Should You Always Switch Banks in the Best Savings Rates?

You're making it a point to maximize your savings by keeping money in the top online savings account right now.

When it comes to the smartest place to keep your savings, that's the right idea.

But:

Is it necessary to jump to a new bank once you find that you are no longer getting the very best savings rate?

The switch is quite tempting.

Find out whether it is worth the effort to move your money on a regular basis.

Interest Rates Can Change Frequently

To set their savings rates, banks use a variety of factors to decide what they can offer to customers while still generating a profit.

And, the Federal Funds Rate, which is set by the Federal Reserve, is a big factor on how banks set their rates.

When the U.S. economy shifts momentum, the federal funds rate usually changes as well.

So:

If the economy does well, the federal funds rate usually rises. And, savings rates go up too.

If the economy is poor, the federal funds rate is typically set lower. And, savings rates are low.

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Brick and mortar vs. online banks

Once again:

Banks care about profit.

Therefore, they must factor in their expenses of operations when deciding how much they can give back to savings account customers.

Big national banks are notorious for offering terrible savings rates because they have to pay the costs of running physical branches. There are the extra expenses of property leasing, utilities, employee payrolls, insurances, and much more.

Online banks don't have to deal with most of these expenses. Rather, customers interact with their savings accounts entirely through online or mobile banking.

That's why online savings accounts tend to provide the top savings rates.

With that said:

There can be small differences in interest rates between competing online savings accounts.

Also, they can change even more often than savings rates at big banks.

For this reason, you may feel necessary to switch banks once your savings account is not longer at the top.

Pros of Switching

The benefits of switching savings accounts is obvious:

You’ll earn more interest.

Depending on the amount of money that you have in your account, earning a higher rate is nothing to sneeze at.

The interest rate that is paid on your savings account also plays a vital role in maintaining your savings accounts’ value. Over time, inflation will eat away at the purchasing power of your money. Inflation helps fight these effects.

Inflations, like interest rates, is expressed as a percentage.

So, if inflation is 3%, that means something that cost $1 at the start of the year will cost $1.03 at the end of the year. Inflation is the culprit behind products increasing on cost, or packages shrinking but staying at the same price.

The interest that you earn is deposited into your savings account, letting you fight off some of the effects of inflation.

If you have $1 in your account and earn no interest, then your dollar will lose 3% of its purchasing power if inflation is 3%.

If you earn 2% interest, your account’s balance will be at $1.02 at the end of the year. Your purchasing power will have only fallen by 1% in this case.

Cons of Moving Your Savings

There are two noteworthy downsides of switching accounts.

More work than it's worth

You are constantly on the lookout for banks with higher interest rates than your current bank account.

If you do find a better account, you actually have to go through the process of moving your money to the new account. It can take days to open a new bank account and to move money from your old bank.

You also have to close the old account.

Disrupting your financial flow

You also have to take into account the potential for disrupting the way that you manage your money.

If you’ve set up direct deposits or automatic payments, you’ll have to set those up again with your new bank.

If you forget to, you could face late payment fees and a drop in your credit, or a delay in receiving your paycheck.

When Is It Worth Switching Savings Accounts for Better Rates?

A new savings account makes sense for a few groups of people.

Large savings balances

If you have a lot of money in your savings account, a new savings account might make sense.

But when it comes to interest rates, the definition of “a lot of money” might differ from the average person’s.

If you are able to increase your interest rate by 0.10% APY, that means you’ll earn an extra $100 per year on a balance of $100,000.

Very few people have that much in the bank, and a $100 difference is probably not too much to them.

A $10,000 balance is a more reasonable amount to have saved, but a 0.10% APY jump only results in a $10 increase in interest payments for the year.

If you have a massive account balance, it might be worth the effort, but it isn’t for most people.

Calculate the annual difference in savings interest earnings to see if the switch will make a meaningful different to you.

Savers with a very low rate now

If you currently have an account with a brick and mortar banks, the odds are good that you can get a large increase in your interest rate by moving to an online savings account.

Increasing the rate by 1% or more wouldn’t be unheard of.

An interest rate increase of that size can make a sizable difference even for smaller balances. The same $10,000 balance that gets a $10 increase from a 0.10% APY increase would get a $100 increase from a 1.00% APY increase.

In the end, you have to decide how much money you would need to make for it to be worth the effort of changing banks.

Watch out:

Over time, some online savings accounts offer rates that could fall off significantly. The big jump in savings rate could make it worthwhile to switch.

Conclusion

All in all, constantly switching banks for the best savings account rate is generally not worth the effort.

Our advice is to open an account at an online bank with a history of being competitive when it comes to savings account interest rates.

You might not always be earning the best rate available, but you’ll always be close, and the difference won’t be more than a few dozen dollars a year.

The more important move is:

Maintain the habit of depositing into your savings consistently.