   Target retirement date. Working backwards using a retirement calculator, people can determine just how much they need to save each month to retire on time. From there, certain retirement plans might make more sense than others.

Selecting a retirement plan is a personal decision that depends on factors like their personal goals, the target date for retirement, risk tolerance, and more.

For questions, it can be helpful to consult with a qualified financial professional. With retirement accounts, the money contributed is locked-in until retirement. Withdrawing early can result in fees and penalties that can cut into savings.

Finding Accounts That Work for You

Since different types of accounts have different purposes, benefits, and uses, it is likely that individuals will have a few kinds of accounts to meet their needs. You might keep all or most of your accounts at one institution, or you might open them at various banks and/or brokerage firms.

Each financial institution is likely to have its own policies in place so it can be helpful to review the options available with a few different institutions as you build your financial portfolio. If you have questions, consider consulting with a financial professional who can provide personalized financial advice.

Recommended: Requirements to Open a Bank Account

Looking for Something Different

When it comes to personal finance, different account types can serve different purposes. Checking accounts make it possible to easily withdraw and deposit money while accounts like 401(k) or IRAs are designed for longer-term goals, like investing toward retirement. People will generally have a mix of these accounts. A checking and savings account can offer account holders the ability to easily deposit and withdraw money into their account, while also earning a competitive interest rate.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What are the most common types of bank accounts?

There are a variety of common bank account types, depending on your financial needs and goals. These include checking, savings, checking and savings, and certificate of deposit (CD) accounts, among others.

What are the two most common types of bank accounts?

For many people, the two most common types of bank accounts are checking and savings. Typically, a checking account is for daily use, meaning depositing money and spending it. A savings account is geared towards savings and typically pays interest.

What is the best kind of bank account to open?

Of the different types of bank accounts, the best kind to open will depend on your particular needs. Many people find a checking account to be the hub of their financial life, allowing them to deposit and then spend funds. A savings account can be a good place to stash money for a while and earn interest. (There are other types to consider as well.) You will find variations in interest, minimum deposit and balance, fees, and other features depending on the financial institution.

Photo credit: iStock/hemul75

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK0723034

Read more
Oct
04
2024
Smartphone and credit card

Pros & Cons of Online and Mobile Banking

By | Budgeting & Goals, Growing Wealth, money | Comments Off on Pros & Cons of Online and Mobile Banking

Online and mobile banking are growing in popularity, thanks to how they can make transactions faster, easier, and more secure. Indeed, the number of Americans who are going all in on managing their finances this way continues to grow. Recent research shows that about 27% of Americans use online-only banks.

Not only that, those who use any type of online banking, whether through a traditional or online-only bank, tend to use it frequently. In SoFi’s April 2024 Banking Survey, which looked at the banking usage of 500 U.S. adults, 48% of respondents said they use online banking daily, and another 26% reported using it several times a week.

Whether you are among the online-only banking crowd or are using your traditional bank’s website or app, online and mobile banking have many advantages. And as with most financial services, there are also downsides to consider. Here, take a closer look at this important facet of your personal finances, so you can decide which banking style suits you best.

Key Points

•   Online and mobile banking are becoming increasingly popular, with close to 30% of Americans primarily using online-only banks.

•   Common online banking features used include checking balances, transferring funds, depositing checks via mobile device, and using automatic bill pay.

•   Some online banks may offer higher interest rates and lower fees compared to traditional banks.

•   Online banks provide the convenience of banking from just about anywhere, but lack in-person assistance and may have more limited services and ATM access in certain areas.

•   Any traditional and online bank that is insured by the FDIC guarantees the same amount of protection in the highly unlikely case of a bank failing.

What Is Online Banking?

Online banking, most generally, refers to the ability to conduct transactions through a financial institution’s web page or app, making it unnecessary to go to a branch. Most banks today offer some form of online banking, and most members, in turn, are accustomed to having that option.

For instance, 63% of respondents in SoFi’s survey said they frequently use online banking to transfer funds between accounts, and 43% said they frequently do mobile check deposits.

Frequent Uses of Online Banking

Check account balances 77%
Transfer funds 63%
Mobile check deposit 43%
Automatic bill payment 40%
View or download account statements 38%
Chat online with customer service 17%

Source: SoFi’s April 2024 Banking Survey of 500 U.S. adults

Often, however, the term “online banking” is used to refer to online-only banking vs. traditional banking, meaning you manage your personal finances completely online.

Since online banks typically have no physical locations and therefore lower overhead, they can usually offer consumers a higher annual percentage yield (APY) on deposit accounts and other perks.

