Playing the Rate Chasing Game

by: Richard A. Anderson

Interest rates on savings accounts are on the decline. In the past few months a number of banks have lowered interest rates on savings accounts in anticipation of the Fed cutting interest rates in the future. This is because short-term interest rates typically follow the federal funds rate.

In June, a number of online banks, including Marcus (By Goldman Sachs) and Ally Bank, reduced the interest rate on savings accounts being offered to account holders. Marcus lowered their savings account interest rate from 2.25% to 2.15% and Ally lowered their savings account interest rate from 2.20% to 2.10%.

Less than one month after other online banks were lowering interest rates on their savings accounts, Betterment launched an online savings account that lets account holders earn up to 2.69% on their cash. Betterment EverydayTM Savings has no fees and no minimum balance, which is customary for most online savings accounts. There is one catch, however. The 2.69% interest rate is only available if you also join the waitlist for Betterment Everyday Checking, which is an online checking account Betterment will be launching at a future date. If you don’t want to be added to the waitlist, the interest rate is 2.43%.

When a company launches a new online savings account, they will typically offer an interest rate that is higher than its competitors. It does this because it will help them acquire new account holders and grow assets. But eventually a new savings account provider comes along and promises a higher rate. This will then prompt account holders to switch banks in order to take advantage of the higher interest rate.

Interest rate chasing is a common strategy to try to maximize the interest we earn on our savings accounts, but it can be a tedious process. It requires opening a new account, which is a much smoother and shorter process with an online bank because it doesn’t require actual signatures or leaving the comfort of your home. It also means updating any automated savings goals and linking your new account to your existing checking and/or investment accounts.

The biggest reason I am not a fan of interest rate chasing is because there often isn’t enough meat on the bone to warrant the extra work.

For example, say you were going to switch from Marcus’ savings account with an interest rate of 2.15% to Betterment EverydayTM Savings’ with an interest rate of 2.69%. This is a rate differential of 0.54%. For every $1,000 this amounts to an extra $5.40 per year.

If you have a small savings account, the hassle of opening a new account and all that comes with it is probably not worth the meager interest rate difference. However, if you have a large balance the interest rate difference could be meaningful.

There is one group of people who should be thinking above making a move with their savings account, but it has nothing to do with chasing interest rates. As of the end of June, there is almost $8.1 trillion in savings deposits at commercial banks. The national average savings account interest rate is 0.10%. Savings account holders are leaving at least $16 million per year on the table by not using online savings accounts.

If you currently have a savings account at a brick and mortar banking earning less than 2%, you should move your money to an online savings account ASAP. The most important move you can make is going from earning basically nothing to earning something.

At HIGHLAND, we have partnered with Flourish Cash to provide our clients with access to an online savings account with an interest rate of 2.20%. Flourish Cash has no account fees or minimums and provides FDIC coverage of up to $2 million for an individual and $8 million for a couple.

If you have any questions about selecting the best banking solutions for your needs, or for more information on Flourish Cash, please contact a member of the HIGHLAND team.

Author’s Bio

Richard A. Anderson is a portfolio analyst at HIGHLAND Financial Advisors, LLC based out of Wayne, NJ. HIGHLAND Financial Advisors, LLC is a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management services to help clients focus on what matters most to them.

Richard graduated from Ramapo College of New Jersey where he earned a Bachelor of Science degree in Business Administration with a concentration in Finance. Richard joined the firm in June 2013 and is responsible for assisting HIGHLAND’s Wealth Advisors in developing portfolios to help individuals, families, and institutions reach their financial goals. He is a Chartered Financial Analyst (CFA) charterholder and member of CFA Society New York. For more of Rich’s thoughts on the markets and sports, follow him on Twitter and connect with him on LinkedIn.