Usefulness of Rate Chasing in the Last 3 Years
Looking back at internet savings accounts over the years, no banks or credit unions have been able to remain a rate leader for the long run. Some have been able to be a rate leader for several months, but their rates will eventually fall. If you're lucky, the rates will remain above "middle of the pack". There have been a few cases in which they became savings account duds. I reviewed some of these last year. One example of a dud is HSBC Online Savings Account. This account had a 6% APY promo back in 2007. Today the rate is only 0.40%.
Since there are no long-term rate leaders, if you want the best rates on an internet savings account, you need to plan to keep opening new accounts. I thought it would be interesting to look back at the rate history that we have collected over the last 3 years to see what would have been the best strategy. Instead of assuming someone would have switched to every new rate leader, I only assumed a switch no more than twice a year. I only switched when the new rate was significantly better. It turned out I did not have to switch that often. Below are my "ideal" picks that would have maximized rates over the last 3 years:
- Sep 2009: Alliant Credit Union Savings Account, 2.00% APY
- Nov 2010: Morrill and Janes Bank Elite Checking, 1.51% APY (Alliant was 1.35%)
- Aug 2011: UFB Direct Savings Account, 1.30% APY (MJ was 1.06%)
- Mar 2012: TIAA Direct Savings Account, 1.25% APY (UFB was 0.80%)
Average over 3 years: 1.48% APY
What if you had decided to just stick with Alliant Credit Union? Its savings account rate actually held up well until this year when its yield has fallen from 1.00% to 0.80%. So over the last 3 years, the average Alliant savings account yield was 1.33%.
I also looked at the average rates for two popular internet banks:
Ally Bank money market account 3-year average: 1.13% APY
ING DIRECT savings account 3-year average: 1.03% APY
Note, in my calculations I did not take into consideration the time it takes to transfer the money when no interest is earned. However, this time is rarely more than 2 days which is very small for a 3-year average.
Instead of keeping your money in a savings account, another option would have been opening a 3-year or 5-year CD in 2009. In September 2009, Melrose Credit Union had a 3.03% APY 3-year CD and a 3.91% APY 5-year CD. Ally Bank had a 2.70% APY 3-year CD and a 3.30% APY 5-year CD.
As you can see above, savings account rate chasing didn't help a lot over the last 3 years. It just added 15 basis points to the 3-year average. That's compared to if you had stuck with Alliant Credit Union. It helped a little more compared to if you had stuck with one of the popular internet banks.
For the most interest, CDs came out way ahead. Of course, that should be expected in a falling interest rate environment. Today's CD rates aren't much higher than savings account rates. The main benefit today with a CD is that you don't have to worry about falling rates until the CD matures.