What is an Online Savings Account?
Unlike what a lot of us are familiar with, an Online Savings Account is a bank without a local branch that you are able to walk into. It is also not the online version of your local bank, like your credit union's website. Instead, it is a bank that you do business with entirely by mail, phone, or preferably, the internet.
Why an Online Savings Account?
There are three major reasons why you should set up an online savings account.
1. Higher interest rates. Growing up, my credit union's savings account was banking me a whopping 0.1%. That means that every year, they gave me one tenth of a percentage of my money back. At that rate, I was losing money to inflation. However, my online saving's account is giving me
2. Separation of church and state (or at least savings and spending). Online banking's greatest weakness is also it's greatest strength. The online account will not give you a debit card, you cannot write cheques for the account, and you can't pay your credit card bill with it. In addition, transferring money to or from the account will take a business day or two. That's a good thing. The point of a savings account is money that you won't spend immediately. Forcing yourself to think over a purchase for 48 hours will ensure that if you are withdrawing the money from the account, it's for a good reason.
3. Automatic transfers. You can set up your online account to withdraw money from your normal bank account on a regular basis. Automating savings is the most important step you can take towards saving money. I guarantee that if you don't have money in your bank account, you will be far less likely to spend it. Keep reading and I'll show you how to set it up.
How to Open an Online Savings Account
While Americans have a few more options, the best bet for Canadians (as far as I am aware) is to head on over to ING Direct. I have an account with them, and I've been very happy with it. Just click on the "sign me up" tab and choose to open an "investment savings account". Fill out the information and you're practically done. The most difficult part of this process is linking the online account to a real bank account. This is how you'll be doing most of your banking online, by transferring money from your regular main account to and from your online savings account. A few minutes of work now will be worth it later though, I promise.
You'll have to get a cheque from your local bank account, make it out to yourself, and mail it to ING Direct. Once they receive it, and the cheque is processed, then your account is open, verified, and ready to go. Want to earn that extra $13? Make the cheque at least $100, include the Orange Key "17504111S1" and when your cheque clears you and I will both get an extra $13 deposited into our online savings accounts. Opening an online account won't take you more than an hour and you'll get $13 for moving $100 from your regular account to your new one. Free money. Please note that this is not the $100 I said you could save. This is, however, the first $13.
How to Set Up an Online Savings Account
Once your account is opened you have the option of setting up an automatic savings plan. This is where your online account will automatically pull a set amount of money from your main chequing account on a regular basis. For example, if you're saving for a new computer, or a car, you could have your savings account pull $100 at the end of every month into your savings account. After a few months you'll have enough to transfer the money back to your chequing account for your new purchase.
What I've done is set up my account so that every other friday, on payday, I have my employer directly deposit my paycheck into my bank account. On that same day, ING Direct pulls a set amount of money right back out of that account for my wedding savings. It's as if I never even had the money. That is the brilliance of the automation. I cannot spend money that I never had. Trying to hold onto a couple hundred or thousand dollars in my chequing account is too tempting for me, there's too much to spend it on. By automating my finances, I've removed temptation from savings. It's not whether or not I want to save money this paycheck, it's already saved.
So if you want to save $100 by the end of this month, set up an online savings account today. It'll take about an hour and you'll earn an (almost) instant $13. Start small by setting up your automatic savings plan to withdraw $10 twice a month from your account, and by the end of the month you'll have $33 waiting for you. It isn't much, but we all have to start somewhere. I started with $15 a month while I was a student, and by the time I realized it I had a couple hundred dollars in there.
*Disclaimer. I am not endorsed or paid in any way by ING Direct, I've just used their service, have appreciated it, and wanted to share it with my readers. Yes, I will get $13 if you use my orange key, but so will you.