With interest rates continuing to trend lower, savings accounts are looking less attractive by the day. And while lower yields help decrease our mortgage payments, they offer little help to our savings balance. To that point, considering yields won’t be coming to the rescue anytime soon, is it wise to use bank promotional offers to help supplement your income?
Well, many banks will often pay a hefty price to win your business. Some will even pay more than $300 in cash when you open a checking or savings account.
But, is a bonus offer really worth making the switch?
Where Is My Interest?
We know, it’s nearly impossible to find these days.
With average U.S. savings rates and interest checking rates still sitting at 0.10% and 0.06% respectively, there isn’t much to get excited about. Say you have a $10,000 savings balance and earn 0.10% on your money – at the end of the year you only receive $10 in interest. With inflation hovering around 2%, that $10,000 will be worth almost 1.90% less than it was when you first made the deposit!
But, what if we take advantage of the bonus offer.
If a bank offers you $100 to switch institutions, that’s a 1% return on your $10,000 savings. When combined with the average savings rate of 0.10%, you make off with a cool 1.1%. If we bump up the reward to $300, now you’re pulling in 3.3%. Much better, right?
What About The Fine Print?
Before you get too excited about the promotional offer, make sure you read the fine print. Often times, the deal is only open to new customers and if you have an existing account – say a mortgage or investment account – you may not qualify.
As well, you can be required to make a minimum deposit to receive the reward. Sometimes, banks will require a $10,000 deposit to qualify for the offer. Moreover, they can also mandate that you set up direct deposit or enroll in its most expensive checking account. For example, say your current checking account has a monthly maintenance fee of $4 and the new checking account has a monthly maintenance fee of $10: netting the results requires an additional $6 per month, which annualized to $72 per year. If your bonus offer is only $100, then making the switch really only nets you an extra $28.
And what about overdraft fees?
Considering fee policies vary across institutions, the new bank may use high fees as a way to recoup its bonus offer. For example, some banks don’t charge any overdraft fees, while others can charge $38 or more. If a few transactions trigger and overdraft charge, the high fee can eat away at the bonus offer and make it look even less attractive.
Are Bonus Offers Really Worth The Hassle?
While bonus offers are great, they shouldn’t be your first priority. Instead, focus on earning the highest rate of interest on your savings balance. There are plenty of online banks that offer high-yield savings accounts with APYs of 2.25% or more. Moreover, there are no hidden fees and require a $1 minimum deposit to qualify. To illustrate the point, imagine earning 2.25% in a no-fee Marcus: By Goldman Sachs savings account. Here, you earn $225 in annual interest per $10,000 deposit. For the bonus offer to match this, it needs to be at least $215, which may be on the high-end for most banks.
How To Get The Best Of Both Worlds
While a high-interest savings account should always be your first priority, what if there was a way to combine the two? During promotional periods – especially tax refund season – banks are always looking to lure new customers. They often advertise significant bonuses or have promotional interest rates that exceed their 2.25% mark. The best approach is to find some online banks that have high APYs and charge zero fees. Then, wait for tax season and use the opportunity to capitalize on the best promotional offer.
Remember, planning in advance is always better than making impulse decisions. And when you’re on the lookout for the latest and greatest offers, you’ll be ready when it’s time to strike!
While bonus offers seem like a great idea on the surface, when you peel back the layers, they’re often more trouble than their worth. We know, upfront cash is great. And who couldn’t use a few hundred dollars in their pocket? But, when you weigh all relevant factors, you can see that a larger sum of money at the end of the year outweighs a small sum of money received today. As well, fees and eligibility criteria can quickly ruin your strategy. If you end up paying higher monthly maintenance fees, higher overdraft fees or have to make several extra transactions per month, these will make the bonus offer look less appealing by the day.
So, do yourself a favor and analyze the deal from all angles. That way, you’ll know if making the switch is right for you.