5 Reasons A higher Interest Checking account Might not Always Make Sense For Everyone
Many banks in Singapore offer their own version of a high-interest checking account. The greater popular ones range from the DBS Multiplier Account, OCBC 360 Account, Standard Chartered Bonus$aver, UOB One Account and there are others.
Having a higher interest savings account helps grow our savings in a much higher rate of interest than the 0.05% per annum we would receive. Extremely high interest savings accounts are obviously not meant being an investment. Rather they allow us to earn decent interest on our emergency cash, investment “ammo” or even funds intended for our everyday expenses.
However, extremely high interest rates happen to be another victim from the COVID-19 economic crash. Rates of interest globally happen to be slashed to assist businesses access cheaper funds to tide over as well as encourage more investment from growth industries. Similarly, most of the high-interest checking account have implemented multiple rounds of downward revisions to their rates of interest in 2021 itself.
Against this backdrop, there are several explanations why a high-interest savings account today could make less financial sense.
#1 The Lower Rates of interest They're Offering
With interest rates being revised down, there's less financial sense to keep money in these high interest accounts. Rather than being able to earn about 3% or even more previously, we might simply be able to realistically earn about 1% or less today.
This boosts the opportunity price of leaving our funds during these high-interest accounts.
Moreover, with the US Fed planning to leave rates of interest at near-zero levels until 2023, everything is unlikely to improve. For those we all know, the next downward revision might be around the corner.
#2 We must Jump Many Hoops To Collect Better Interest Rates
To earn the high rates of interest on pretty much all of the high-interest savings accounts, we need to jump through multiple hoops. Apart from declining interest rates, a few of these accounts also have revised their criteria being increasingly harder to attain through the years. Some of them include needing to credit our salary, spend on credit cards, invest or buy insurance with them.
Hoops for example crediting our salary and even spending an acceptable amount on our charge cards can be achievable. However, many of these accounts now require us to hit certain levels of transactions each month or provide higher interest rates only when we deposit a lot more profit our accounts.
Certain hoops are entirely prohibitive, for example hitting an “investment” amount or having to purchase insurance with them.
Worst of, after optimising our savings hitting a great rate of interest, a brand new change could be implemented at any time to undo our effort. This is why it's close to impossible for the majority of us to offer the highest rates of interest provided by these savings accounts to begin with.
#3 We're able to Make Poorer Financial Decisions By Optimising Our High-Interest Savings Accounts
Some of the hoops we're forced to jump to optimise the interest rates we receive might not make sense for all of us either.
A high-interest checking account usually means we should lump our savings into one account. This simple action can already upset financial planning many, who wish to use different savings account for various purposes to split up their financial lives. This may be for a joint saving using their spouse, another account entirely focused on their investments and dividends, and the other for their daily expenses.
Similarly, locking ourselves into an ecosystem of merchandise might not result in the best outcome for the finances either. For example, if we use the DBS Multiplier Account in order to save, we might wish to purchase stocks or other investments offered by DBS as well. However, it may be more cost-effective to take a position with another stock broker or any other investment products.
In the same vein, we do not desire to be locked using only one credit card. If we spend the majority of our groceries at Sheng Siong, we ought to choose to use to BOC Sheng Siong card to optimise our savings, if we are into cash back, we might want to use the HSBC Advance Cashback Card to obtain a superior cashback.
If we want to buy insurance, we shouldn't just lock ourselves to products in one insurer. Or worst, we shouldn't choose to buy insurance for the sake of jumping via a hoop for higher rates of interest on our cash savings.
#4 We Should Focus On Optimising Other parts of Our Life
Leading in nicely into this time, we may need to be spending our time and energy into optimising other parts of our finances which will repay more handsomely. After working so much time attempting to earn our high-interest checking account, this can be easily undone by lower interest rates or more difficult to achieve hoops. Moreover, the maximum we are able to earn on these accounts can also be limited to around 2% and slightly above currently.
If we spent exactly the same period of time optimising our investments, we could considerably best even if we earn a poor rate of interest on our savings. For example, the greatest tier of great interest rates we are able to earn on high-interest savings accounts today is all about 3% or even less. When we put our time to find better investments, we might have the ability to beat this rate. Moreover, investments are longer-lasting as our returns compound. Whereas, banks have shown that they'll and can alter interest rates and hoops because they think fit.
Other things we can concentrate on include a freelancing gig, starting a company or investing in property that will have a bigger financial impact on our way of life. Or perhaps spending that point with this family.
#5 Other Ways To economize And Still Earn Decent Interest Without Optimising
At the same time, this doesn't mean that in our cash savings have to suddenly earn 0.05%. Even without having to spend time and energy to optimise our high interests checking account, we can simply employ products today such as a cash management account or an insurance savings plan.
Both don't require our savings to become kept in, while still giving us a decent rate of interest. Actually, cash management accounts can pay us around 1%, while insurance savings plans are paying nearer to the 2% range.
In fact, these products may even become more stable because they are more aligned with market rates. Our prime interest rates provided by banks are simply a means to allow them to push us into other kinds of products in their ecosystem.
We can simply put aside funds that people require slightly down the road or perhaps our emergency funds into these accounts and keep what we requirement for our daily expenses within low-frill savings accounts that don't charge unnecessary fees.
The only bad thing is the truth that we can't withdraw our funds using an ATM instantaneously.
A High-Interest Checking account Is nice To Have, But We ought to 't be “Over-Optimising” It
We're not saying a high-interest checking account is not useful. We're just pointing out the way it may not lead to superior outcomes in other aspects of our way of life. This is why you shouldn't have to be too fixated on experienceing this highest tier of great interest rates.
What may be more practical is by using it for that purposes we want it for. Not be overly fixated on missing out on the very best rate of interest on offer. Instead, we can spend more time optimising the way we use other lending options along with other regions of our finances.