Interest rates are just about invisible these days. As a result, more people are going to greater lengths to find the highest interest rates they can on bank CDs. But is it a good use of time?
Not always. Here’s why I say this. If you have $25,000 and are shopping for a CD, you might be lucky enough to snag 1% if you work hard at it. But if you are only offered 0.5% you really don’t give up that much.
1% of $25,000 is $250 a year. If you only earn 0.5%—that means you’ll only earn $125 instead. The question is, what it will cost you in terms of time and money to earn 1% rather than 0.5%. If you can find that 1% rate easily, no problem—you should do it. But if it takes you several hours of driving around town and filling out paperwork, it may not be worth it. Does that mean you should be complacent when it comes to shopping for a bank? No.
Most banks know that you don’t have much opportunity to earn a higher rate but they still want your business. Make them compete for it. Demand great service. If the people fail to treat you in a professional manner, let them know it’s unacceptable by moving your money. And let your new institution know the reason you are opening up your new account. Create a relationship with a personal banker at the branch and discuss your expectations. Get a commitment from this person to provide great service and hold them accountable.
The bank loves to show you a fee chart and use that document as an excuse to rake you over the coals. Don’t fall for it. The bank is making plenty of profit by paying you close to nothing and lending your money out to others at 4% or more. If you are being charged banking fees, don’t put up with it. Go into the branch and let your personal banker know that you expect them to waive those fees or else.
With rates this low, it’s easy to see that your time is much more valuable than the paltry interest the banks are paying. Choose your bank based on how convenient it is to do business there. For me, that means having a bank that has easy online access. Also, I want to do business with a bank that can answer my calls 24 hours a day—or as close to it as possible. Finally, I want a bank that is tailored to the transactions I typically undertake.
If you have a small business, and both a personal account and savings account in addition to your CDs, make sure the bank you are dealing with offers these services. It makes no sense to have several banks with each one serving a different purpose. The time you’ll spend running around will more than eat up any extra interest you might earn.
But if you want a bank that offers high-interest rates consistently, and you tend to roll the money over all the time, consider looking at an online institution like CIT Bank. They tend to offer high rates to depositors because they have very low expenses. But they don’t offer checking accounts. So if I wanted both checking and CDs, I’d probably go shopping for a local brick-and-mortar institution, even though they pay less interest.
The bottom line is to think about your entire picture before you decide who to bank with. Interest rates are fine but with rates this low, your time is far more valuable. Make sure you do business with a bank that offers great service, low fees, and is convenient. Then worry about the interest rates they pay.
How do you decide which bank to do business with? Are interest rates the only thing you consider?
This is a guest post written by Neal Frankle. He is a Certified Financial Planner in Los Angeles and an avid blogger over at Wealth Pilgrim.com. He has been in the business of helping people make smart decisions about their finances for over 30 years.