Why you don’t want a savings account at a big bank

Frankfurt skyline

I talk about investments a lot, but there there’s a lot more to saving money than investing.

Investments are “illiquid”, meaning you can’t just get at the money if you decide you want it. There are tax and penalty consequences for, say, withdrawing from your 401(k). In general, as a rule, if you’re not retired, you don’t want to be accessing retirement assets.

But even though one can make a good return on investments, there is another kind of money that we all need to have saved, and that is “liquid” money, meaning that it can be accessed easily and without penalty. I’m referring, of course, to regular savings accounts.

Savings accounts are very important to everyone. Your emergency fund needs to be in a liquid account like a savings account, so it can be accessed in an emergency.

Will it hurt a little bit to have lots of money (tens of thousands of dollars even) in an account that’s not earning much? Of course. But you’ll be glad you had it at the ready, should you need it.

But that said, just because you won’t be earning much, doesn’t mean that you shouldn’t be earning anything.

And if you have a savings account at a big bank or other traditional retailer, you’re probably earning 0.01% interest. And you can do better than that.

One hundredth of a percent

I remember when I was a kid and setting up my first passbook savings account at my local bank.

My interest rate on that account? 6%.

Boy, the 1980’s were a different time.

These days, major banks in the U.S. offer rates of 0.01% on their standard savings accounts. That’s not 1%; that’s one-hundredth of 1%.

How much is 0.01%? Well, imagine that you had $1,000,000 lying around (!), and you decided to put it in a savings account earning 0.01%.

Over the course of an entire year, the amount you would earn in interest is: $100.

And let’s face it, you probably don’t have $1,000,000 in savings. So you’re going to be making less.

I’m not making this up

Don’t believe me? Here is Chase’s savings account rates:

Chase interest rates
Chase: At least they don’t hide it.

Here is Wells Fargo’s savings rates on its Way2Save account:

Wells Fargo interest rates
Wells Fargo: They have other rates on the site, but still nothing you’d want.

And here is Bank of America’s rates:

B of A interest rates
Bank of America: Oooh tiers!

This one is my absolute favorite. It has tiers where you can earn a higher rate. If you’re a Platinum Honors Tier, you can earn 0.06% on your savings account! That’s hilarious.

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How do you become a Platinum Honors Tier? Who cares? That’s the wrong question.

How?

The real question is: how can banks offer such terrible rates?

The short answer is that they can, and they don’t care.

The traditional view of banks is that they hold your money and lend it out to other customers at a higher rate, and give you a little bit of that back in interest as a kind of thank you for letting them use their money.

Back when the economy was totally terrible, a 0.01% rate was kind of understandable, and maybe even generous.

But rates are increasing. The Fed has raised rates twice this year and plans to do it twice more. We’re up 2% from the bottom; surely banks could up their game a little bit, couldn’t they?

Alas, no. Banks, like airlines, seem to treat their retail customers as annoyances, a necessary irritation in the process of doing business. And making fat profits in the process.

So what’s your excuse?

So with all this in mind, why do people continue to use big banks for their savings?

I’m not sure, to be honest. My only guess is inertia, and also the perceived benefit of having your savings account at the same bank as your checking account.

But that doesn’t make much sense these days. Transferring money between institutions is very convenient, and usually only takes a few business days. I can’t think of many instances when someone needs a large infusion of cash from savings and can’t wait a few business days.

If you have a savings account at a major bank, and they are offering almost zero on interest rates, you need to move it to another account, preferably an online savings account such as Ally or any of the others. You’ll send a signal, which admittedly may not be heard, but at least you’ll make a little more money in the process.

But enough about me. Where do you keep your savings?

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