When Is It Savvy to Chase Higher Interest Rates for Your Deposits

by Kevin on April 2, 2013

In my last post we talked about the pros and cons to having multiple bank accounts.

But not everyone should have multiple bank accounts. Sometimes the juice isn’t worth the squeeze; keeping your financial life simple can allow you to focus on more profitable activities.

Yet for some, chasing higher deposit rates and opening a new account can be a savvy move.

How do you decide which one fits you?

How to Decide Whether Chasing Higher Interest Rates Makes Sense

There are two main issues to consider before you run off to chase the highest interest rate available:

  1. how much more interest income you will earn from the switch
  2. are you looking to move all of your deposits or just a subset of your cash on hand

Pick a Rate of Return That is Worth Your Time

You must decide what rate of return is worth the added complexity of managing a new account.

That rate of return could be a percentage on your deposits or the additional monthly interest you will earn by opening the new account.

I would recommend sticking with the actual amount of extra cash you can generate each month as an easy barometer to determine if the effort is worthwhile.

For example, if you are only going to get an extra 0.1% on your deposits worth $0.27 per month… then it doesn’t make sense to open a new account. Your time and energy are best spent elsewhere.

On the flip side if opening a new account with a higher rate will result in $10, $20, or $50 more per month in interest income then you know you are in the right territory. Who wouldn’t want an extra $20 per month?

Seeking New Rates for All Deposits or Just a Subset of Your Cash

Completely upending your entire financial life to move all of your deposits from one institution to another can be chaotic. You need new debit cards, new direct deposit forms filled out, and the patience to set all of your automatic bill pays up with the new banking information.

It may seem counterintuitive, but opening a new account for only a portion of your total deposits can often be easier than changing your whole financial system.

For example, let’s say you have a reward checking account with a $10,000 limit. It pays 2.5% APR or about $250 per year in interest. You’ve been doing a great job with your saving and you are near the max. After $10,000 the deposit rate drops to 0.25%, so adding in extra dollars doesn’t really help you that much.

In this case it can make sense to open up a new account elsewhere — an online savings account that pays 0.8% on all deposits or another reward checking program (if you can meet the additional requirements) that pays 2% on deposits up to $15,000.

The beauty of moving only some of your money is you can leave your normal financial processes in place. You can leave your bill pays in place, and only change a certain percentage of your direct deposit. The process is a lot more simple than changing everything all at the same time.

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