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Don’t Rate Chase High Yield Savings Accounts

Posted By Jim On 01/23/2008 @ 2:20 pm In Banking | 14 Comments

The Fed just dropped the federal funds rates, a ton of banks recently dropped their high yield rates on their high yield savings accounts [3], 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 [4] 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.


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[3] high yield savings accounts: http://www.bargaineering.com/articles/top-5-online-banks-savings-or-checking-accounts.html

[4] ladder my CDs: http://www.bargaineering.com/articles/laddered-cdmmc-safe-invesment-plan.html

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