Money To Live

August 11, 2008

Rate Chasing

Filed under: banks,savings — by moneytolive @ 5:00 am
Tags: , ,

If you want the best rate on your savings, bankrate.com tells you the current banks that pay the highest interest rates. Since the listing changes daily, to constantly get the highest rates, you have to transfer your money between banks regularly.

Some people “chase rates” by switching money between any number of savings accounts in order to always get the highest yield. I definitely want my savings earning interest, but I do not want to deal with the hassle of constantly switching between banks. That is why I use ING Direct for my savings (and also my checking account, but that’s another story). ING typically does not offer the highest savings rate, but it is consistently near the top. I have not had a single problem since opening an account (in 2005).

First of all, Why do interest rates change?

  • The Fed changes the discount rate (which is what a bank pays to borrow cash overnight from the Federal Reserve). Your bank’s rates could go up or down and will usually be in the same direction the Fed’s change.
    Why the Fed changes the discount rate is a very complicated question. Generally, the Fed changes the rate to influence the economy, by spurring it on in a recession or taming inflation in times of growth.
  • The bank wants new customers. Rates typically go down.
  • The bank wants to make more money. Rates could go down or stay the same.

My reasons for not chasing rates essentially come down to simplicity (or you could call it laziness).

  • It takes my time to check the current rates, open a new account, and transfer money.
  • The potential gain is small. Let’s say by constantly switching to the highest yielding bank you can stay 0.5% above ING’s rate. Annually, this gives you an extra $5 per $1,000 invested.
  • This results in extra paperwork when filing taxes. Each bank account that yields more than $10 in interest will send you a 1099, and that income needs to be included in your taxes (either entering another form in Turbo Tax or attaching another 1099 if you submit by paper)

I recommend checking your rates about once a year and comparing them to the national averages and the highest paid rates. If you are earning near the top and are otherwise happy with the bank, keep your money where it is.

When do you switch banks for a higher interest rate?

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1 Comment »

  1. I heart ING!

    Comment by Amie — August 12, 2008 @ 3:25 pm |Reply


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