As featured in The Wall Street Journal, Money Magazine, and more!
     

When It Makes Sense to Chase Savings Interest Rates

This article was written by in Banking. 12 comments.


I’ve been closely tracking changes in high-yield savings account interest rates for a few years. Having a high-yield savings account is an essential part of being in control of your finances, and it’s the perfect vehicle for the bulk of your emergency fund. There is a possibility of having too much of a good thing.

Traditional banks have caught on to the popularity of internet-based savings accounts and over the past few years have launched their own online savings accounts to increase competition. For a while this resulted in significant benefits for savers through higher interest rates. Unfortunately, the economic downturn encouraged banks to lower the interest rates offered to savers. The concept of “high-yield savings” is currently a joke.

Customers are desperate for higher interest rates, and it’s now popular for some customers to keep moving their cash to the latest savings account to post the highest interest rate on the list. There is nothing wrong with ensuring your money is always taking advantage of the best opportunity.

Before you consider chasing the highest interest rate, keep this in mind.

  • It takes time to open a new account. Some account opening processes are better than others. In my experience, Discover Bank (review here) was by far the quickest and most painless while EverBank (review here) was by far the worst. The time you spend completing applications, talking to customer service, and managing yet another account has a value.
  • You might be charged inactivity fees. The more you open new accounts and transfer funds out, the more you’re abandoning accounts. You may choose to leave these accounts open in case they once again offer the highest rate. Although most banks offering high-yield accounts don’t currently charge inactivity fees, they might in the future.
  • You are adding clutter to your finances. Simplicity has a value. Adding more financial accounts into your life invites disorder and stress. While there are great tools to help you organize all your bank accounts, credit cards, and coins in your coin collection, you can create more peace for yourself by reducing to the smallest number of financial accounts possible. This saves time, as well.
  • Bank-to-bank transfers can take several days. Is it worthwhile to move your money from one bank to another with an interest higher by 10 basis points if you don’t earn any interest during the five days the funds are “in transit?” Some transfers are faster than others, so it will take some time for you to recover the lost income during the transfer.

Although I would love to simplify my accounts, I find myself adding more only for the purpose of researching for Consumerism Commentary. I would prefer to leave all my personal cash in one bank with a history of competitive high-yield rates.

In this simpler world, here is the strategy I would take:

  • Start with a high-yield savings account that consistently offers interest rates among the highest.
  • Switch banks only when something frustrates me (customer service, access, or fees) or if I can earn a few hundred dollars a year by switching to a different account.

For me, this beats moving thousands of dollars and possibly wasting time opening new accounts every time one bank leapfrogs another. Have you had any success chasing interest rates?

Photo: Tobyotter

Updated February 14, 2012 and originally published March 3, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦127,535
Rank: Platinum
About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 6 comments… read them below or add one }

avatar Brian

After i became “financially aware” and decided to start a high yield savings account, this is one of the thought processes i went through. Should i chase rates? Should i go have different accounts all over the place to take advantage of every deal available? Its the economist in me that said yes, but practically speaking, it made little sense. Now i am at ING and am incredibly happy. Not the highest rate, but i love my account and unless someone wows me away with a better offer (a full percentage point higher… very unlikely), i will stick there for a while.

Reply to this comment

avatar Ken

I have had better luck with reward checking accounts than online savings accounts. I opened a reward checking account at a local credit union two years ago when it was paying 6% APY. It’s now down to 3% APY. As a comparison, my EmigrantDirect savings account yield has fallen from 4.30% APY to 1.10% APY over that same period

Reply to this comment

avatar Investor Junkie

Good article and I agree, but I take it one step further…

I do chase yields, but at the moment it’s not with CDs or savings accounts. The return of capital (after inflation) is low with the traditionally “safe” investments. After all, I believe inflation was 2.7% last year (if you trust the government stat, some say it was much higher) That means if your money is earning less that that you are loosing in terms of real money.

As my ladder of CDs have matured I’m moving into other things like Lending Club, bonds (govt and corp), MLPs and stocks with dividends.

The things I choose have much higher returns but their risk (this part is the hardest and depends upon what you pick) are low.

Chasing after sub 4% returns are in general a waste of time and one of the reasons why I wrote my post on the subject:

http://investorjunkie.com/the-4-percent-rule-to-investing

As long as the FED keeps rates at zero percent and the recent FDIC rulings, expect little returns on your money. In fact, with the FDIC ruling has recently decreased rates, as I stated in a recent blog post.

More than likely you’ll loose money in real terms with these traditional safe investments.

Reply to this comment

avatar Evan

When or if you do the math, it is almost never worth it to rate chase for minor interest rate gains.

Lets say you have $10,000 in cash sitting in a high yield account earning 1.5% pre tax. Then you get an offer for 2%. The different between the two is $50 FOR THE YEAR (maybe a little more if we are going to compound it monthly as most accounts would) – and this is PRETAX. Lets say it is $100,000 then the difference is only $500 PRETAX leading to a gain of $350 (assuming an effecitve tax rate of 30%, which would probably be close if you have a 100K sitting in the bank).

Yes this adds up over time, but there is no guarantee that your bank won’t drop to the rate also to meet market conditions. And like Flexo said, this doesn’t even take into account the headaches and time associated with moving $10K or $100K. I remember when I was rate chasing back in 2007 when rates were HIGH, I had like 7 1099s to keep track of.

Reply to this comment

avatar RetirementInvestingToday

Well said, particularly the “The concept of “high-yield savings” is currently a joke.”. I recently just picked up on this here http://retirementinvestingtoday.blogspot.com/2010/02/home-for-cash.html

In the UK today I have been unable to find a savings account which is ‘clean’ and ‘no frills’ providing a return that after tax provides a return above inflation. I guess this is what happens when your Central Bank (The Bank of England) provides an Official Bank Rate to the market that is well below inflation.

Reply to this comment

avatar Harm

As much as I don’t like to berate the government for engaging in historically government-like behavior (buying votes, in this case), this is one of the clearest cases I can remember seeing of a war on savers and frugal people. People today have evidently forgotten (or never heard of) parables like ‘The ant and the grasshopper’ or ‘The little red hen’.

Reply to this comment

Leave a Comment

Connect with Facebook

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: