One common tactic I see on personal finance blogs is what I like to call “rate chasing.”
This tactic usually involves carefully watching the yield rates on savings accounts over at Bankrate.com (or a similar service), always signing up for one of the top accounts, and transferring their savings to that highest-yield bank.
For me, at least, I don’t find this tactic of much use at all. Here’s why.
The interest difference between a good bank’s interest rate and the top interest rate is pretty small. I took a look at Bankrate’s 50 newest additions to their database and sorted them by APY. The best rate found on that list was 1.40%; the median one (the one in the middle) was 0.95%. In other words, you’re gaining just 0.45% by choosing the top bank over a random bank.
That’s not much money. Let’s say you have $5,000 sitting around to play with in this fashion. The amount you’ll gain over the course of a year is $22.50 by rate hopping from the median bank above to the top bank above. And, in truth, it’s usually worse than that.
It takes time to locate the right offers. In order to keep up with these offers, you have to visit sites like Bankrate very regularly to find out what’s on top today. This is a small, continual drag on your time as you have to actually evaluate the top offers to make sure there’s not some sort of catch and to make sure that the rate was actually reported correctly to Bankrate.
It takes time to sign up for new accounts. If you do find a new offer, you have to sign up for that account. This can be an arduous process depending on their sign-up procedures, sometimes requiring mailing documents back and forth and waiting quite a while – another source of eating away at your valuable time.
The more accounts you have, the more identity risk concerns you have. While banks have amazingly strong security procedures, no security system is perfect. Each individual bank might have a 99.9% chance of keeping your personal data safe this year, but if you have fifty accounts out there, the chance of all of your accounts being safe this year drops to 95%. Identity theft is a real mess to clean up, so it’s worth your while to minimize the number of access points to your personal data.
Diminishing returns are in effect. Let’s say you’re at a bank offering 0.5% on your savings account. You can earn at least a little by hopping to an account earning 1.3%, right? That’s $80 extra per year on $10,000.
But once you’re in that 1.3% account, the benefit of the next leap is much smaller. You might dig for a while and find a 1.5% account, earning you $20 for the jump per year. The next time, you have to search a long while to get 1.6%, earning you $10 more.
My approach is simple. I usually encourage people to simply get an online savings account with a great customer service reputation and a reasonably competitive rate and just stick there without worrying about what other banks are doing with their rates.
Would I ever rate hop? Yes, in certain situations, I would rate hop. First, the interest rate competition in online banks would have to heat up. If you were seeing a top rate of 6% APY versus a median of 3%, then you’re talking about some significant interest. This is particularly true if you’re dealing with a large balance – say, $50,000 or more. 3% of $50,000 is $1,500 – that’s definitely worth your time.
But that doesn’t reflect the reality of the banking market and it also doesn’t reflect the day-to-day reality of most people. So, for now, I have to say that rate chasing is a pretty ineffective tactic for spinning more money out of your savings.