Generating passive income through high interest online bank accounts is something that is incredibly easy to do and over the last 15 – 20 years has become more and more common. The reason it is becoming more and more popular is because of the high yield and no risk earned from investing through these accounts. There have also been technological advancements that have resulted in the money being easier to manage through apps and websites. In the past the alternative to high interest online accounts has been term deposits and they have actually offered a higher rate than savings accounts. But now the tides are turned and banks are generally giving a higher interest rate to the online high interest accounts over the term deposits. I actually covered off on this in my Complete Guide – Term Deposit where the reason for the difference in rates offered was because the banks re-shuffled their book of assets. Please go through to the Guide if you want to read more about it.
There are three things that you should be looking at when going to invest some money online with a high interest online account:
– The banks reputation
– The interest rate offered
– The user interface of the banking software
What is important?
So what do you look for when you are going to put money into an online account? The main thing really is the interest rate that the bank is offering. So do you just pick the account that offers the highest interest rate? Well I would certainly be considering this but if I have never heard of the bank than I would probably steer clear of them. You also need to consider the banks reputation. Are they likely to go under and your money could disappear with it if it’s not secure. Some banks require you in the fine print to make a constant deposit into your account of between $200-$1000 per month in order to obtain the interest rate which they quote. If you fail to do this you received a base interest rate that is really small. Therefore it is important that you thoroughly read through all the fine print and work out if there are any clauses that you need to consider.
A banks reputation and image is very important. If you have had previous dealings with a bank and they have not provided you a great level of service, then can you really expect anything different? Alternatively if your current bank is excellent, the customer service is fantastic and there has been no issue to date then this is a tick in the reputation column. Similarly if you have never heard of a bank before then hold off until you do your research and make sure they are reputable. There are a lot of small banks out there that offer better deals then the larger banks. You just need to make sure that the bank is not going to screw you over and take your money. Very unlikely but you need to consider the likelihood that the bank will go under. Luckily in Australia any amounts held with a bank up to the Government guarantees $200K if the bank was to go under.
Generally a high yield online account will pay an interest rate of around 2-3% that can be split up between the standard rate and the bonus rate. A standard rate is applicable every month regardless of whether you deposit or withdraw. The bonus rate is generally only available if you meet the bonus conditions that are generally a deposit of $200-$1,000 per month with no withdrawals, if you achieve this you will be able to qualify for the bonus rate. For example the UBank USaver has a standard rate of 1.8% and a bonus rate of 1.06% that combines to 2.87%.
You also need to make a comparison between online high interest accounts and term deposits. The interest rates that they offer on these two products are very similar interest. You may be better off based on your needs in selecting a term deposit over high interest online account or vice versa. The trade-off is that the high interest online accounts you can access your money more frequently whereas a term deposit has restrictions on the use and accessibility. That being said you can still withdraw your money from term deposits and you just incur a loss of interest or a small transaction fee. Same thing with high interest accounts, if you want to qualify for the bonus interest you must make no withdrawals.
One of the things that I’ve noticed when I’ve been looking into high interest bank accounts is that some banks have an amazing website and the user interface is magnificent and super easy. Then you go to the smaller bank which has a much slower website and transactions are way harder. Even the transfer time between accounts can blow out to being a few days. My experience in withdrawing money is the following – it’s much easier with the bigger bank than if you had money in a small bank. I’ve not been able withdraw my money due to the website issues. This is really worrying as generally people carry around less cash as they rely on cards more and more. The website could be down and your money stuck in the account. I know this isn’t the experience with all small banks but I wanted the readers to be aware that sometimes this can happen and just to be aware of it.
Another point to consider is whether you keep all your accounts with one bank or whether you go out there and deal with numerous banks. I have seen problems in businesses caused by using many different accounts, they don’t really get to build a relationship with their banking and because of that they can lose out on deals. With a personal account that shouldn’t necessarily cause any issues there just something to keep in mind.
We are now going to compare an online bank account shares that are making a 5% dividend payment and a small capital growth each year. An online account that has no risk returns will earn between 2-3% interest, but has no risk involved.
I’ve also seen some people put money online into foreign banks, that way are you able to access higher yields but there may be restrictions and signing up for accounts i.e. if you’re not like a citizen of the country. As an example if you put money into an Albanian account I’m certain that’s going to have a high interest-rate then what you would if you use an American bank account. This way you also face the foreign currency risk in that and if the Albanian dollar decreases in in comparative strength of the American dollar are you are also going to lose out on the exchange rate, however this may be hedged against the increase in interest rate.
Generating passive income through an online account
So how do you create passive income through this online account? Well it’s pretty easy, you see the interest that you earn on a monthly basis is entirely passive income. In fact it is nearly the most passive investment you can get, you literally do not have to worry about anything at all, and just sit there and wait for the month to tick over before you go and collect the interest you have earned that month. There is hardly any risk involved here.
Why cash inflows are king
For me generating cash inflows on a regular basis is a huge psychological thing. My strategy is so focused on this and that’s what keeps my reinvesting and pumping money into my passive income snowball. The reason I do this is because it is at the forefront of my mind. I will explain a bit further – you see if you are going to received $5,000 passive income in a year would you rather receive $5,000 in one hit or receive 12 payments of $600 every month? Well for me I would take those monthly payments every single time. The reason I would pick this is that constantly throughout the year you are thinking about the passive income you are generating and it is not something that you just forget about for 12 months of the year. This will lead me to try and grow that $600 of passive income a month to $650 of passive income a month and then $700 of passive income a month. You see I am constantly thinking about it and trying to grow it. For me it’s a mental thing and I am certain that there are other people out there who are similar to me and think this way.
That is why my investment strategy is focused on receiving constant small returns throughout the entire year. That’s why I think cash inflows are king and why my passive income snowball is growing.
All in all I think investors should have some portion of the portfolio in cash and it should be either with in term deposit or pay interest online accounts I’ll leave that up to you to decide whatever suits you better though they’re pretty similar, but yet you want some portion of your portfolio in cash.
Want to read more?
If you are like me and want to read all there is one generation of passive income, then follow this link through to my Top 30 Passive Income Ideas. Here I list out similar ideas to the one above, and go into detail explaining how to generate passive income through them.
I also have my Top 10 Passive Income Book list that I save you hours and hours of reading and take the very best lessons I learnt from each book.