Sometimes Saving Hurts! Declining Interest Rates Shouldn’t Lead to Rate Chasing

Sometimes Saving Hurts! Declining Interest Rates Shouldn’t Lead to Rate Chasing

I always thought one of the smartest things the Wife and I did when we got our wedding presents (read: cash) was to separate those gifts which we had to pay back (read: have the donor’s upcoming wedding), I even wrote a post it titled, “The Simplest Personal Finance Advice for Newlyweds.

In addtion to massively helping us with our wedding, The Wife’s parents gave us a very generous gift as well, which we put in a designated account aptly titled, “Parents’ Gift.”  We never added to this account but let it compound since July/August when we finally got our act together to get on the same page.  We did this so we could buy something special with it, and nothing has come up just yet.

At this point you should be thinking…Get to the point!

I have Watched my Interest Payments Decline Despite the Amount only Increasing with Compounding

I should mention that the account is an ING Account and that account’s APY has been reduced from about 3% down to its current 1.5%.

Month Interest Payment
8/31/08 $7.52
9/30/08 $7.30
10/31/08 $7.10
11/30/08 $6.73
12/31/08 $6.93
1/31/09 $6.28
2/28/09 $4.80
3/31/09 $4.10

My Bank has Decreased their Interest Rate, Should I Chase a higher Interest Rate?

In most cases NO! Can I say every case? absolutely not, but lets look at the math.

Lets say you have $20K ind the bank earning 1.5%  your pre-tax interest earnings would be 300 for the year.  Assuming we have a 20% tax rate we are looking at a total of $240for the year or about $20 bucks a month (ignoring compounding right now).  Lets say you then start chasing and find that random bank account that is earning 3%.  Your Pre-Tax interest earnings on the same $20,000 would be about $600.  Post taxes (20%) we are looking at $480.

Your next thought might be – My Journey that is doubling my money, whats wrong with you – I am chasing!

Well my responses would be:

  • How long is it going to take you to set up your new online high yield account? Probably not long
  • How long is it going to take you to change your entire money flow? An hour or two?
  • How long is it going to take you to get the money into the new account? Every single day it takes eats into your small profit margin.  My Money blog has a GREAT calculator showing you the cross over period.
  • Most Importantly – What guarantees do you have that once you hurdle the 3 issues above, that your new account won’t drop?  The answer is None!
    • If 9 out of 10 High Yield Online Accounts are offering between 1.5% and 2% do you really expect your 3% rate to keep up?  Its a legitimate issue.

What about you? Do you rate chase? Do you think I am nuts?

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