Don’t Get Drunk On High Savings Interest Rates

Throw a dart at the internet and it’s easy to find an attractive savings interest rate these days. Walk into your local big bank branch and you’re lucky to find free coffee and a half-eaten donut.

For our comparison, we use annual percentage yield (APY). It’s what banks advertise. APY takes compounding into account, whereas interest rate doesn’t. 

 or financial advisor Consider the regional bank stock investors are searching for most in today’s Trackstar top five. 

At US Bank — parent company, US Bancorp (USB) — you can go online from Los Angeles and find “special” CD APYs of 4.8% for 13 months, 4.3% for 11 months and 4.2% for 7 months. If you have an existing relationship, US Bank says you can score a higher “bonus” rate. 

On savings accounts, it gets trickier. 

US Bank only offers a high 4.5% savings account APY if you keep a balance of $25,000 or more. Most high-yield savings accounts from banks with little or no brick and mortar presence offer similar APYs with fewer restrictions. For example, SoFi (SOFI) advertises a 4.6% savings account APY with no minimum balance that it says will “earn more interest in five weeks than you would in one year in a big bank’s savings account.”

And SoFi isn’t lying. 

At Wells Fargo (WFC), for example, you need a savings balance of $1,000,000 or more and an existing relationship with the bank to score a mere 2.51% APY. That’s absurd. Because, even if you had $1,000,000, are you really going to keep it in one savings account at freaking Wells Fargo? On more modest balances of less than $100,000, Wells Fargo pays an embarrassing 0.26% if you have an existing relationship and 0.25% if you don’t. 

Where’s government regulation around day-to-day banking when you need it? 

Wells Fargo reported net interest income (NII) of $13.1 billion in Q3. That beat estimates and was an 8.3% year-over-year increase. NII is the difference between the revenue a bank collects on loan payments and the interest it pays out to depositors. 

Wouldn’t it be nice if the government required all banks, especially the big ones, to pay higher APYs during periods of high interest rates rather than continue to line their pockets with OUR money? 

But, we digress. 

To something we read the other day in one of those personal finance advice columns. 

Why hire a financial advisor who will take around 1% percent of your assets per year when you can get a certificate of deposit (CD) at over 5% with no fee?

If only it was this simple. 

Yes. You can score 5%-plus CD rates like crazy these days. Any number of banks (especially online) and credit unions are even flirting with 6% CD APYs. However, parking a few grand in a CD isn’t an investment strategy. Nor is going for whatever is paying the most today. 

This is where a financial advisor might or might not come into your picture. 

Out of curiosity – if you have a second, let The Juice know at this link. Do you use a financial advisor? Do you use robo-advisory services? Your responses can help inform future installments of The Juice where we discuss ways you can get professional help with your long-term investing strategy. 

Keyword — strategy. 

Consider one potentially sound strategy to help answer this financial advisor versus CD question. Which, if we’re being blunt, is sort of a dumb question after all. 

Let’s take it in layers.

• A high-yield savings account for your emergency fund. 

Find the bank that offers the best yield alongside features you require (e.g., checkwriting, bill pay, an ATM/debit card) and immediate access to your money to keep an emergency fund. 

How much you keep in your emergency fund depends on your comfort level with such things. The Juice suggests having access to anywhere between three months to one year’s worth of expenses in a savings account. An emergency fund is step one to any investment strategy.

• A CD with money you need/want for short-term purposes. 

The big difference between a high-yield savings account and CD is access to your money. With the savings account, you have instant, penalty- and usually fee-free access. With a CD, you agree to a term. If you withdraw money prior to your CD’s maturation, you’ll generally pay a penalty. 

So, CDs work best for money you don’t need right now, but might need or want access to three, six, nine, 12 months down the road. Whatever. Not necessary, but, depending on your circumstances, this can be layer two of a comprehensive strategy. 

• Long-term investing. 

In future editions of The Juice, we’ll drill down into specifics on this, specifically in our forthcoming series on retirement. But this is where we answer that “dumb” question. 

Whether you’re doing it in a 401(k) or IRA, taxable investment account, something else or a mix of two or more of these things, you need investments that you regularly add to and let rest for a long time. 

As we have argued, you might only need to own the two most popular ETFs that track the stock market’s biggest and most prolific companies. The engines behind the American economy. However, to realize the benefits of long-term investing in these ETFs, other ETFs and mutual funds, or an assortment of your favorite stocks, you can’t be taking your money in and out of these investments. 

If the stock market’s down and you pull your money out and put it in a CD because you can get 5% today, you’re missing opportunities to buy low (both with new money and, potentially, dividend reinvestment) and realize the power of dollar cost averaging and, subsequently, compounding. As earnings collect on your new money contributions, future earnings accrue on this combined balance. Compounding — it’s the way average people can get rich (or closer to it) over time. 

The Bottom Line: You can execute these three basic steps all by yourself or with the help of a financial professional. 

Whatever you do, don’t let the allure of 5% savings rates today derail the power of a long-term saving and investing strategy where you adhere to basic, but proven principles that require time and patience for the most powerful results. 

In the next couple of weeks, we’ll cover ways you can use financial professionals and other advisory services to help guide your saving and investing. Because, even though we live in an age of do-it-yourself everything, not everybody wants to do everything by themselves. Sometimes, we need expertise, technology or both to help lead the way.

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