Interest Rate Chasing

In a user forum I frequent at (which, by the way, is a great place to get personal finance advice), a mom the other day asked a question that ties perfectly into my post a few days ago on where to keep your short term savings. In that post, I talked about the interest rate being one of the last factors you should consider when choosing a savings account. It’s much more important to consider the account’s convenience for you in terms of transferring and accessing your money.

Well, this mom apparently had been using ING for several years now, and in her words was very happy with them. But she was considering switching because she saw that two other banks were currently offering higher interest rates. My advice to her was what you would expect based on my recent post. If she was happy with ING, and their rate was still competitive (which it was), then there’s no reason to switch. It’s much more important to have a system you trust and that runs smoothly than to constantly be chasing the highest interest rate.

To illustrate my point, I compared the current interest rate at ING to the interest rates at the banks she was considering. Her rate at ING was 0.75% while the rates at the other two banks were 0.9% and 1%. So in the best case scenario, her rate would improve by 0.25%, which if she has $40,000 in savings, would add up to $100 over the course of an entire year. While $100 certainly isn’t nothing, there are several reasons why I don’t feel like this kind of effort is worth it.

First of all, she would have to go through the effort of learning the new bank’s website, opening a new account, transferring her money, cancelling her old automatic transactions, and setting up new automatic transactions. This likely isn’t a ton of effort, but it still must be done and there can always be complications that cause something to be more difficult than anticipated. There are also little things like getting two tax forms at the end of the year instead of one. Again, not incredibly difficult to handle, but still extra work.

Second, interest rates change constantly. While this other bank may have a better rate right now, she probably chose ING to begin with because they had a better rate at the time. If she went down this path, how much time was she going to spend checking interest rates in the future to see if her new bank had the absolute best current offer? At what point would she decide to switch again? In an almost perfect illustration of this point, the day after her post one of the banks she was considering lowered their interest rate by 0.06%. It was still higher than her current account, but the difference was now smaller. Would this cause her to change her mind? What if this had happened immediately after she had switched?

The big point here is that the interest rate is a very small part of your savings strategy. We like to keep things simple and focus on the big wins that get you the furthest ahead. It sounded like she already had a strong system with regular savings to a bank she “loved” and was very comfortable with. Why waste time worrying about getting an extra couple tenths of a percent of interest? Set that system on auto-pilot and get back to enjoying your life.

In money and in life, it’s important to know what’s important. Focus on the things that matter. Don’t stress the things that don’t.

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