The Times Herald (Norristown, PA)
Is chasing the highest savings rate worth it?
Last year, Peter Hsiao learned about high-yield savings accounts from his friend, and within a week, he had opened one. His rate was above 2%.
High-yield savings accounts pay interest rates far higher than the national average of 0.09% annual percentage yield. They’re generally offered by online-focused banks and credit unions.
Months later, Hsiao’s bank emailed him to say it had lowered his rate. “At that point, I didn’t think much of it,” says Hsiao, a digital marketing professional in Dallas.
But his rate kept falling. “When it dropped to 1.70% (from 1.90%), I thought maybe I should consider more options” and switch accounts, Hsiao says.
If getting the best rate made you choose an online savings account, should you keep chasing the highest rate — even if it means switching accounts again? Here’s how experts say you should think it through.
Know how your rate compares
If the rate on your savings account is close to the national average and you’re comfortable with an online bank, consider switching to a high-yield account. But if you’re earning a rate above 1% APY, should you opt for a higher one?
The short answer is probably no, but it depends.
Certified financial planner Dan Stous recommends doing some quick math to decide. Multiply your current rate by your savings balance to estimate your annual interest. Now do the same with the better rate.
The result might surprise you. The difference between the interest 2.00% and 1.50% will earn you on a balance of $10,000 over one year is only $50. And that’s before taxes.
For some, however, the difference may be significant. “The higher the balance in (your) account, the more reason there is to switch to a higher rate,” says Stous, director of financial planning at Flagstone Financial Management in Lincoln, Nebraska.
Weigh the pros and cons
The perk to chasing the highest savings rate is, of course, maximizing your interest earnings. But the reality is more complicated. Competitive rates change over time and usually follow a similar trend. If the Federal Reserve drops its rate, many banks drop theirs, too — so the bank with the highest rate might not stay that way for long.
Plus, every account you open takes some effort to maintain. And a more abstract downside to chasing rates is losing perspective.
“The habit of saving is more important than the rate,” says Natalie Slagle, CFP and founding partner at Fyooz Financial Planning in Rochester, Minnesota. “If you don’t have a great habit of saving, it doesn’t matter what the rate is.”
Saving money is a gradual effort. Regular contributions to your savings account, such as monthly transfers from your checking account, usually play a bigger role in growing your money than interest does.
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