How an online-only bank can put more money in your savings account

It’s always great when that payday direct deposit hits, but exactly where that money hits could make a major difference in your financial future. If you haven’t yet set up a savings account to stash some of your earnings, you could be missing out on an opportunity to add a little extra to your bottom line.

Whether you’re new to opening a savings account or you have concerns about an existing account, we’ve turned to an expert for help. Grab that spare change, and let’s determine how a savings account can be right for you.

What’s a savings account?

As Priya Malani, co-founder of Stash Wealth, explained, a savings account is an account separate from your standard checking account. You typically draw from a checking account to make basic, everyday purchases, but a savings account is intended to hold money aside. The account, which you can deposit or transfer money to, is in addition to a checking account. By having at least two accounts—a checking account that holds your everyday cashflow, and a savings account that ostensibly holds money for future use—you’re more likely to reach a money-saving goal.

Some banks may require a minimum deposit to open an account; others may require you to maintain a certain balance to keep the account open. Both online-only and traditional bank branches offer savings accounts, but Malani recommends doing your research when it comes to online-only banks, noting that you can generally take advantage of online banks’ better interest rates (more on that below). But, before opening any account, always review the terms and conditions.

Why you should have more than one savings account

It may seem like a good idea to have one basic savings account for all of your extra money, but Malani warns against that. “If you have a general savings account, it’s very easy and tempting to tap it for bills, life, boozy brunch, that extra splurge, whatever.” To make sure your savings account actually keeps its savings, she recommends having more than one account and designating each for a specific purpose.

For example, you could create an account for an emergency fund or an account to hold money for recurring costs like holiday gifts or charitable donations. For shorter-term savings needs, like an upcoming vacation, you can open a specific savings account for that goal that you can later close out without penalty. (Discuss account closure fees with your bank ahead of time to avoid any surprises.)

Malani has a great tip: “Each account should be nicknamed according to what you’re saving for. Studies show that by nicknaming your savings account—something that online banks make it easy to do—you’re less likely to use it for something other than its intended purpose.”

What to know about interest rates

An interest rate is a small percentage of money you earn by depositing your money in the bank.

Online-only banks like Ally or Marcus are often able to offer higher interest rates, Malani explained. “An online-only bank has less overhead. They don’t have to pay for any real estate, and they save on salaries because they don’t have to pay people to staff their bank branches. They pass their savings on to you in the form of a higher interest rate on your savings account.”

She noted that some online-only banks are currently paying up to 200 times more yearly interest (or what’s called APY: annual percentage yield) than a physical bank. This means, for example, if you placed $10,000 in savings at a bank with a .02% APY you’d earn $2 in interest, but a bank offering 2% (like Ally currently does) would earn you $200 in interest over the year.

Manage your expectations

Although selecting a savings account with a higher APY might sound like a way to make quick, easy money, Malani suggests managing your expectations. “When interest rates are really low (like they are now), [your savings] may not be ‘racking up money’ for you,” she said. “Investing takes time to work, it’s not like gambling, where you can double your money overnight.”

Ultimately, deciding on a savings account is a great way of taking the next step toward achieving your financial goals. No matter what bank you choose or what purpose your account will serve, Malani said it’s important to just get started. “Don’t let the options confuse or paralyze you,” she said. “Pick a bank and start stashing.”