Is Chasing Rates Worth It?
One of the strategies often employed in order to ensure that cash is working as hard as it can is to chase savings account yields. In the current economic climate, it’s difficult to find truly “high yield” savings accounts. As a result, it can be tempting to chase yields, opening accounts wherever the return is the highest. While this can be a desirable strategy to earn a little bit more from your cash, it also has its drawbacks.
Drawbacks to Chasing Savings Account Yields
Before deciding on a course of action, it is important to review your options, and consider some of the possible drawbacks associated with yield chasing. Here are some things to take into consideration before you move your money:
Fees: In some cases, you might decide that you want to leave your old account open. This makes it easier to move your money back if the old account increases its yield, and starts paying you more again. Many high yield savings accounts right now don’t currently charge inactivity fees, or require a minimum balance to avoid a monthly fee.
However, that doesn’t mean that this will always be the case. Last year, one of my online savings accounts, a high yield at the time I opened it before the financial crisis, instituted a minimum balance requirement. I was rather shocked to be charge $9.75 for not having the minimum balance. This was my fault for not carefully reading the banking notices, but the fee was still pretty steep, I thought. I closed the account since I had moved most of my money anyway, and never forgot that lesson.
Before chasing yields, make sure you understand the fee structure on the account, and consider the consequences of leaving an account open after you have moved most of your cash elsewhere.
Lost earnings: When you move your money between high yield savings account, a bank transfer is often used. This means that your money will be “in transit” for a period of time. Some bank transfers only take a couple of days. Others might take longer – especially if you are initiating transfers over weekends or during holidays. As a result, you are losing earnings. Is the yield on the new account sufficiently high to make up for lost earnings? You won’t be earning interest while the funds are being moved, and that’s something to take into account.
Inaccessible funds: Additionally, it is worth considering that the money might not be accessible while it is being moved. Some high yield savings accounts impose a waiting period on deposits. This means that you have to wait a specified amount of time before you can withdraw the money again – even if the transfer from another bank has been completed. This means that you don’t have access to the funds during that time. In most cases, this is not a problem. But if you are moving your emergency fund around to get better yields, and an emergency crops up during this time, you might not have access to the money when you need it. A back-up plan, whether it is cash you keep on hand, a credit card or some other access to funds, might be in order so that you have what you need if the money in your high yield savings account is inaccessible.
Time: What is the worth of your time? Some high yield savings accounts are easy to open. You can accomplish the task in less than 5 minutes with relative ease. Other banks, though, require a little bit more. You might have to spend time filling out applications and even contacting customer service. Consider the value of your time, and how it stacks up to the increase in interest rates. If a bank has a frustrating opening process, and you are chasing a yield that is 1.35% instead of 1.15%, you need to decide whether or not the increase is worth your time.
You truly can put a monetary value on the time you spend. Many people also value convenience. Decide what value you place on convenience, and determine whether or not the time and hassle associated with the account is worth the slightly higher interest rate. Figure out the type of increase would make it worth it to you to deal with the inconvenience and time associated with opening a new account. Half a percentage point? A whole percentage point? Any higher yield at all? Only you can decide.
Also consider that it takes time to look for the highest rates online. Even though we try to make this process easy on you, you still have to devote some of your time to comparing accounts and yields if you are always going to be chasing the highest yield.
Loss of simplicity: For some people, simplicity is not so important in finances. Others, though, value uncluttered finances. It takes time to manage multiple accounts, and keep track of which accounts have inactivity fees, and which have minimum balances. If you are interested in reducing the number of financial accounts that you have, it might not be worth it to open yet another account in order to chase a higher yield. Of course, if you want to keep the number of accounts you have small, you could always close each old account as you open a new one.
There are also plenty of apps that can help you keep track of your accounts, if you are concerned about that. For some, the loss of simplicity is not a big deal, since there are plenty of organizational tools available to help mitigate some of the problems.
Whether or not chasing higher yields is worth it is something that only you can answer. However, it is worth it to consider some of the drawbacks associated with jumping from account to account. Decide what is most important to you, and what is most likely to help you reach your personal financial goals in the long run.