Pros of Online Banking

To better understand online-only banking, consider these upsides:

Higher Interest Rates and Lower Fees

As mentioned, online-only banks tend to offer a higher interest rate on savings accounts and possibly checking accounts, too. As of July 2024, the national interest rate on savings accounts is 0.45%. At some online-only banks, however, you can find an APY of 4.00% or higher.

In addition, these banks may offer lower or no fees. Stashing your cash in one of these banks can be a way to avoid bank fees, such as account maintenance charges and the like.

Recommended: APY vs. Interest Rate: What’s the Difference?

No Minimum Balance

Many traditional banks still require you to maintain a minimum balance or else be charged a monthly fee. In terms of how much money you need to open an account online and keep it in good standing, you may be in for a pleasant surprise. A number of digital financial institutions allow a balance of just a few dollars, and you still won’t be hit with charges on your statement.

Convenience

Online banks are open 24 hours a day, 7 days a week, which means you can take care of transactions after normal bank hours. You can manage your money whenever and wherever.

ATM Access

Most online banks are part of an online network of ATMs, such as MoneyPass or Allpoint. What’s more, there is generally no fee for using these ATMs. If the financial institution doesn’t partner with an ATM network, they will typically offer to refund ATM fees up to a certain number of withdrawals.

Enhanced Online Experience

As digital innovators, online-only banks may provide a better user experience when online or in the app. Expect to get the latest tools and access to a wealth of features such as round-up savings programs or a dashboard that helps you track your earnings, spending, and savings.

Get up to $300 when you bank with SoFi.

No account or overdraft fees. No minimum balance.

Up to 4.00% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
FDIC insurance.


Cons of Online Banking

There are, however, some potential downsides to managing money this way. Consider these potential issues with online banking:

No In-Person Assistance

While most online banks provide a customer service line or chat function, they generally do not offer personal bankers. This means that there is no one available face-to-face to help you with your banking needs, such as setting up accounts, applying for loans, and getting a document notarized. If you are a person who wants and appreciates this kind of personal connection, you may not be well-suited to digital banking.

Limited Services

There may be some services that you aren’t able to enjoy with an online-only bank. It may or may not offer credit cards, car loans, and mortgages; you may not be able to deposit cash easily, as you can at a brick-and-mortar bank branch. Every online bank is different, so do your research to see what services they offer.

Limited ATM Access

Although many online banks will have a network of tens of thousands of ATMs that customers can access, others may offer less robust options vs. traditional retail banks. It’s worthwhile to see exactly where a digital bank has allied ATMs near your usual haunts, like your home and office, before signing up.

Is Online Banking Safe?

People may worry about whether online banking is safe. In the SoFi survey, 21% of respondents said they were very concerned about the security of their online bank accounts, and another 21% said they were somewhat concerned. The truth is, traditional banks are no more or less secure than online-only banks, and vice-versa. All are at a very minimal risk of a hack.

Recommended: What Do You Need to Open a Bank Account Online?

The Takeaway

Whether you call it online banking, mobile banking, or digital banking, keeping your funds with an online-only bank can offer many rewards. You’re likely to earn a higher interest rate and pay fewer fees, for instance. But those who like banking in person at a branch may choose to stick with a traditional bank. Think carefully about what suits your financial style and needs best.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK-Q224-1890351-V1

Read more
Oct
03
2024
What Is a Good Interest Rate for a Savings Account?

What Is a Good Interest Rate for a Savings Account?

By | Budgeting & Goals, Growing Wealth, money | Comments Off on What Is a Good Interest Rate for a Savings Account?

When searching for a good interest rate on a savings account, you’ll typically find that the rates banks offer vary widely. You may see the terms “interest rate” and “APY” (annual percentage yield) used, but these two things are not the same and it’s important to understand the difference.

The interest rate on a savings account is the rate you earn from keeping your money in the account. Essentially, you’re earning interest for lending your money to the bank or financial institution.

Here’s how it works: Say you have a savings account that earns simple interest, paid annually. In this case, if you have $1,000 and earn 1.00% interest, you would have $1,010 at the end of the first year, $1,020 after the second year, and so on. However, savings accounts usually pay compound interest. With compound interest, you earn interest on the entire balance, including previous interest payments. Interest may compound daily, monthly, or annually, depending on the bank.

APY is how much you will earn on the money in your savings account over the course of a year, taking compound interest into account. APY is higher than the interest rate because it includes the effect of compounding

When you’re looking for the interest rate on a savings account, you’ll usually see the APY listed, which tells you how much you’ll earn on your money over the course of a year. For most traditional savings accounts, the APY is currently below 1.00%. To get the best possible rate, you may want to consider a high-yield bank account, which may offer 3.00% APY or higher.

National Average Savings Account Rate for 2024

The national savings account rate is 0.45% APY as of October 21, 2024 as of August 19, 2024, according to the Federal Deposit Insurance Corporation (FDIC).That’s more than the average checking account rate of 0.08%. By comparison, money market accounts have a rate of 0.68%.

If you’re wondering, “what is a good interest rate on a savings account,” keep in mind that the rate can change. For instance, rates were even lower in 2021 and 2022.

Now that you know what the typical rate is currently for a traditional savings account, when you’re choosing a savings account, you may want to look for one that pays as high of a rate as possible while delivering the features that are most important to you.

How the National Average Savings Rate Is Calculated

The national average savings account rate is the national average that includes all banks insured by the FDIC. The average is weighted by each bank’s share of domestic deposits. This matters because some of the country’s largest banks have savings account rates that are even lower than the current national average.

It’s also important to note that savings account interest rates usually rise and fall with rates set by the Federal Reserve. Generally, when the Fed slashes interest rates, APYs on savings accounts fall. When the Fed raises interest rates, savings accounts tend to have higher yields.

Earn up to 4.00% APY with a high-yield savings account from SoFi.

No account or monthly fees. No minimum balance.

9x the national average savings account rate.

Up to $2M of additional FDIC insurance.

Sort savings into Vaults, auto save with Roundups.


APYs at Big Banks

Here are the APYs for traditional savings accounts at some big banks in the U.S. as of May 7, 2024.

Bank* APY
Capital One 4.25%
TD Bank 0.02%
Chase 0.01%
Bank of America 0.01%
Wells Fargo 0.01%
U.S. Bank 0.01%

*May not reflect regional variances or balance tier options.

Recommended: Plug in the APY percentages above into the APY calculator below to see how they compare.


How to Get a Higher Interest Rate for a Savings Account

There are two main ways to earn a higher interest rate on a savings account: with a high-yield savings account or by linking your checking and savings accounts.

High-yield Savings Accounts

High-yield savings accounts offer interest rates that are considerably higher than the national average. These accounts are usually available at online banks as well as some traditional banks and credit unions. However, the online savings account typical interest rate is generally higher than the rates at bricks and mortar institutions.

The benefit of these types of high-yield accounts for savings is that you can generally earn more than 3.00% APY on your money, which is a good rate for a savings account in comparison to the national average rate.

Money held in a high-yield savings account is usually FDIC-insured, meaning your money is protected in the event of a bank failure up to $250,000 per depositor and per ownership category. This generally makes them a good place to set aside extra cash for an emergency fund or to meet short-term savings goals.

Recommended: Understanding How High Yield Savings Accounts Work

Linked Accounts

If you have a checking account at a bank, you might be able to increase your interest rate by opening a savings account at the same institution. Some banks will offer a higher interest rate if you have both a checking and a savings account with them and link the two.

Although savings rates on linked accounts are typically higher, everything is relative. Opening a linked account might allow you to increase your savings APY from 0.01% to 0.02% or 0.03%. Banks might also increase the rate a bit more with higher account balances.

Common Requirements to Receive a Higher Interest Rate

In order to open a high-yield savings account, there are typically certain criteria you are required to meet.

•   Account minimums: You may need to make a high initial deposit in order to open a high-yield savings account. Additionally, you might be required to keep a certain balance in the account.

•   Direct deposit: You may have to set up direct deposit for a high-yield savings account. In many cases, you can only deposit money by electronic bank transfer.

•   Limited withdrawals: Some banks impose a monthly withdrawal limit on savings accounts. For instance, they might not allow you to make more than six withdrawals a month, otherwise they may charge you a penalty. Inquire at your bank to find out their specific policy.

How Will Savings Rates Change Throughout 2024?

It’s impossible to know exactly how the savings rate might change during the rest of 2024. That will depend in part on whether inflation rises and how the Federal Reserve responds to keep inflation in check. In general, if the Fed cuts interest rates, savings rates may be reduced as well. If the Fed raises rates, the savings rates might go up.

Currently, many high-yield savings accounts offer rates above 3.00% APY. By taking time to shop around and find the right fit, you may be able to find the right savings vehicle to help you save for the future — and earn money while doing so.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What is the interest rate on a traditional savings account?

According to the FDIC, as of August 19, 2024, the current national average deposit rate for savings accounts is 0.45% APY as of October 21, 2024.

What is considered a high-interest savings account?

