Should you use an online bank?

So, you've done your job of beefing up your emergency fund only to learn that your hefty new savings account is only going to earn how much? According to bankrate.com (June 15, 2009), your local bank is probably paying about 0.20 percent Annual Percentage Yield (APY) on savings accounts. You might earn a slightly higher rate of interest by investing in a short-term certificate of deposit (CD). Six-month CDs in and around Columbus are paying about 0.50 percent. Hardly worth tying up your funds, especially if you might need to withdraw them in the case of an emergency.

Earn more interest on your savings
The interest rates offered by high-yield savings accounts of many online banks may be far higher than those offered by your local brick and mortar bank. The rates may be double or even triple those of your local bank, allowing you to earn hundreds of dollars more in interest each year, depending upon your account balance. Many of these accounts are FDIC-insured and are available with no fees and no minimum balances. Though some of them pay higher rates of interest for maintaining higher balances.

The pros
In addition to paying higher interest rates because their overhead is lower, online banks are generally quite convenient. You never have to wait in line and you don't have to meet with a banker during business hours to set up your account. Online banks are open 24 hours a day, 7 days a week. You can set up your account on Saturday afternoon in your pajamas, in the comfort of your own living room. Moving money from your high-yield savings account to your checking account, when you need to, can be just as simple and convenient.

The cons
Drawbacks of using an online bank include not having a local branch to visit when you need or want to work with someone you know face-to-face. For some, it is comforting to know the staff of the local bank at which their hard-earned money has been deposited. Chances are you may receive better customer service from the tellers and bankers at your local branch because they know you.

Another downside of using an online bank is the potential for technical difficulties. Websites go down and transactions will experience hiccups. When this happens, you can't jump in the car and drive to your local branch for assistance. Calling customer service may result in long hold times as many other customers will be calling for assistance as well.

Where to start
If you think an online bank might be the right place to park your emergency cash, it's easy to shop and compare your options. Websites such as bankrate.com and MoneyRates.com have done most of the work for you reporting interest rates, fees, required minimum account balances, etc. As of this writing, high-yield savings accounts at popular online banks are paying about 1.5-1.75 percent.