Don’t Rate Chase High Yield Savings Accounts

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The Fed just dropped the federal funds rates, a ton of banks recently dropped their high yield rates on their high yield savings accounts, and now you’re thinking about switching banks, right? Well … don’t be tempted. There are two huge reasons why rate chasing is a foolish endeavor:

  • Rates are not guaranteed.
  • You lose interest in the interim.

(Case in point, when I opened an E*Trade account three weeks ago, the rate was 5.05% – it’s only 4.40% now. That’s a drop of 0.65%!)

Rates Aren’t Guaranteed

Just because you signed up for a 5.05% APY savings account at E*Trade doesn’t mean that the rate will stay there for any period of time. These bank accounts aren’t CDs and the rate can drop just as easily as you can transfer your funds. While it’s tempting to swap your bank account for another one with a higher rate, the higher rate might disappear in a few days simply because that bank was slow to update their rates! Some banks anticipated the Fed rate drop and lowered their rates, other banks will wait until after the Fed move to shift their rates, you have no guarantee which one your prospective bank is. Banks can and will lower rates to as low as they are able to get away with so chasing is never as valuable as you think it is.

Interest Lost

When you transfer the funds between two accounts, you lose the interest that would’ve been earned during that time. The transfer usually will take about a week so that’s 1/52th of your interest gone. While that may not seem like a lot, you start moving your funds around every few months and that 1/52th becomes 1/26th, then 1/13th… you get the picture.

So, let’s say you still want to rate chase, is there anything you can do to ensure the rates stick? No, but you can do the next best thing, start analyzing their CD rates and consider putting some funds into those. What I do at ING is ladder my CDs in $500-$1000 increments such that I create a psuedo-liquid situation (click thru for an explanation of CD laddering). The laddering gives me some downside protection against a big rate drop and you should be looking for something like that. For example, right now I have several CDs in the 4.90% to 5.25% range – the ING rate is currently 4.1%.

So if you want to chase, look for banks that will let you take a no-minimum CD with a decent rate so you can give yourself some protection against a drop.

{ 14 comments, please add your thoughts now! }

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14 Responses to “Don’t Rate Chase High Yield Savings Accounts”

  1. RacerX says:

    Great post.

    Rates aren’t going up for awhile. I bet we even have another cut this month at the 29th meeting.

  2. Right now, seems like the best way to get a great rate of return on your cash is to pay off high interest debt!

  3. Lily says:

    Great advice!

    People should also be careful if they open any accounts with a minimum daily average balance requirement. They may have to pay extra fees if they move all their money out to chase a better rate.

  4. AJ says:

    One of the reasons I’ve stayed with ING over the years is they have no fees and no minimums. May not have the highest of high rates but their customer service is excellent.

    My Current APY @ING: 3.65%

  5. Job Saver says:

    Good work. I think as the job market begins to squeeze, people will need to save money and this kind of advice is invaluable. Cheers

  6. Tim says:

    yeah, with the way things are, rates are changing too quickly.

  7. King of Debt says:

    You’re right, these rates are changing way too fast. It would be way too complicated to try and chase the rates.

  8. Frank says:

    5.05 – 4.40 = .65

  9. jim says:

    Geeze that was bad, please pretend that never happened.

  10. saladdin says:

    Try this out Jim, as a rate chase calculator.



  11. z3trkrnr says:

    The best is to find a High Yield savings account and just park your money.
    I love my ING Direct account. It doesn’t have the highest APY but you won’t get better customer service anywhere else. Also, their online interface is just easy and awesome.
    I also do still have many referral links left if anyone would like to contact me to receive a link (either for an orange savings account or the electric orange checking/savings account) to sign up for an account. You receive $25 for signing up with a min. of $250 or more. A nice little bonus for nothing! Just shoot me an e-mail @ and I’ll send the link right back to you!

  12. Bob says:

    5.05 – 3.45 = 1.6

  13. Regor says:

    I love these savings accounts, I started with ING then switched to Emigrant. Does anyone predict problems with the safety of high yield savings accounts (other than less than stellar rates)…

    Does FDIC = bulletproof?

  14. saladdin says:

    Follow the money limit restrictions and FDIC will cover you.

    I love how 3% is called “less than stellar rates” when my first savings account was 0.5%.


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