High-interest savings accounts typically offer interest rates many times the national average. For instance, currently, these accounts generally offer 3.00% APY or higher. While high-yield savings accounts may be offered at traditional banks and credit unions, the highest rates are often offered at online banks.

Is 5.00% a good savings rate?

Yes, 5.00% is a good savings rate. It’s much higher than the current national average deposit rate for savings accounts, which is 0.45% APY as of October 21, 2024.

How much interest does $10,000 earn a year?

How much interest $10,000 earns in a year will vary depending on several factors, such as the interest rate and how often interest is compounded. Assuming a 3.00% APY, $10,000 compounded annually earns $300 in interest in a year. Compounded daily, the same interest rate earns approximately $304 in a year.

Photo credit: iStock/MicroStockHub

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

4.00% APY
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SOBK-Q224-1860700-V1

Read more
Oct
03
2024
piggy bank with band-aids

Emergency Fund: What It Is, Why It’s Important, and How to Build One

By | Budgeting & Goals, Financial Independence, money | No Comments

Life can be unpredictable, and financial setbacks can crop up at any time — whether that’s a job loss, medical or dental bills, a fender bender, or a major appliance that suddenly stops working.

That’s why it’s important to have an emergency fund. An emergency savings fund is a lump sum of cash set aside to cover any unanticipated expenses or financial emergencies that may come your way.

Besides offering peace of mind, an emergency fund can help save you from having to rely on high-interest debt options. These include credit cards or unsecured loans which can snowball. Not having rainy-day savings can also threaten to undermine your future security if you wind up tapping into retirement funds to get by.

Key Points

•   An emergency fund is a financial safety net that can be used for unexpected expenses, for financial emergencies, or in the event of income loss.

•   Financial professionals generally advise having three to six months’ worth of living expenses in your savings account.

•   An emergency fund may prevent you from going into debt, provide funds during unemployment, give you the space needed to make better financial decisions, and provide peace of mind.

•   To begin building an emergency fund, it can help to start with a smaller goal, such as $1,000.

•   Using a high-yield savings account and automating contributions to the account can help you gradually build up your emergency fund to the amount that’s best for your circumstances.

What Is an Emergency Fund?

An emergency fund is essentially a savings fund earmarked for emergency expenses—aka unplanned expenses or financial emergencies. A major home repair, like a leaking roof, is an example of an unplanned expense that needs to be dealt with right away. Losing a job is an example of a financial emergency that can cause a lot of stress if you don’t have an emergency fund to dip into to pay for necessities and bills.

If someone doesn’t have an emergency fund and experiences financial difficulties, they may turn to high-interest debt. For instance, they may use credit cards or personal loans to cover expenses, which can lead to struggling to pay down the debt that’s left in its wake.

You may be wondering just how much to keep in an emergency fund. Financial experts often recommend having at least three to six months’ worth of basic living expenses set aside in an emergency fund. That can be a lofty goal considering that one recent study showed that about half of all Americans would struggle to come up with $400 in an emergency scenario. And in SoFi’s April 2024 Banking Survey of 500 U.S. adults, 45% of respondents said they have less than $500 set aside in an emergency fund. It’s wise not to be caught short and to prioritize saving an emergency fund.

Recommended: Take the guesswork out of saving for emergencies with our user-friendly emergency fund calculator.

Earn up to 4.00% APY with a high-yield savings account from SoFi.

No account or monthly fees. No minimum balance.

9x the national average savings account rate.

Up to $2M of additional FDIC insurance.

Sort savings into Vaults, auto save with Roundups.


Why Do You Need an Emergency Fund?

With all of the bills that a person typically has to pay, you may wonder, “Why should creating an emergency fund be a top priority?” Here’s why: An emergency fund can be a kind of self-funded insurance policy. Instead of paying an insurance company to back you up if something goes wrong, you’re paying yourself by setting aside these funds for the future. Building this cushion into your budget can be a vital step in better money management.

How you invest emergency funds is of course up to you, but keeping the money in a high-yield savings account typically gives you the liquidity you need while earning some interest.

Having this kind of financial safety net comes with a range of benefits. Below are some of the key perks of having an ample emergency fund.

Preventing You From Going into Debt

Yes, there may be other ways to quickly access cash to cover the cost of an emergency, such as credit cards, unsecured loans, home equity lines of credit, or pulling from other sayings, like retirement funds.

Preventing debt is one of the most important reasons to have an emergency fund.

But these options typically come with high interest fees or penalties. Though there are many reasons for having an emergency fund, preventing debt is among the most important and enticing.

