Why do only online banks offer this? If the rate is 6% and you put in 100k, then does it stay 6% for as long as you have the money in there….even if it’s years? How safe is this and why aren’t more people doing it.
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> Why do only online banks offer this?
The branches operated by most banks cost a lot of money to run. Employees to pay, rent to pay, renovations to pay. And overall a branch is really just a place where customer service happens, all of the “banking” is done by computers at a head office. Online banks don’t have these costs, so they can offer different products.
> If the rate is 6% and you put in 100k, then does it stay 6% for as long as you have the money in there
No, most high interest savings accounts would be veriable rate. The bank would publish that they are paying and that’s what they pay right now. In the future, rates would change and so too would the rates on these savings accounts. There’s 2 exceptions.
First is a promotional rate. A bank is basically doing a sale where they guarantee X rate for Y time.
The second exception is when it’s not actually a high yearly savings account but rather a diffident type of investment. In Canada we use the terminality “GIC”, but I’m not sure if it’s the same in the US. The basic difference is that with a High Interest Savings account, you take your money out at any time. With a GIC it’s locked in for a set term (3 months, 6 months, a year ect). The rates on a GIC are normally better, but if you pull the money our before the term is up, you lose the interest. But in the case of a GIC, the rate is also locked in for that term. So you could go buy a 5 year GIC right now, get a decent interest rate, and keep that rate for the entire 5 year term.
> How safe is this and why aren’t more people doing it.
High interest savings accounts are generally federally insured up to whatever the maximum is, I think $250,000. So it’s pretty decently safe.
> why aren’t more people doing it.
Well, the answer here is 2 fold. First off, you’ve got to have money available to you in order to take advantage of a High Interest account. If you live a life of credit card debt, or some other paycheque to paycheque lifestyle then a high interest account does nothing for you.
The second answer is that you can generally get BETTER returns in a higher risk investment vehicle. A High Interest Savings account is extremally anti-risk. But if you invest in stocks or something like that you’ll likely do a lot better than 6%.
Of course, you could do worse as well, that’s the nature of risk. But if I told you that there’s a 50/50 shot with a particular investment. 50% of the time you’d get a 15% return, and 50% of the time you’d get no return (just get your money back). That averages to 7.5% and is a better return than a high interest savings account.
So not everyone does it because not everyone has the means, and those that do have the means might have better uses of that money.
A High Interest Savings Account is a really good place to keep something like an emergency fund. The money is not locked away incase you need it, it’s very safe and virtually risk free (so you won’t lose money), and if you need to transfer to your notmal account it happens very quickly. So it’s a nice place to keep money that you might need short notice access to.
On the other hand. Money that you might be OK with locking away for a few years (like a retirement fund, or home down payment savings). Or money that you won’t need 24/7 access to. the Stock Market is generally a better option. It might take a few days to sell stocks and withdraw money, but that’s fine as long as it’s not emergency money.
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