Why it’s smart to open a savings account at a different bank

By Sabrina Karl

If you’re like many Americans, you hold your checking account and primary savings account at the same bank. The convenience factor of that can’t be disputed. However, it’s also easy to argue that you can do significantly better for yourself by expanding your banking horizons and opening a savings account at a separate institution instead.

 

The biggest reason is that savings accounts have evolved considerably over the last couple of decades, due largely (but not only) to the advent of online banks. These are FDIC-insured institutions that operate no branches and the cost savings can be used to pay substantially higher interest rates.

 

You may look at the interest you earn on your savings account statement and think it’s such a pittance (in this low-interest environment we’re living through) that even boosting it by double wouldn’t matter much. But here’s the thing… Odds are high that you can multiply your interest earnings by five, ten, perhaps even 15-30 times.

 

The national average on bank savings account rates is a paltry 0.06% APY. Even worse are many banks, including some of the Big Four, that pay just 0.01% or 0.02%.

 

Contrast that with almost three dozen institutions (yes, 34!) that are currently paying at least 0.50% on savings accounts (the current leader tops out at 0.70%). That means if your current rate is 0.02% and you move that money to a 0.50% savings account, you’ll be multiplying your annual interest earnings by a whopping factor of 25.

 

If having your savings account at a separate institution sounds inconvenient, consider how easy it’s become to electronically transfer money between accounts with online banking. Assuming you’re using your savings account for just occasional deposits and withdrawals, doing so with online transfers is generally no problem, and an easy thing to get used to.