Providing Peace of Mind

Here’s another reason why it is important to have an emergency fund: Living without a safety net and simply hoping to get by can cause you to stress. Thoughts about what would happen if you got hit with a large, unanticipated expense could keep you up at night.

Being prepared with an emergency fund, on the other hand, can give you a sense of confidence that you can tackle any of life’s unexpected events without experiencing financial hardship.

Providing Finances During Unemployment

Applying for unemployment benefits, if you are entitled to them, can help you afford some of your daily expenses. Unfortunately, these payments are generally not enough to cover your entire cost of living.

If you have an emergency fund, you can tap into it to cover the cost of everyday expenses — like utility bills, groceries, and insurance payments — while you’re unemployed.

Starting an emergency fund also gives you the freedom to leave a job you dislike, without having to secure a new job first. Sometimes this can be the best move if you are stuck in a toxic situation.

Making Better Financial Decisions

Having extra cash set aside in an emergency fund helps keep that money out of sight and out of mind. Having money out of your immediate reach can make you less likely to spend it on a whim, no matter how much you’d like to.

Also by having a separate emergency account, you’ll know exactly how much you have — and how much you may still need to save. This can be preferable to keeping a cash cushion in your checking account and hoping it will be enough. In fact, 77% of the SoFi survey respondents who have a savings account said they use it specifically to save for emergencies.

Recommended: Guide to Practicing Financial Self-Care

Emergency Fund Statistics

Curious about how much other people have in their emergency funds? Or what percentage of Americans actually have a rainy-day account? Here are some recent research numbers to know:

•   About 50% of people report having emergency savings.

•   23% have enough money to cover six months’ worth of expenses.

•   56% of Americans say they couldn’t cover a $1,000 emergency expense. And just 19% of people in SoFi’s report said they have between $1,000 and $5,000 in emergency savings.

•   26% of people overall have no emergency savings at all.

•   37% of those who earn less than $50,000 per year have no emergency savings at all.

•   Less than half of people earning between $50,000 and $99,999 per year are comfortable with how much they have saved for a rainy day.

•   More than half of Americans are concerned about the amount of their emergency savings.

How Do You Build an Emergency Fund?

One of the basic steps of how to start a financial plan is saving for emergencies. Stashing money aside for a rainy day is a vital part of financial health.

The good news is that starting an emergency fund doesn’t have to be complicated. These tips can help you get your emergency fund off to a good start.

•   Set your savings target. The first step in building an emergency fund is deciding how much to save. The easiest way to do that is to add up your monthly expenses, then multiply that by the number of months you’d like to save (typically, at least three to six months). If the amount seems overwhelming, you can start smaller and aim to save $1,000 first, then build up your emergency fund from there.

Recommended: Use this emergency fund calculator to help you determine how much you should save.

•   Decide where to keep it. The next step is deciding where to hold your emergency savings. Opening a bank account online could be a good fit, since you can earn a competitive APY (annual percentage yield) on balances while maintaining convenient access to your money. You could also choose to open a traditional bank account and use its online banking features. Forty-eight percent of people say they use online banking daily, according to SoFi’s data.

•   Automate contributions. Once you set up an online bank account for your emergency fund, you can schedule automatic transfers from checking. This way, you can easily grow your emergency fund without having to worry about accidentally spending down that money.

One of the most frequently asked emergency fund questions is whether a savings account is really the best place to keep your savings. After all, you could put the money into a certificate of deposit (CD) account instead or invest it in the market. But there are issues with those options.

A CD is a time deposit, meaning you agree to leave your savings in the account for a set maturity period. If you need to withdraw money from a CD in an emergency before maturity, your bank may charge you an early withdrawal penalty.

So, should emergency funds be invested instead? Not so fast. Investing your emergency fund money in the stock market could help you to earn a higher rate of return compared to a savings account. But you’re also taking more risk with that money, since a downturn could reduce your investment’s value. Proceed with caution before taking this step.

How Long Does It Take to Grow an Emergency Fund?

Emergency funds don’t necessarily come together overnight. Saving after-tax dollars to equal six months’ worth of typical living expenses can take some work and time. Here’s an example to consider: If your monthly costs are $3,000, you would want to have between $9,000 and $18,000 set aside for an emergency, such as being laid-off.

•   If your goal is $9,000 and you can set aside $200 per month, that would take you 45 months, or almost four years, to accumulate the funds.

•   If you can put aside $300 a month, you’d hit your goal in 30 months, or two and a half years.

•   If you can stash $500 a month, you’d have $9,000 saved in one and a half years.

