Is the savings account a good financial strategy? | Banking advice

Savings rate hunting is a strategy in which savers routinely use a tool such as Bankrate or MyBankTracker to determine which savings account offers the highest interest rate, and then regularly move their cash reserves to the account. the most profitable.

For example, if a rate hunter has $ 25,000 in savings in Bank A, which offers a 1.9% rate, and sees that Bank B is currently offering 2%, he will transfer his savings to Bank B. If a few weeks later the rate-chaser notices that Bank C is now offering 2.25%, it will move funds into that new bank. And so on.

For some savers, this strategy may become more and more tempting as interest rates continue to rise and consumers find that their current banking institution is not raising rates as quickly as another.

But does this strategy work? Experts say: not really.

“It’s something we don’t recommend,” says Jason Reposa, CEO and co-founder of MyBankTracker, a resource for consumers making banking and financial decisions. He describes himself as a “reformed rate hunter” who briefly employed this strategy before recognizing its pitfalls.

While transferring your savings from a low-interest account to a more generous one is usually a good decision to make rarely, it is risky to do it on a regular basis, experts say. “Everyone has to do it the first time,” says Greg McBride, chief financial analyst at Bankrate.com. “In other words, get your money out of the [account] that pays 0.1 percent and put it in a savings account that earns about 2 percent. ”

But after you’ve made that initial transition, try to stay on your savings, says McBride. “Yields are hard to come by unless interest rates go up by leaps and bounds, which they don’t,” he says.

Here’s one reason to limit your savings rate: “There are diminishing returns,” says McBride. While the difference between a return of 0.1% and a return of 2%, for example, on a savings account of $ 5,000 is large, the difference in interest between that $ 5,000 saved on a savings account. 2% versus 2.25% is much smaller: only $ 12 in the first year.

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Plus, there’s a good chance that if your bank already offers a fairly competitive rate, it will eventually catch up with its peers. “Find a bank that offers really competitive rates and stick to it because, as the rates go up, all the banks float higher and higher,” says Reposa.

Another quirk that can eat away at any interest rate gain results from the fact that changing bank accounts is rarely as easy or as quick as just hitting the “delete” button on your computer. “Banks are smart,” Reposa says. “They won’t let you go that easily.

You may need to pay a fee to close your account, lose a signup bonus that hasn’t been fully vested, or deal with a “customer loyalty” service that’s pressuring you to stay. Also, there is usually a time lag between when your money goes out of the old account and into the new one. During this time of limbo, your funds will earn no interest, which will reduce the gains you were hoping to make by moving your money. “You could easily have a week of downtime,” says McBride. “The lost interest in a week of downtime is going to take a while to recover. ”

Keep in mind that if you are very concerned about the amount of interest accruing on your savings, there are other ways to increase the amount of your money (although they usually make your funds less accessible). For example, a laddered certificate of deposit, or CD, strategy can help you earn higher interest rates while not locking in all of your money at once. In this scenario, you divide your funds among several CDs that mature at regular intervals. Directing money into a conservatively allocated Roth IRA will allow you to keep your capital available while potentially earning higher returns. Money market accounts may also pay higher rates, but they may have high minimum deposit levels and limited authorized transfers.

Maybe you could even take the hour or half hour you spent researching bank rates and use that to make some extra money. Said Reposa, “You better work next door.”


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Don F. Davis

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