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A client recently asked the question: Should I switch from my traditional bank savings to a high-yield savings account online?

Online savings accounts offer 10x higher interest rates than traditional brick and mortar banks. On the surface, it seems like an obvious improvement to switch to something paying 10x more interest. But in reality, in many cases the additional interest is not worth it. Find out how we help clients navigate this decision in our post this week.

My friend Jeff Rose at “Good Financial Cents” wrote about the top online savings accounts. Many of our clients earn 0.10% or less on their savings account. Synchrony Bank’s online savings account pays 1.05%. That’s more than 10x the interest.

What’s the Rate Spread?

Interest rates today are extremely low. 10x a tiny number is still a pretty small number. Another way of looking at it would be online savings accounts pay 0.95% more than typical bank savings. That’s not a huge spread. Keep in mind that if interest rates increase or decrease (not sure if that’s possible), this could change.

When comparing the online account with your current bank savings, use the rate spread to determine how it would affect your account. Multiply the rate difference by your average balance to estimate the annual interest.

What’s Your Savings Account Balance?

If your savings balance is $10,000 and the spread between your local bank and the best online alternative is 0.95%, the interest difference is $95 per year (assuming your balance stays at $10,000). Is your savings balance consistently at this level, increasing or decreasing? This should also play into this decision.

The larger your average savings balance, the more value you’ll see with a high-yield online savings account. If you’re not sure how much cash you should keep in savings, check out our post on determining appropriate cash reserves.

What is Your Time Worth?

How much are you compensated per hour? What’s your time worth? Unless you want to go all-in with online banking, there will be some additional headaches with using two banks. Either way, switching savings in and of itself comes with some amount of time commitment.

If you’re a physician earning $400,000 per year, at minimum, your time is worth $200 per hour ($400,000 divided by 2000 hours). And in many cases it’s more because overtime or moonlighting gigs pay higher hourly rates.

If you keep $10,000 in savings, is the $95 in additional interest really worth it? Odds are you’re going to spend at least a few hours switching accounts and messing with the new account. Plus, there are services local bankers provide that you must do yourself with an online bank. If you’re worth $200/hour, and you dedicate 3 hours, you must make an additional $600 in interest to be at square one. So at $95, this would be a loss.

The Value of a Good Banking Relationship

If you’ve ever worked with a good banker, you know the value in this type of relationship. It’s tough to put a price on having the ability to call a cell phone on a weekend when you find out someone is fraudulently using your account. When problems inevitably pop up, having a good contact is priceless. Although online banks provide numbers to call, it’s nearly impossible for them to match the level of service provided by a quality local banker.

This is especially important if you’re into business dealings that require lending and other banking services. When you’re looking for funding for a business deal, a good banking relationship is key.

At the end of the day, it depends on the person. Many people with larger account balances, plenty of spare time and fewer full service banking needs will benefit greatly by switching to an online high yield savings. For others, the interest savings is not worth the effort.

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