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.
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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?
Updated September 24, 2015 and originally published March 3, 2010.