A terrific way to grow your emergency fund is to set up automatic transfers from your checking account into your rainy-day savings. That way, you won’t see the money sitting in your checking and feel as if it’s available to be spent.

Next, we’ll take a look at how to accelerate saving for an emergency fund.

How Can You Grow It Faster?

You’ve just seen how gradually saving can build a cash cushion should an emergency hit. Here are some ways to save even faster:

•   Put a windfall into your emergency fund. This could be a tax refund, a bonus at work, or gift money from a relative perhaps.

•   Sell items you don’t need or use. If you have gently used clothing, electronics, jewelry, or furniture, you might sell it on a local site, such a Facebook group or Craigslist, or, if small in size, on eBay or Etsy.

•   Start a side hustle. One of the benefits of a side hustle is bringing in extra cash; it can also be a fun way to explore new directions, build your skills, and fill free time.

These techniques can help you ramp up your savings even faster and be prepared for an emergency that much sooner.

Prioritizing Your Emergency Fund When You Have Other Financial Obligations

Most of us have competing financial goals: paying down student debt or a credit card balance; accumulating enough money for a down payment on a house; saving for college for kids; and socking away money for retirement. In many cases, you’ll see variability in financial goals by age, but there are often several needs vying for your dollars at any given time.

Here’s advice on how to allocate funds:

•   Definitely start or continue saving towards your emergency fund. Even if you can only spare $25 per month right now, do it! It will get you on the road to hitting your goal and earning you compound interest. Otherwise, if an emergency were to strike, you’ll likely have to resort to credit cards or tapping any retirement savings, which probably involves a penalty.

•   Continue to pay down high-interest debt, like credit card debt. You want to get this kind of debt out of your life, given the interest rates that currently sit between 15% and 19%. You might explore balance transfer offers that let you pay no or very low interest for a period of time (say, 18 months) which can help you pay down your debt.

•   Steadily stick to your schedule for low-interest debt, which typically includes student loans and mortgages.

•   Fund your retirement savings as much as you can. As with an emergency fund, even a small amount will be worthwhile, especially with the benefit of compound interest. Make sure to contribute enough to take advantage of the company match if your employer offers that as part of a 401(k) plan; that is akin to free money.

Banking with SoFi

If you’re looking for ways to save for an emergency and want your money to grow fast, why not open an online banking account with SoFi? When you start a Checking and Savings account with direct deposit, you’ll have automatic savings features at your fingertips, earn a super competitive APY, and pay zero fees. That’s what we call banking smarter.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What is the purpose of an emergency fund?

An emergency fund is a financial safety net. It’s money set aside that you can use if you are hit with a big, urgent, unexpected bill (like a medical expense or car repair) or endure a loss of income. In these situations, an emergency fund can help you avoid using your credit cards and taking on high-interest debt or hurting your credit score by paying bills late. How to invest an emergency fund is up to you, but a high-interest savings account is one good, liquid option.

Can I use an emergency fund for a non-emergency expense?

Technically, you can use an emergency fund for a non-emergency expense. After all, it’s your money. But it’s not wise to do so and defeats the whole purpose of saving this cash. If you use your emergency funds to pay for a vacation or new clothes, then if a true emergency arises, you won’t be prepared.

How difficult is it to rebuild an emergency fund?

It can be difficult to rebuild an emergency fund, just as it was to accumulate the money in the first place. But even if it takes years to achieve your goal, it is worth it. Putting away money gradually for an emergency is an important step towards being financially fit.

More from the emergency fund series:

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK0822015

Read more
Oct
03
2024
What Is an Online Savings Account and How Does It Work?

What Is an Online Savings Account and How Does It Work?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Is an Online Savings Account and How Does It Work?

Savings accounts at online-only banks — often referred to simply as online savings accounts — function similarly to traditional savings accounts, except you will manage your account entirely online or by app. Not only can these savings accounts be one-click convenient, they may offer you a healthier interest rate than accounts held at a brick-and-mortar bank.

If you’re trying to decide whether an online savings account or traditional savings account would suit you best, here are the details you need.

Key Points

•   Online savings accounts are managed digitally, and often provide higher interest rates and lower fees than traditional banks with brick-and-mortar locations.

•   Online savings accounts typically provide 24/7 access and a broad range of online banking tools; however, they lack in-person interactions and may not offer as many banking services or products.

•   To deposit money into or withdraw it from an online savings account, a customer may use an ATM in the bank’s ATM network, sign up for direct deposit, transfer funds between accounts, use a check, or complete a wire transfer.

•   While cash deposits are not possible at every online bank, some banks enable customers to make deposits at ATMs in their ATM network or at certain retailers.

•   Opening an online savings account typically involves filling out an online application, choosing an account type, designating beneficiaries, making an initial deposit, and creating an account login.

What Is an Online Savings Account?

An online savings account functions similarly to one offered by a traditional bank, except you manage your banking needs digitally. With an online savings account, you won’t have the option of walking into a bank when you need support, but you will be able to quickly click your way ahead and complete most transactions.

Many traditional banks also typically offer online banking, and this feature tends to be widely used by members across different types of banks. According to SoFi’s April 2024 Banking Survey of the bank usage of 500 U.S. adults, 48% of people reported they use online banking daily.

Since the principle is that your money will sit and grow in these accounts, rather than flow in and out constantly, banks pay you interest on these funds. They get to use your money, and they give you interest in return for that privilege. As your cash grows in the account, you can achieve different goals, such as building up an emergency fund, saving for a vacation, or getting a down payment together for a house. SoFi’s survey found that 77% of respondents with a savings account use it to save for emergencies, and 52% use it to save for a goal like a vacation or a house.

Of the percentage using a savings account to save for a goal, the survey showed that they are saving for different things:

•   40% are saving equally for long-term and short-term goals

•   35% are saving primarily for short-term goals like a vacation or for holiday spending

•   26% are saving primarily for long-term goals like a house or a child’s education

Earn up to 4.00% APY with a high-yield savings account from SoFi.

No account or monthly fees. No minimum balance.

9x the national average savings account rate.

Up to $2M of additional FDIC insurance.

Sort savings into Vaults, auto save with Roundups.


How Does an Online Savings Account Work?

You start an online savings account with an opening deposit, and then you’re ready to start saving. With an online savings account, you can manage your savings from anywhere in the world at any time of day. While there are plenty of banks and credit unions that have online account management services, purely online savings accounts often come with unique perks. For example, online banks usually don’t have a minimum balance requirement like traditional banks do. They often pay a higher interest rate, too.

You can transfer funds in and out as needed, as with any savings account. Typically, savings accounts had only allowed six or fewer transfers per month. Initiate more than that, and you might have to pay a fee. However, many banks have stopped following this guideline in recent years. Check with your bank to know the details.

It’s also worth mentioning that with an online account, you won’t be able to deposit or withdraw cash from your account by strolling into a branch. There aren’t physical banking locations to visit. You’ll need to transfer funds in and out electronically, or you may be able to use ATMs. There’s a silver lining, though. In exchange for not having to pay for the overhead that comes with running an in-person bank, online banks often offer lower fees and higher interest rates.

Depositing Funds Into an Online Savings Account

As mentioned above, it’s not possible to deposit cash into an online savings account by visiting a branch. Instead, you can deposit money in the following ways:

•   Transfer money from a linked account into your online savings account. (If you’re really committed to saving, you may want to automate recurring transfers). SoFi’s survey found that 63% of people said they frequently transfer funds between accounts using online banking.

•   Use a check; this deposit can be done by mobile deposit, which 43% of respondents in SoFi’s survey said they do frequently, or by mail.

•   Complete a wire transfer into your online savings account.

•   Set up direct deposit of funds (say, your paycheck or other benefits) to go into the account.

Withdrawing Money From an Online Savings Account

Next, consider withdrawing and spending money from a savings account. When you have an online savings account, here are your options:

•   Transfer funds into another account (say, one held at a traditional bank), and then take out cash in person.

•   Use an ATM. Some online banks allow you to link your savings to a debit card, which makes this possible.

•   Initiate a wire transfer.

•   Put in a check request.

•   Digitally send money to other people (say, by a P2P transfer) so you don’t need to take out cash.

Cash Deposits

Not all online banks enable you to deposit cash, as they have no physical banking locations of their own. However, many online banks allow you to deposit cash at participating retail locations, typically for a fee. Some may also have options for depositing cash at select in-network ATMs. See above for some of the other ways you can move your funds around so your cash gets where you want it to go.

Benefits of Using an Online Savings Account

Here are some of the key benefits you may enjoy with an online savings account.

•   Higher interest rates and lower fees. This means your savings can likely grow faster. These higher interest rates are possible because the financial institution doesn’t have to pay for expensive brick-and-mortar banking locations.

•   Manage accounts anywhere, anytime. It’s possible to do all of your basic savings account management whenever and wherever you like. The only requirement: a good, secure wifi connection.

•   Helpful mobile banking apps. Plenty of traditional banks have mobile apps, but online banks tend to have high-tech apps with more features.

