I was having a conversation with a friend of mine that I need to share with you. She currently has 3 bank accounts spread out among 3 different banks. Because of a new fee structure, she is looking to consolidate. Her decision is between Bank of America that she’s been with forever, a local bank that she joined 2 years ago, and USAA which she recently set up. She was aware of my personal finance blog and decided to ask for my advice.
I began to ask her several questions around how she would use the accounts and why she thought each specific bank was worthy. After just a few brief questions, it sounded like she was set on USAA. In Mr. Belding – like – fashion I shout “Hey, hey, hey! You haven’t given this nearly enough thought.”
Here is the conversation from there:
“Why do you think they are the best?”
Because they have the best rates.
“The best rates? What kind of rate are we talking?”
I don’t know. I just know they’re better than everywhere else.
So we pull up each bank’s site to view their different features.
“What kind of balance do you typically keep in your savings?”
Less than $1,000 usually.
“Okay, so this account will pay you 0.11%. Is this what you were calling “good”?”
It’s better than the 0.05% I’ll receive at my local bank.
Here is when she starts to understand.
“Have you ever calculated what this comes out to in dollars?”
“Alright. You will earn either $1.10 or $0.50 each year. You’re making an important decision based on 60 cents. As you can see, the interest rate on your savings account is irrelevant.”
I started asking her questions about how she would use the accounts and how she prefers to make purchases. We found that her local bank is one of the few that still offers good rewards on their debit cards (with a small cost). We found that she would earn about $200 a year from these rewards. A much more noticeable figure than the $1.10 a year she could earn from interest. I told her she could actually earn a lot more rewards by using her credit card but she stopped me quickly.
I’m still working on her…
Interest rates are so low right now that they have become irrelevant in my mind. If you’re looking for returns, you should be investing. If you need the money completely liquid, then get used to earning nothing. Most people can earn more from rewards points on a credit card than from interest on their savings accounts. Notice I say most, not all.
Have you ever made an important decision by focusing on facts that are meaningless? Do you ever follow the highest interest rate thinking it’s the most important factor?