Wednesday, 18 July 2012

How to get the most out of high introductory bank savings rates

 In the current volatile investment environment more and more people are seeking out the relative safety of high interest saver accounts.  The problem with a lot of the interest rates offered on these accounts is that they offer a very high interest rate in the short term (usually 3 months) and then revert back to a relatively low / ordinary interest rate.

The choice between accounts becomes even more complicated when you consider that some accounts offer a high initial interest rate and then revert to a lower rate than accounts which do not offer this same introductory rate.   However there are ways that you can continuously get this high introductory interest rate - the method below was pointed out to me by a bank staff member so apparently it is legitimate though most people don't know about it.
  • Step 1: Find a subset of ~3 high interest saver accounts which offer the highest introductory rates. 
    • Note that as you are investing in savings accounts you should probably stick with institutions that you are completely comfortable with - i.e. a smaller provider may not be what you are looking for.
    • For Australian savers I did a quick search and the top 3 providers that I was comfortable with were (note that I have left out those accounts which require a savings plan to get the full interest rate)
      • Citibank Online Saver: 5.7% for the first 4 months (balances up to $500k)
      • Rabodirect Savings Account: 5.6% for the first 4 months (balances up to $250k)
      • ING Direct: 5.35% for the first 4 months (balances up to $250k)
  • Step 2: Set up an account with the highest interest rate account and deposit your money there for the high interest period
    • Do not set up all the accounts at the same time.  Your high interest period is generally calculated from the date of setting up your account not from the date of putting the money in
  • Step 3: At the end of the first high interest period set up the second account and transfer your full balance in
    • You will now start to receive the new high interest introductory rate (note that if you had left your money in the first account it would revert to a much lower interest rate)
  • Step 4: As soon as you have moved your money out of the first account completely close down the first account
    • You need to completely close this account down not just leave it dormant.  As you have chosen different institutions you can probably close your whole account down instead of just the high interest savings account
  • Step 5: Repeat for the third account when the second reaches the end of the high interest period
  • Step 6: When the third account comes to an end set up once again with the first high interest institution
    • Generally speaking you will get one introductory rate for a new account for an existing customer and a better interest rate for a new customer so if you have completely closed down your account you can claim the benefit of being a 'new customer'
    • This way you can continue rolling the introductory periods continuously
    • Yes it does take a little time for the admin work to go through.  If you can find a bank / institution that does it's application process online instead of which manual forms you can do the process much quicker.
You obviously need to read the terms and conditions of each account to make sure that you can do the above continuously but from what I've seen it is rarely a problem.  You can technically do it with only 2 accounts but I suggest 3 so as to be completely sure that you receive the full introductory rate instead of spending hours no the phone trying to explain that you are actually entitled to it

Is it really worth the effort?The answer really comes down to how much you have to save
  • From the accounts that I had a look at in Australia there is a 1% - 1.5% difference between the standard rate and the introductory rate.
  • Assuming you're depositing $20,000 into an account this is $200 - $300 extra you can earn each year
  • Given you have to set up / close down accounts every four months (which shouldn't take you more than 1 hours of your time each time - with one institution it took me under 10 minutes to open up an account) that's about 3 hours a year spent on structuring
  • This translates to a $60 - $100 benefit per hour your spend
  • I don't know about you but the implied hourly rate I get paid is lower than that. 
  • Also the more you have to invest in a savings account the more you get out of it

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