Almost eighteen months ago, I wrote a post listing the best on-line high-yield savings accounts. Over 750 comments later, the discussion is still going strong. Kyle recently chimed in with a question many people have:

In January, before I started reading Get Rich Slowly, I opened a high-yield investor checking account with Charles Schwab. The interest rate was around 3.75%, but it’s fallen to 2% now. After starting to read your site, I decided to open an online savings account. I chose ING Direct because a friend had an account and could get me the $25 bonus.

I’m wondering if I should shop around to get better rates without sacrificing the relative ease of Schwab and ING Direct. There are accounts with higher rates, and I’m wondering if it’s worthwhile to switch.

Moving from bank-to-bank (or “rate chasing“, as it’s known) can make sense if you have enormous balances. I have about $8,000 in my high-yield accounts. Over the course of a year, that’s going to earn me $240 at 3%. It would earn me $280 at 3.5%. Should I try for that extra half a percent? It depends.

Fluctuating rates
Since I began tracking bank rates at my high-yield savings, interest rates have climbed and fallen. Each time there’s movement in the market, banks shift positions on the list of highest rates.

Right now, for example, Everbank is offering a promotion where they give 3.01%, but only for the first 3 months. After that, the rate drops to 2.15% APY but only for the first year, up to $50k. So, even if Everbank has the best rate now, they may not be the best rate tomorrow.

You need to ask yourself if it’s worth your time to always be looking for the best rate.

Customer service
There’s more to banking than just interest rates. Savings Square is a new high yield account that made some noise earlier this year. Several GRS readers signed up. But then these readers complained to me.

In fact, one reader sent me a l-o-n-g diatribe about her experience opening an account at Savings Square. After this reader jumped through hoops to chase the high interest rate, Savings Square lowered the yield to be the same as ING Direct, the bank the reader had left. She was exasperated. She was especially frustrated because the Savings Square signup process had been so laborious.

To me — but not to everyone — customer service and ease of use are very important. But how important? $10 a year? $100 a year? $1,000 a year? Only you can answer that.

Doing the numbers
Finally, there’s the question of how much difference half a percent makes. If you have $800 in an account, 0.50% is $4 a year. If you have $8,000 in the account, it’s $40 a year. But if you have $800,000 in the account, it’s $4,000 a year. Obviously, that’s a big difference.

If I had $800,000 in a high-yield account, I might chase rates. But I don’t. I have $8,000. Because of this, I’m content to maintain my account at ING Direct.

Recommendation
If you’re just starting out, it makes sense to sign up with a bank that earns high customer satisfaction marks and offers high interest rates. (The online banks thread is a great place to research this subject. There are hundreds of comments with reader feedback.) Some of the top-yielding banks right now include:

  • HSBC Direct is offering 3.01%, but it’s a temporary rate until September 15th. (Admittedly, they keep extending the length of this temporary period, but the rate is still set to fall.) 1.55% as of May 2009!
  • WT Direct offers 1.76% APY but your interest rate drops if you don’t have a $10,000 balance after 60 days. I don’t have $10,000 in savings yet, so this isn’t an option for me. (Soon! Soon!)
  • E*TRADE Bank offers 0.95% APY, but I hear mixed reviews of them. My cousin loves them, but some GRS readers have had problems.

Notice that each of these accounts has a drawback. I’m willing to host my savings account at a bank with a slightly lower rate because (a) I get great service and a great user interface and (b) my balance is small enough that it doesn’t cost much to sacrifice half a point of interest.

What about you? Do you have a high-yield savings account? What are the most important considerations for you? Would you switch banks over half a percent of interest? Over one percent? Would it make a difference if you had a larger or smaller balance? Are there any other tips you can offer Kyle as he shops for online banks?


This article is about Choices, Money Hacks, Savings  Friday, 1st August 2008 (by J.D. Roth)