The interest rate on savings accounts right now stinks. Even if you use an online bank that typically pays a higher interest rate you are lucky to see 1%. Because of this, I read articles all of the time pushing other avenues that offer a higher interest rate. I am here to tell you to forget about them all and just be happy with your savings account interest rate.
Jumping Around Is A Waste Of Time
Back in the day, I would jump from bank to bank chasing interest rates. This was back in the early 2000’s when you could easily get 4% on an online savings account. New online banks were popping up all over the place and they all were fighting with each other for your money. It seemed they kept increasing the rate they paid to out-do the competition.
At first it was fun, but then it got tiring. Opening and closing accounts and moving money around took time and I realized it wasn’t worth it. In the long run, will 0.25% really make that big of a difference? For this reason I stopped and have been with one bank now for almost 10 years.
Why You Shouldn’t Jump Around
I mentioned two reasons already why it doesn’t make sense to jump around: the time commitment and the lack of a difference a slightly higher interest rate makes. But the bigger reason is risk. Remember that your emergency fund money is there for you in case of an emergency. You want to make sure that it will not disappear due to market fluctuations or anything along those lines. Currently, to get that sort of guarantee – that you won’t lose principal, you have to accept a lower interest rate.
The rate isn’t sexy and won’t make you a millionaire but the point of the emergency fund isn’t to make you a millionaire anyways.
The Point Of Your Emergency Fund
Remember, your emergency fund is there to provide you with a cushion to fall back on should your car break down or you lose your job. It is not meant to grow quickly or significantly over time. Speaking of growth, your emergency fund should be growing primarily based on the money you are putting into it each month. The interest you earn should be looked at as a bonus.
This is the opposite of your retirement account. In this case, you want to keep funding the account and get to the point where it is compounding on itself to outgrow the amount you are investing each month. Your emergency fund on the other hand is never intended to act this way. The sooner you accept the role your emergency fund plays in your entire financial plan, the better off you will be.
Your Overall Plan
That last point is the key – your emergency fund is part of your overall plan. Your plan is made up of savings that grows (investments for retirement for example) and savings that are there to protect you (your emergency fund). When you try to blur these lines, you get into trouble. This is how whole life insurance came to be. Instead of protecting you, which is the goal of insurance, the industry has turned it into an investment, which it is not. Not surprisingly, the industry pushes this product because it is how they make the most money.
In the end, accept your savings account interest rate. If you are earning 0.05% and want to switch banks for a higher rate, that is fine, but don’t make it a habit to start chasing rates. You are just costing yourself time for not much added income.