When it comes to having easy access to your savings, keeping money in a bank account can make sense – especially if you will need the funds in the next one to five years. Savings account interest rates today are the highest they have been since the 1990s. To earn these rates, however, you need to have your money in the right place.
Where you have your savings account makes a difference on the interest rate you are earning. Generally, you will earn less at a brick-and-mortar bank than at an online bank. Why? It all comes down to the bank’s costs and profit. So, Should You Switch Savings Accounts For A Higher Interest Rate?
Brick-and-Mortar and Online Banks
All banks need to factor in operational expenses when determining their interest rates. Brick-and-mortar banks typically offer low savings rates because they have significantly more overhead (including property maintenance, utilities, employee payroll, insurance, etc.) than online banks. This means they have less profit to work with when setting their interest rates.
Online banks, on the other hand, don’t have many of these expenses. Customers interact with their savings accounts entirely through online or mobile banking, keeping costs extremely low and giving these banks the ability to provide top interest rates.
Other economic forces, including the Federal Funds Rate also impact interest rates. Set by the Federal Reserve, the Federal Funds Rate is an important factor in how banks set their interest rates. Typically, the higher the rate, the more expensive it is to borrow money (loans, credit card rates, etc.). At the same time, interest rates on interest-bearing accounts increase.
What is your current savings account interest rate? Should you move your money to earn a higher rate? Here are a few things you may want to consider before jumping ship and heading to a new bank.
When It Make Sense to Switch Savings Accounts
- You’ll Earn A Higher Savings Rate
Depending on the amount of money you hold in your savings account, a significant jump in your savings rate can make the move more than worth it. Over time, inflation will erode the purchasing power of the money you hold in savings. Thus, the higher the interest rate, the more likely you can negate those effects.
- You Have a Large Savings Balance
The higher the balance in your savings account, the more interest you will earn on that money. If you typically keep a large balance in a savings account, having a higher interest rate might make sense. If you generally maintain lower balances, it may not be worth the effort to pursue a high interest rate as you wouldn’t reap much of a reward for switching.
- You Have a Very Low Interest Rate Now
Has your money been sitting in a brick-and-mortar bank’s savings account for several years? Chances are, you are not earning the best interest rate. If you move to an online savings account, you could see a significant increase in interest earnings.
Cons to Switching Savings Accounts
- More Work Than It’s Worth
Once you find a bank that offers a substantially higher interest rate, there is still the process of actually moving your money to the new account. It can take days to open a new account and, while much of the process is relatively smooth and easy, it may be more work than you’re willing to deal with. You’ll also have to handle closing the old account.
- Disrupting Your Money Management Flow
Don’t forget to consider the disruption and extra work you may encounter when opening a new account. If you have direct deposits or automatic payments set up through your current savings account, you’ll have to set those up again with your new bank. This could be an easy process once you get going, but if you forget, you could potentially face late payment fees or a delay in receiving money being automatically deposited into your savings account.
- Not Knowing Specific Requirements
While it is only a con if you don’t do your research, it can come as a big shock if you aren’t on board with the new account requirements. Some savings accounts require a minimum balance to take advantage of a higher interest rate. What is the minimum account balance you need to maintain to avoid fees? Some banks may charge fees that you aren’t paying at your current institution. Are there restrictions on the number of withdrawals or transfers you can make each month? If you can’t meet the new savings account requirements, switching may be more trouble than it’s worth.
- Teaser Rates
The savings interest rate may change after a certain amount of time; the large initial savings rate may have only been a “teaser” to get you to switch banks. Make sure you know all the details and remember that interest rates can change depending on many factors in the economy.
- Ease of Access and Your Comfort Level
It may be more difficult to bank online, especially if you are not comfortable with computers, don’t use a banking app, or prefer to interact face-to-face with your bankers.
If you want some concrete answers on how much a higher interest will earn you in dollars, give this comparison tool a try:
https://www.mybanktracker.com/savings/calculator
Online banks will almost always give you the best return with savings interest rates. If you are currently set up at a brick-and-mortar bank with a low interest rate, you may want to consider moving. Switching banks, however, is a personal decision that you need to weigh for your own circumstances. Should You Switch Savings Accounts For A Higher Interest Rate? Know your options and the new bank’s account requirements before you jump to a new savings account.
This blog is published to provide you with general information only and is not intended to provide specific or comprehensive advice. Money Care, LLC encourages individuals to seek advice from competent professionals when appropriate.
