Q: I've been attracted to some high-yield savings accounts, but a common restriction seems to be that the high yield only applies to a limited amount of money, like $20,000. Is there a drawback to spreading my money around to a few of these accounts, so I can capture the higher yield on as much of my money as possible?
A: Today's limits on high-yield balances in savings accounts are a sign of the times. Traditionally, banks have offered an interest rate premium for large deposits. Today, those big-deposit premiums are virtually nonexistent. Instead, some banks are willing to offer a little extra on a limited amount of cash, but not on larger deposits.
What's going on here? The answer is that with the lending business weak and few good investment opportunities available, banks can't make much money on your deposits, so they aren't willing to pay extra to attract bigger deposits. Some are, however, willing to pay extra on a limited amount in order to attract new relationships. The thinking is that they can find ways of making money from those new customers by cross-selling into other products, such as credit cards and financial services.
The question becomes whether it is worth it to you to spread a few smaller deposits around to capture a few of these high-yield deals from different savings accounts. The answer comes down to a matter of time. Savings accounts are typically less labor-intensive than checking accounts (i.e., fewer transactions mean less time spent balancing your records against the bank's). Still, it does take some time to set up and monitor extra savings accounts.
So, compare the extra interest you expect to earn against the time that effort will take. If the extra interest pays you a good hourly rate for the time you expect to spend, then consider it a good deal.
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