My Check-Up: What to do with my Savings
Continuing my financial check-up, its time to decide what to do with my savings. I think using an online savings account is almost a no-brainier — online savings accounts offer significantly higher interest rates (right now around 3.0 - 3.5% APY), are easy to open and maintain, and by-and-large are fee-free, safe, and liquid. I have been very happy with my high-yield online savings account for years, but lately I have been wondering if I should move account elsewhere in pursuit of better rates.
My Situation
Several years ago I opened up my first online savings account at Emigrant Direct, and that is where the majority of my savings has been ever since. When I opened up the account, Emigrant Direct was one of the few major online savings accounts available, and their rates were very competitive. These days, however, there are many more banks offering high-yield online savings accounts, and Emigrant Direct has consistently been about 0.5% behind the highest rates.
My thoughts on Emigrant Direct? By and large, I have been happy with them. Honestly, I have almost nothing to say about them, which is exactly they way it should be with an online savings account — the website is visually and functionally simple and easy to use. Since I try not to touch my savings often, I don’t require many fancy features. Except for a few kinks when they updated their site a year or two ago, I have had almost no problems with their website. Transfers to or from my Bank of America checking are also quick, which is nice. Currently they offer 3.0% APY.
I also have an ING Direct savings account which I opened a year ago, and while I have not moved the majority of my savings over (since they are currently offering the same 3.0% APY as Emigrant Direct), I have been impressed with how easy, responsive, and friendly the ING Direct website is — it really is a great choice for those that might be easily intimidated.
The Question: To Rate Chase or Not To Rate Chase
The difficult question with online banks, though, is whether or not it is worthwhile to constantly move your money around to chase the highest interest rate. The rates these banks offer fluctuate, especially when the Federal Reserve adjusts interest rates, and they are never guaranteed at any given level. While HSBC Direct may offer one of the highest rates today, tomorrow another online bank might. In my own experience, I have witnessed Emigrant Direct slip from being a rate-leader to a rate-follower. So should you stick with a bank that is no longer out front?
Some say you should always chase the highest interest rate. Over at Money Blue Book, Raymond described how he actively manages his bank accounts to maximize interest earnings. This is not nearly as difficult as it sounds, as most online savings accounts will transfer money for free electronically within a few days; furthermore, account aggregation services like Yodlee and Mint allow you to monitor all of your accounts in one place. Combine that with the fact that there is virtually no cost to opening as many online savings accounts as you want, and rate chasing no longer seems that crazy.
On the other hand, some suggest it is more complicated. J.D. over at Get Rich Slowly suggests that customer service and other factors are worth considering in addition to interest rates. He points to the example of a specific bank that many of his readers signed up with and later were upset with over its poor customer service. While that is certainly the exception rather than the rule, it does suggest that other considerations might be worthwhile. Again, it seems that features like customer service and account fees, etc. are critical to consider, but may not be enough to whittle down to a final choice.
Beyond other considerations, some suggest that, from a numbers perspective, the money gain is often not there. Jim over at Blueprint for Financial Prosperity stresses that the amount of money you are chasing is often just not significant enough to make it worthwhile when you stop and look at how much money you stand to gain in interest combined with any opportunity costs in the transfer. For one thing, rates are not guaranteed — they can change at any time, and different banks change by different amounts. Combine that with the fact that every time you make a transfer, you lose a day or two worth of interest, it suddenly becomes far less enticing.
Consider this: The difference between ING Direct (3.0% APY right now) and HSBC Direct (3.5% APY right now) is 0.5% APY. That means, for every $1,000 in savings, the difference between what you would earn at HSBC and ING Direct is $5. And that is before you take into account any taxes. That is a pretty small amount, even if you have thousands of dollars in your account.
My Decision
So back to my own situation. For a while now, Emigrant Direct has not been offering the highest rate, and I have to admit that it has been bothering me. But as I have sat down and evaluated the situation, the interest I am losing out on is just not that great at all – $5 for every $1,000.
As a result, I have decided not to open a new account at HSBC or FNBO Direct for now. It is just not worth the few dollars I would gain. I have, however, decided to move more of my money over to ING Direct from Emigrant Direct, which in addition to offering the same interest rate and a very intuitive webpage, also makes it incredibly easy to set up subaccounts for targeted savings. I am not going to close my Emigrant Direct account, as they have been good to me, but I am going to change my focus. However, if ING Direct falls even further behind the rate leader, I may consider moving my savings in the future.
I think with all of this discussion of rate chasing, there is really something to be said for simplicity - the simplicity of not having to constantly move money around. One of my goals for the last few weeks has been to cut out a lot of my extra bank accounts in favor of a more simplified system, and I think I am far happier as a result.
So what do you think? Do you chase interest rates?
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