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RISING INTEREST RATES are impacting everyone. The Federal Reserve has raised short-term rates at its last five meetings. It hiked interest rates 0.75 percentage point at its September meeting, the third time this year it’s raised rates by that amount. Bankrate reports that current projections see the Fed boosting rates by another 1.25 percentage points before year-end.
These increases affect what consumers pay for mortgages, car loans and credit card debt. As I write this, Bankrate says the current average rate for a 30-year fixed-rate mortgage is 7.06%. This is almost half a percentage point higher than a week ago.
With all these rates rising, why aren’t my bank accounts following this meteoric path? Capital One 360 Savings is currently paying 2.2%, but its checking account still pays just 0.1%. That 0.1% is also typical for savings accounts from big banks, according to Bankrate. Meanwhile, one-year CDs are 3.25% and five-year CDs are 3.5%. Vanguard Federal Money Market Fund (symbol: VMFXX) is yielding 2.78%.
I understand that banks need a margin between what they charge customers to borrow money and what they pay savers on deposits. The difference is how they earn a profit. But it always feels like the borrowing rates go up faster than the savings rate.
Earlier this week, The Wall Street Journal ran a story that helped explain this phenomenon. The article said large banks have plenty of cash to cover all their lending, so they don’t need to raise rates to attract new savings.
Some banks have increased their yields, especially online banks, in response to the Fed’s rate increases. But there are many still paying paltry interest. My TD Bank checking account is paying 0.1%. How do banks get away with this?
I was surprised to learn that the problem is us, the saver. Apparently, we don’t seek out higher rates. Inertia keeps us in our current accounts because we view switching as painful.
Depending on your balance, the increased interest payment may not be worth the trouble. The Journal article said the median bank account balance in 2019 was $5,300. As the reporter noted, earning 3% in interest, rather than 0.1%, would only amount to some $160 a year. Many of us don’t find that a compelling reason to switch.
People with larger balances have a greater incentive to change. That same three-percentage-point increase in rates on a $50,000 balance brings a $1,500 reward. That is indeed worth a little effort.
I think one reason for our inertia is that many of us have automatic withdrawals and deposits linked to our accounts. Changing may entail more than simply setting up a new account. We may need to adjust multiple regular transactions, such as our Social Security deposit and our monthly health insurance payment.
One option is to have two accounts. One would be for monthly transactions. That account could be the repository for regular deposits and have enough funds to cover monthly expenses. This account should be convenient and easy to use, with up-to-date security measures and bill-paying capabilities.
Another account could hold the bulk of a family’s cash reserves—money we want to keep liquid, but don’t need on a regular basis. This is the account we could move to a higher-yielding account whenever it makes sense. Creating new online accounts is relatively easy, so it’s not a big burden. I’ve done a little of this over the years. Still, I have to admit, I’m as susceptible to inertia as the next person.
While I was stressing out this year from all available options, I bought another $10K of I bonds. Glad I did. It forces a person to forget about all the options for at least a year and make a decent return.
I’m getting 2.55% APR from Wealthfront online savings account. Most people know them as an online robo investment manager, but you can also use them for online savings only.
I have them linked to my main bank’s checking account for transfers, so when I need to top up funds I can easily wire funds (for free) back and forth.
I. have a second online account at Marcus, which is another online-only savings account from Goldman Sachs. They’re currently paying 2.15%.
Sometimes they’re higher than WF, other times, like right now, WF is higher. I have those two linked to each other for transfers as well, so when there gets to be a 20 or 30 point difference between them I move the balance to the higher one, leaving a few bucks behind to keep the account active.
Over the years this approach has yielded a few thousand dollars in extra interest income, with not a lot of effort on my part once I got it set up.
PS – I also have money stashed in iBonds, which I only started this past year. And I recently bought my first Treasury bond paying 3.4% with a 12 month maturity, moving funds out of my conservatively invested ‘savings’ account and into the bond. I chose a one year bond based on our current cash position. When this bond matures I’m going to have an instant 9-12 months of liquid cash which I’ll probably just roll into one of the high-yield savings accounts and start using it for 2023-24 living expenses.
You can buy T bonds through the big brokerage houses and avoid dealing with Treasury Direct auctions and all that rigamarole, only paying a couple basis points for doing so. Well worth it imho.
Don’t the banksters charge 25-30% interest on credit card balances? I’m sure they have to share the vig with VISA and Mastercard, but there still is a healthy spread between that (Americans with a Trillion dollars of cc debt) and their generous passbook account interest of .01% on savings (don’t know that figure for America’s savings stash).
