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Don’t Chase High Rates for Savings Accounts

Take the Money and RUN by southtyrolean on Flickr Since the moment there was more than one high-yield online savings account to choose from, people have been comparing these accounts based on the interest rate. When I first got a high yield savings account, it was between ING Direct at 4.75% and Emigrant Direct at 5.05%. Oh, how I miss 2006… now the rates are clawing at each other at much lower levels. But the debate still rages on…

“Why would you go with XXX Bank when YYY Bank’s rate is .50% higher! You could be getting a better return on your money!”

At first, I fell for this type of thinking, just like everyone else. I went with the slightly higher rate at Emigrant Direct. And then couldn’t get my account verified for months! The tiny amount of extra interest I would have earned was wiped out.

If you look at the number of high yield savings accounts I have now, you’d think I was still a rate-chaser. I mean, I’ve got accounts at Emigrant Direct, ING Direct (high-yield checking and four savings sub-accounts), E*TRADE Bank, Citibank, and even a SmartyPig account.

Actually, the reason I have all of these accounts is not because I’m a rate chaser. It’s because for the bulk of 2007, I was a bonus chaser. If your bank offered a bonus of $25 or more, there was a good chance I took advantage of it and opened an account! (Assuming your account was fee-free and had no minimums.) Of course, 2007 was a different time, economically, and very few banks are still offering bonuses for opening an account. ING Direct still has the same bonus referral system it’s had this whole time, though.

I can’t recommend that you be a bonus chaser like me. First of all, it’s much harder to do these days. Secondly, it results in a lot of open accounts. This can be a security risk if you don’t carefully monitor them all. I use Yodlee and Mint to monitor all of my accounts and make sure there’s no fraudulent activity. There’s other software and web sites you could use, too. No matter what, you’ve got to have a system for tracking your open accounts.

Why keep all of those accounts open? Why not just close the accounts that have poor customer service, or I’m not happy with for any reason? Well, I’ve never had a major problem with any of my accounts. Secondly, I use all of those open accounts to my advantage!

Savings Rebalancing

The idea of “savings rebalancing” is an extension of my Savings Snowball. I use all of the different accounts as “buckets” for my savings goals. One for my brother’s Florida wedding, one for a new car fund, one for an emergency fund… there’s a lot of them! For that reason alone, having multiple accounts is just nice. With one account for everything, I’d have to keep track of how much money was in each goal on paper. With multiple accounts, I can just set up automatic transfers out of my checking account, and I can easily see how much is in each goal.

Rebalancing comes into play when I establish a new savings goal. It actually happens more often than you would think. A few months ago I closed my “textbooks” savings when I graduated, and started my “Brother’s Wedding” and “Charity Fund” savings goals. With this big shift in goals, it was time to look at my accounts and figure out the best place for each goal.

For the goal that will have the most money in it (currently, my car fund), I picked the account that was giving the highest interest rate at the time of rebalancing (SmartyPig). For the emergency fund it was more important that the money be easily accessible than it get a high rate, so it stayed at ING direct. My charity fund took over the hole that was left in Citibank when I moved my car fund over to Citibank.

You don’t have to shift a lot of money around to rebalance. My car fund had $117 in it when I moved it from Citibank to SmartyPig. But I also had a $50 SmartyPig gift card, so there was already money in that account. That meant I only needed to move $67. But, instead of moving it from one savings account to the other, I just put $67 in SmartyPig from my checking account. That brought the balance up to what it should be, and I just counted the $67 as a contribution to my charity fund.

So what does rebalancing do for me?

  • Ensures that I’m getting a high rate on the largest chunk of my savings.
  • Forces me to reevaluate my savings snowball.
  • Keeps me sane and out of the rate chase debate!

Savings rebalancing is best if you’ve got a real Type-A personality, which most rate-chasers do! I highly recommend it if you have several accounts open because of rate chasing. And if you don’t have one, I highly recommend an account with ING Direct. Out of all of the accounts I have, their customer service and ease of use makes them my favorite!

6 responses to “Don’t Chase High Rates for Savings Accounts”

  1. Chris

    I like your ideas on re-balancing, but you in essence chased multiple offers to get the desired goals of using multiple accounts for your various goals.

    You could have one account but segment it in a spreadsheet or there is software like Quicken that allows you create categories for your accounts. The danger there is it looks like you have more money than you do and you may jump the gone when it comes to making the purchases that the goals have been set-up for.

  2. Chris

    I see you don’t like Keywords in the name. :O)

    I’ll behave from here on out. In my first comment, I had a purpose for doing it. The blog post it is linked to is something that has bothered me for years and I’m on a little “rampage” trying to get the right people to take note. Thanks for allowing the comment to stand.

    BTW, taking advantages of the bonuses to push down the balances seems reasonable. Were there enough of them at the time to make a serious dent?

    Have a great day.
    cd :O)

  3. Roger

    Hum, not bad, the way your use of multiple accounts worked out. Having buckets of money for different goals is a decent plan, one I follow myself. Good stuff, and I hope that you managed to gain plenty of bonuses by opening so many accounts.

  4. John Hunter

    I agree. It isn’t worth the bother to chase small gains. Most important to me is good service over the long term. Then, within that category, I look for good long term deals. I am very skeptical of bonuses, fake teaser rates (or fake teaser monthly fees for things like cable TV…). If you offer a good value be honest and advertise that. If you are so embarrassed that you advertise something other than your real long term offer I figure that is a sign you are not proud of what you will really offer me as a long term customer.

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