•   More accessible customer service. You are likely to be able to get all of the banking support you need from the comfort of your own home or on the go. Online banks were built to be responsive in this way.

Disadvantages of Using an Online Savings Account

On the flip side, there are some disadvantages when you only bank online. Here are some of the cons of using an online savings account.

•   No face-to-face interaction. With online savings accounts, you can’t go into a physical banking location, ask questions, or sit down with a bank representative. For those who like face-to-face interaction, this can be a disadvantage.

•   Can lose account access. When a savings account is entirely online, you may lose account access temporarily in the rare event of the bank’s system going down.

•   ATM access can be limited. Some online banks don’t have their own ATMs. They may try to provide greater access with some independent ATM networks or by reimbursing customers for ATM fees incurred when using out-of-network ATMs.

•   Fewer financial services. Some online banks offer more limited product selections than larger traditional banks. If you’re looking to manage your savings account, loans, and other financial products in one place, you may find that an online savings account doesn’t meet your needs.

Pros of Online Savings Accounts

 Cons of Online Savings Accounts

•   Higher interest rates and lower fees

•   Ability to manage accounts anywhere, anytime

•   Helpful mobile banking apps

•   Accessible customer service options

•   No face-to-face interaction

•   May lose account access temporarily

•   ATM access may be limited

•   Fewer financial services

Opening an Online Savings Account

If you decide you want to open an online savings account, here are the steps you will likely take.

1.    Fill out the application. This process typically happens entirely online. Generally, you will be expected to provide such information as your name, proof of address, Social Security number, and government-issued photo ID (say, a driver’s license or a passport).

2.    Choose an account type. There may be an option to choose between different savings account types, such as an individual account or a joint account that you can share with a family member.

3.    Designate beneficiaries. Next, you will need to choose a beneficiary to whom the savings account would go if you were to die.

4.    Deposit funds. Some online banks won’t require a minimum initial deposit or will only request $1. Whatever the amount may be, you will need to make that minimum deposit. (There’s no typical online savings account minimum balance to maintain, by the way. Check with banks to understand their particular guidelines.)

5.    Create login information. All online savings accounts will need a username and password. It’s important to make the password a secure one that includes one or more capital letters, numerals, and symbols. Also, it bears repeating: Don’t reuse passwords. Unique passwords will help keep you secure from hackers. This is a big issue if you are wondering whether or not online savings accounts are safe.

💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.00% APY, with no minimum balance required.

Online Savings vs Traditional Savings: Which Is Best for You?

There are both advantages and disadvantages to consider when choosing between an online savings account and a traditional savings account. Being aware of the unique advantages and disadvantages of each can make it easier to find the right fit.

Online Savings

 Traditional Savings

•   May offer better rates and low or no fees

•   Tend to have more robust digital tools and features

•   Offers the convenience of banking from just about anywhere, at any time

•   Potentially minimal ATM access in certain areas

•   May have fewer options for depositing and withdrawing cash

•   No face-to-face customer support

•   Provide in-person banking locations

•   May provide broader ATM access

•   May offer a broad range of products

•   May have fewer online resources

•   May have lower interest rates and higher fees

•   May not provide perks that many online banks offer, such as sign-up bonuses

The Takeaway

Online savings accounts vs. traditional ones can be more convenient, have more digital features, and offer lower fees and better interest rates. Traditional banks, however, may have more options for withdrawing and depositing funds, and they can be the right choice for people who like face-to-face interaction when it comes to their finances. Figuring out the right fit can depend on your money style and goals.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How do I use an online savings account?

With access to a computer or a smartphone, you can access your online savings accounts from anywhere at any time simply by logging in.

What is the typical minimum balance for an online savings account?

That depends: Some online savings accounts have minimum balance requirements while others don’t. Check at the banks you are considering.

Is my money insured in an online savings account?

Your money should be safe in an online savings account, as long as the online savings account is insured by the FDIC. If so, your account is automatically insured for up to $250,000 per depositor, per account category, per insured institution.

What is the typical interest rate for an online savings account?

Interest rates vary over time and from bank to bank. Generally, online savings accounts offer higher interest rates than traditional savings accounts. High yield savings accounts at online banks may be 8x or more the national average rate for savings accounts.

How can online banks offer such good interest rates?

Because online banks don’t have the expensive overhead that comes with managing in-person banking locations, they can afford to pass their savings to their customers in the form of higher interest rates.

Photo credit: iStock/m-imagephotography

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK-Q224-1890370-V1

Read more

CATEGORIES

  • All
  • No categories
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2024 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender