Should You Always Chase the Best Savings Rates?

If you're reading about personal finance on the web or using any personal finance software, you're probably being bombarded by offers for high yield savings accounts. Should you chase the best savings account rates?

Yes and no. What are the benefits and drawbacks? And how do you decide?

How to Find the Best Savings Rates

When you're first opening your account, by all means seek out the best savings account rates. Compare savings account rates as a first pass at choosing a bank. For a checking account, there are more likely to be factors other than rates that can sway your choice--for instance, branch location or banking policies on overdrafts or maintenance fees. But for a savings account interest rates are probably your biggest deciding factor.

To find the best savings account rates, consider online banks. Online banks frequently offer savings rates that are much higher than their bricks-and-mortar competition because their operating costs are typically lower. (That's not always the case, of course--competitive rates can be offered by traditional bricks-and-mortar banks, but it's worth seriously considering an online savings account.) This difference in savings account rates isn't trivial. The spread between the highest savings rates on the market and an average rate can be many times the return.

If your current savings account is offering you pittance compared with the market leaders, switching to the high interest savings account seems pretty smart.

Should You Chase the Highest Savings Rates?

Don't bounce your savings around all the time, though. Even the highest savings rates are low compared to long-term average investment returns on stocks or many bonds. So for most people, it's not worth the time and hassle to run an exhaustive search on savings account rates every month.

It's possible you can earn and save more money doing other things, like working an extra hour at your job, or planning a weekly menu to keep our grocery bills low.

But if you let your savings languish too long in a low-interest account, you're passing up free money. So every so often it's useful to seek out the best savings account rates. The schedule may be twice a year, once per quarter, or once a year--whatever you're comfortable with.

More Options for High Savings Rates

If you have a large amount of cash savings (good for you!), you may get even better rates by opening a money market account or buying certificates of deposits (CDs). It depends on your goals for your money--how you want to access it and what you may need it for.

To get a high interest money market account, you may need a fairly large minimum opening deposit--possibly thousands of dollars. Concerned about security? A money market account is generally an FDIC-insured deposit account. It is not the same as a money market fund, which is an at-risk money market investment. If in doubt, verify with the bank if the funds are FDIC-insured.

Another good option is to buy a CD. These are investments that tie up your money for a fixed period of time but offer a guaranteed rate of return during that time. You'll give up interest and, in some cases, part of your principal to penalties if you withdraw the money early. But if you're saving for something long-term, CDs can be a great way to boost your savings rate while keeping your cash secure. Again, online banks may have better rates; the key is to shop around.

Stick to Your Savings Plan

Remember, however, that even a low savings account rate on some amount of savings is better than the best savings account rates on no savings! Keep putting money away on an automatic schedule, even if you're not getting the best savings rate. Don't use researching savings rates as an excuse to postpone actually building up your savings account.

Do compare savings account rates periodically, though, and move your savings to higher ground if you notice your interest rates sinking or staying stagnant too long.

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