Chasing Savings Rates in a Falling Rate Environment is A Losing Strategy

I often speak to bank executives who are pursuing capital with the goal of bringing in large deposit volumes and who are setting their rate strategies. These folks will tell me that they are trying to avoid “fast cash”. In other words, they do not want depositors that will come only for the rate and leave as soon as they find a higher rate. My advice to these bankers is always that if they want their asset base to be more permanent, they should offer competitive CD rates as well as savings rates, and they should keep their savings rate competitive and not launch a huge campaign to advertise a great rate, only to later quietly lower it to a rate that is not competitive.

My advice to depositors is likewise pretty simple. If you have an online savings account or a local savings account that is not competitive or no longer competitive, you should consider moving your assets to one that is. By regularly checking online rates and local rates at BestCashCow.com, you can ensure that your money is compounding at the highest rate available over time.

In any environment, depositors need to consider the opportunity costs of moving cash from one savings account to another. You will always loose a day or two of interest getting your money out of an account through an ACH transfer, and may lose more if ACH is not available. Then your money may sit at a hub account paying only nominal interest that you hold (like Morgan Stanley or Merrill or Bank of America or Wells Fargo) for a day or two before you can get it transferred again. And, then by the time your money is earning the higher rate, it may no longer be the higher rate.

In a declining rate environment – like the current one – the opportunity costs of moving cash from one account to another may be lower, but you run the risk that the bank that you are moving your money to will shortly be lowering its rates too.

This, in fact, is what happened to me. I held a maturing one-year CD at a major online bank at 2.85% APY. Rather than allow the CD to renew at 2.00% or to keep the principal at that bank earning 1.70%, I decided to move it to a local bank near me that was still paying 2.00% APY on savings. However, by the time I finally got the money deposited in that bank, it had actually lowered its rate below 1.70%, causing me to have to move the money back to the bank where I had held the CD. In the end, I had lost almost a week’s worth of interest.

This strategy, of course, makes sense if you are chasing a higher CD rate and have locked in a rate by beginning the application process before you begin to transfer your money, but it just does not make sense for money that you have allocated to savings only. Read my recent article discussing whether to lock money in short-term CDs here.

The moral of the story here is that you cannot fight falling savings rates, but you sure can lose interest trying.

Think very carefully about your opportunity costs and about the direction of rates generally before you chase a few more basis points at another bank. You are often better off leaving your money where it is.