Banks offer a pretty wide swath of services, and it can often seem to make sense to do your banking exclusively with just one company. The virtues of simplicity, correct?
But that’s not always the case. Even if you do your primary checking at one institution, the benefits of looking elsewhere for savings accounts, CDs, or other low-risk investments usually far outweigh the convenience of keeping all of your eggs in a one basket.
Taking advantage of what other banks have to offer can often translate into getting more bang for your buck. It helps to understand the different types of banking features and what they are supposed to accomplish, and know the answer to the question “why switch banks?” is because “t usually makes sense.”
When it makes sense to switch your savings account
Savings accounts are one of the simplest, most commonly used places people use to store their money. One of their most attractive features, when compared to other low-risk investments, is that it’s very easy to get your money when you need it. A savings account is about as liquid as an investment can be. Barring bank failure, you can access your money without meeting any roadblocks. And of course, even if the bank does go belly-up, FDIC insurance covers all deposits up to a quarter million dollars. So your money itself earns interest in an essentially risk-free environment.
The problem most people have when it comes to savings accounts is that they open an account at the same bank that houses their checking, even if it makes little sense to do so.
For instance, let’s say someone has checking through Bank of America®, and by default they open a savings account with them as well. The problem is, a savings account with Bank of America® pays a negligible interest rate of 0.01 percent. That means if you put $15,000 into a savings there, after a year you will have just made a paltry $1.50. Pretty much every option out there makes more sense than that. Ally Bank, for instance, pays 0.87 percent on their savings accounts, or 87 times as much. In this case, it makes a lot of sense to switch banks, and put your savings into an account that will make you more money than the cost of a candy bar.
It’s not just about higher rates, though. From a psychological standpoint, opening a savings accounts at a separate institution can also temper the desire to dip into an account that is ostensibly for the purpose of saving money.
When it makes sense to switch where you buy CDs
While they don’t pay out as much as they did in their heyday, CDs still maintain a high level of popularity with investors who are seeking a higher return than a savings account but don’t want to have to check in on their investments constantly. That is to say, CDs are steady and predictable, and don’t require constant checking in. For its entire life, a CD will gain value at the same slow and steady pace. There can be up to five years between buying a CD and its maturation, and in some cases even longer. The fact that you only really need to deal with it twice in its history means the convenience factor of having all of one’s money in the same place is highly negligible.
The same, of course, can’t be said of the market at large. While the stock market can certainly provide nice returns (as it did in 2013 when the S&P 500 returned 32 percent in a single year), it is also as erratic as the day is long. As long as the FDIC keeps insuring banks, which is to say as long as the U.S. government is a functioning entity, a CD will appreciate at the same rate while remaining virtually risk-free. It’s hard to put an exact premium on a good night’s sleep, but if there’s any worth to that at all, a CD has a lot of value beyond just its interest rate.
It’s disadvantageous to buy all your CDs in one place if you plan on building a flexible CD ladder. Depending on what your goals are, mixing up the institutions you utilize for CDs usually makes more sense than just picking one for every type of CD you plan on buying.
When it makes sense to switch your checking account
Checking accounts are one of the most basic services that banks offer. If you live in the U.S., a country where nearly 50 percent of people say their favorite place to shop is online and its citizens spent $263 billion on the internet last year (a number that’s growing), having access to plastic is key. A checking account is one of the simplest ways to do that. To be sure, there are alternatives to a checking account that provide some of the same services, like getting a prepaid card, but a good, basic checking account still makes the most sense.
But of course, some checking accounts make a lot more sense than others.
Not all checking accounts are the same. Many charge a fee to even keep them open, unless you abide by certain rules like maintaining a minimum balance and/or utilizing direct deposit. By switching, you can also avoid potentially costly hassles like ATM fees.
In essence then, with a checking account at a large bank like Bank of America®, the only advantage you are getting is having a place to store your money that’s not under your mattress. Unless you meet the requirements, you’ll have to pay for the honor of having a non-interest earning checking account.
It might make more sense to have checking at a separate institution. This is especially true if you are considering interest checking in lieu of a bank account that pays out zero returns.
Ally, for instance, pays a 0.10 percent interest on a checking account under $15,000, and 0.60 percent on balances higher than $15,000. That’s 60 times what Bank of America® pays on their savings account.
Overall, no matter where you do your banking, the thing to keep in mind is that mixing and matching often makes more sense than doing everything at a single institution out of habit. And it’s not just about rates. By banking with different companies, you could be avoiding costly ATM fees, charges for simply keeping a savings account, or exorbitant overdraft charges. When it comes to banking, simplicity isn’t the key — getting the best deal is.