Today’s high-interest rate environment impacts more than just mortgages. The interest you can earn on savings accounts has also soared.
But you might be missing out on these massive gains.
If you haven’t yet, it’s time to review the interest rates on all your savings accounts and decide whether to switch banks to take advantage of rising interest rates.
Big Banks Haven’t Increased Interest Rates
America’s biggest banks haven’t raised their interest rates to match the Fed’s rising rates. They’re banking on customers’ reluctance to change, assuming most people don’t want to go through the hassle of switching banks to earn an extra few percentage points in interest.
They’re right, and it’s been costing consumers big time.
Bank of America offers a paltry .01% interest on its standard savings account. Diamond Honors Preferred Rewards Program members only see a tiny increase, up to .04%.
Wells Fargo offers similar rates, with the standard .01% on most accounts. Customers who link their checking and savings can earn more, but you must have over $100,000 in savings to earn just over 1%. Most normal folks will only earn .05%.
Bank of America and Wells Fargo offer some of the lowest interest rates in the industry, but other big banks like USAA offer similarly low rates.
To find out what your bank is paying, head to their website and explore their interest rates. You may be shocked to discover how low it is.
Switch Banks to Take Advantage of Rising Interest Rates
The big banks aren’t the only game in town. Many smaller banks, online banks, and credit unions pay far more.
To find the best rates, head to a site like Investopedia, which regularly publishes updated lists of banks paying great rates. Be careful – some of the offerings might be affiliate links or special bonuses. Read the fine print before making any decision.
You should also call your local credit union to see what they’re offering.
If you’re more comfortable with a big bank, consider Capital One. I moved my money from Bank of America to Capital One, which has a high-yield savings account currently paying 3.5%.
Full disclosure: I still use Bank of America for checking, and have a small emergency fund with them. Although I’m a customer of both banks, I don’t have any financial incentive to direct you to either. The link to Capital One above is not an affiliate link, and they did not sponsor this article in any way.
How Much Will You Make by Switching?
The amount of money you will earn by switching banks depends on how much money you have in savings, but even those with small accounts can make some money.
Customers with only $1000 will earn an extra $30 per year when they move their money from an account offering .01% APY to one offering 3%, not including interest from additional contributions.
Those with more in savings have even more to gain. A $10,000 initial investment will earn $300 over a year, while a $50,000 savings account will earn $1500.
To determine exactly how much money you will make by switching, head to Investor.gov, where you will find a handy compound interest calculator. Input your initial investment amount and your current interest rate to see what you will make by staying put, and compare that to what you’d make by switching.
The Power of Compound Interest
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The simple calculations above don’t tell the whole story. If you switch banks, you’ll earn even more due to the magic of compound interest.
Compound interest is interest earned on your initial investment plus the amount you already made in interest.
Most banks compound interest monthly, meaning you will start earning extra money off your interest after each month. In our example of a $10,000 initial deposit, you will earn approximately $25 in interest the first month at 3% APY.
With compound interest, you will earn even more the next month, even if you don’t make any additional deposits, because the interest is based on the new balance of $10,025, earning you an extra six cents.
That doesn’t seem like much, but it adds up over the years.
After five years, your investment will be worth $11616, over $100 more than the $11500 you would have with simple interest.
If you don’t switch banks and keep earning .04%, you’ll only have $10020.
Watch Interest Rates
Although we’re still currently in a high-interest rate environment, it’s crucial to read the fine print and understand how your new savings account works.
Many of the banks offer adjustable-rate savings accounts, meaning that as the Federal Reserve increases rates, they will increase the rates on their accounts.
However, keep in mind that the opposite is also true, and rates will go down if the Federal Reserve reverses course and decides to lower interest rates again.
Even though there’s a risk these banks will lower their rates, I’d rather move my money to reap the benefits of high interest rates while we have them, rather than keep my money in an account earning pennies on the dollar.
Money Market vs. Savings Accounts
Some banks may offer higher interest rates on money market accounts than on savings accounts. Remember that the FDIC (Federal Deposit Insurance Corporation) does not insure money market accounts.
The FDIC insures your money. If a bank goes belly up, FDIC insurance ensures consumers don’t lose all their savings. Each depositor is automatically insured for up to $250,000 per insured bank.
Money market accounts don’t have this insurance. If you deposit funds in a money market account and the bank fails, you may lose your deposit.
Consider a CD (Certificate of Deposit)
If you don’t think you will need your money in the next few months, you might consider opening a CD. CDs are FDIC-insured accounts you can open with a bank, but they aren’t as liquid as savings accounts.
With a CD, you lock up your money for a specific amount of time and typically pay a penalty if you need to withdraw early. Investopedia also keeps a running list of the highest-yield CDs available, some of which are over 4%. However, you must commit your money to the CD to access this rate.
CD lengths vary, as do interest rates. You can find CDs with timeframes as low as three months, but long-term CDS hold your money for up to five years.
Typically, the longer the term, the higher the interest rate, but some banks offer short-term high-interest-rate CDs.
Obstacles to Switching Banks
The biggest obstacle to moving your money is closing your old account. Most big banks don’t allow you to close an account online, so you need to call and speak to someone or visit one of their brick-and-mortar locations. Both options are giant hassles, but they are worth doing to earn more money over time.
If the thought of calling or visiting a bank is overwhelming, consider leaving the account open. If you have a no-fee savings account, you can leave a nominal amount of money in it and allow it to stay open.
Check your bank’s rules and fees to ensure leaving the account open won’t cost you. Some require minimum deposits for free savings or charge other fees for low balances.
Bottom Line: Move Your Money to Take Advantage of Rising Interest Rates
If your money is locked in a big bank savings account earning paltry interest, you need to move it. It takes about twenty minutes to open a new account with an online bank and set up a transfer from the existing bank.
The additional income you can make from interest is worth the time, even if you don’t have a lot of savings. And as a bonus, it will add up and compound over time, giving you even more free money.
Move your money today and reap the benefits of rising interest rates.