You said Cap1 360 saving is now paying 2.2%. Earlier this week when I checked, it was 0.3%. For weeks I had been hoping the rate would jump, but it hadn’t, so I opened an account at a different bank with a rate of 2% and moved the money to get about $50 per month more. Yes, it was a hassle, and now it seems, a waste.
To address the checking account rate (a comment below), sometimes money market accounts have good rates and offer checking, like the last few years at CapitalOne 360 (which I just closed). Also, their online portal makes it really easy to move money from one account to another, but this requires keeping an eye on balances, and I think a point that we can appreciate is that a benefit of being financially comfortable is not having to keep too close an eye on day to day accounting.
When I edited Rick’s article early in the week, the Capital One 360 performance savings account was paying 2.15%. By Friday, it had climbed to 2.2%:
https://www.capitalone.com/bank/savings-accounts/online-performance-savings-account/
Perhaps the 0.3% was for another Capital One product?
Thanks for this article as it caused me to check what rate I was receiving for my Cap1 savings account. I was earning just the 0.3% as well. I incorrectly thought I was getting the 2+% rate. Turns out you have to change account types from 360 to 360 Performance. Cap1 silently started this new account type in 2019. They didn’t alert existing customers so we were missing out on the increased interest rates. Why do companies treat their loyal customers so poorly?
Anyway, for any Cap1 customers if you are in a older 360 savings account you might want to switch. It is easy to do. Took a few minutes. But come-on Capital One, this leaves a bad taste.
It would be great to have a checking account where the interest paid is larger than zero to the left of the decimal point. Good points and definitely need to improve, if even by a point or two, interest on the checking account balances. Just hope inertia does not slow me down to do this.
Excellent article, Rick. You highlight the prime issue: higher interest vs. hassle factor. What I’ve done is set up online savings accounts and “no penalty” CDs at several of the banks that tend to consistently offer the best rates. I link them with our day-to-day checking accounts we use to pay bills, etc., and with each other. Then it’s fairly easy to move funds back and forth when one bank gets way ahead of the others on interest rates.
Also, on occasion, I’ve had a bank up our interest rate as a “retention incentive” when I’ve told them they were getting behind and I was about to transfer funds.
I agree that inertia is a major factor. For me financial simplicity is the major factor. Further, I have recently retired and have a HELOC balance (effectively a negative bond) that I intend to pay off over the next five or so years to mitigate the tax effect of current taxable retirement distributions and in the meantime if I have short term excess cash I pay down my HELOC which has a rate higher than what I can earn. For cash I think is intermediate or long term in nature then I have a treasurydirect account. I have bought some I-Bonds for the long term money. I do not currently have any cash I consider intermediate term but when I get the HELOC paid off I plan to buy Treasury Bills as they seem to me to always be fractionally better than the money market accounts and the interest is not state taxable if you live in a state with an income tax (I don’t).
The WSJ article you referenced that cites a 2019 $5,300 average balance does not seem to me to take into account float from outstanding cash transfers or likely disbursements in the next thirty days. I sleep better when I know I have the next month disbursements covered.
In a better financial world I would like to be able to buy treasury offerings directly with money inside my traditional IRA or 401(k) and cut out the middleman financial institution. Come on federal government and make it happen.
You can already buy Treasury bonds in your IRA. The cost differs depending on the purchase method (online vs phone assisted, and auction vs secondary market) but online action purchases are free at Vanguard and probably most other discount brokerages. Welcome to your better financial world.
Thanks Nick M,
Available options are not a perfect solution for me as no I-Bonds a can be purchased for a IRA either in a treasury direct account or via a broker. Personally, I would like to see the option to earn the current 9.62% I bond rate on IRA cash.
For some taxpayers without a 401(k) available to them at work and who struggle to meet even the modest investment minimum threshold at a broker a treasurydirect IRA option would be great.
I agree the online purchase of T Bills is reasonably straight forward at Vanguard.
Vanguards instructions-
Follow these steps to buy new-issue Treasuries in a Vanguard brokerage account. Click on the three dots next to Transact near the top right of your account and scroll toward the bottom. Click on Trade bonds or CDs. Click on the Treasuries tab and then the Auction radio button.
Always good to learn something new. Cost wise only the online route makes financial sense for me to avoid phone fees.
Thank you for your post.
Best, Bill
Do Fidelity and Vanguard make money when you buy a T-bill in your IRA brokerage account?
Good topic, Rick. As you suggest, wife and I have an account with a local credit union for paycheck and other deposits and paying bills. It’s easy to link this account to the online bank with the best rate.
Prime money market funds are a good option if you have significant cash/savings. You can set up ACH with you checking account. They react to the fed funds rate much quicker. PCOXX is one I own.
Thanks for this. I didn’t know about PCOXX and it’s yield seems to be on the very high end at around 3%.