Are you getting more than 5% or less than 1% in your savings account? Do you even know?

By Beth Pinsker

If you haven't moved to a high-yield savings account, half the country is beating you

There's a big difference in interest between a 1% rate and 5% rate on a savings account, and that is such an understatement that it almost defies belief that people would choose the smaller amount. But they do.

A new survey from Betterment on retail investors found that 52% moved money to get a higher yield in the past year as rates rose dramatically. Overall, banks paid out more than $315.4 billion to depositors in 2023, according to an analysis of Federal Deposit Insurance Corp. data by Depositaccounts.com. That's 5.25% more than the prior year. Most of that money came from big banks, where the national average for interest rates is currently 0.5%.

A CNBC Select poll last year found that 18% of depositors keep their savings in high-yield accounts, which are averaging between 4% and 5% these days. Betterment's 1,200 respondents ran the gamut of ages and household incomes nationwide, but Betterment has also seen similar numbers among its own depositors. The financial company, which has an account offering 5.5% interest as of late June, said it doubled its users in 2023 and saw record-high inflows in the past 18 months.

But Betterment is just one of hundreds of players in the high-yield space, which include brokerages, online banks, fintechs and even big banks that have online divisions. The top ones by customer satisfaction last year were Marcus, Ally and Capital One, according to JD Power, which found in its survey in early 2024 that only 22% of respondents had switched banks in the last year seeking higher rates.

While interest rates at these banks are correlated with the Federal Reserve's benchmark rate, they are not directly tied to it, so they have a lot of leeway to choose their own rates, as long as it makes sense for their business. For many upstarts, getting new customers is the goal, so they offer attractive rates.

But while many depositors are jumping ship for high-yield accounts as rates stay high, Betterment's survey shows that 48% still stuck with cash that isn't earning enough to keep up with inflation, let alone beat it. Why?

"There are some times [when] if you dig into the details, it makes sense," said Dan Egan, vice president of behavioral finance at Betterment. But if you tick through the most common justifications for the inertia, they all eventually fall apart after looking at the math. Here's a breakdown of some of them.

I like to have all my accounts in one place

Egan gets this one. "I have a small benefit with keeping my checking and savings together, because my mortgage is linked to my main checking account," he said.

But in today's decentralized banking market, you could keep a small amount in checking or savings at your main bank and keep most of your funds in an account that earns more interest. Betterment's survey showed that this might be easier for younger generations: Millennials led the rate-chasers, followed by Gen Z, because they came of age in an era of banking competition.

Monetarily, there's probably little benefit to consolidating accounts that could outweigh how much more money you'd get from 5% interest compared with 1%. It's not the same as bundling insurance products, which companies discount to get more of your premium dollars, because the big banks offering the lowest rates have so many depositors that they have no incentive to offer bonuses.

I have too little money for this to make any difference

Money is money. That goes even for small amounts. Say you have $1,000 in savings. At a national bank, you're going to make about $11 in interest in a year (but likely even less, because the national average is closer to 0.5%, which would earn you $5). At an online bank, at 5% you're going to make more like $51. It might not seem like big bucks, but the less you have, the more impact it will actually have on your life. And a separate savings account might help you save more for emergencies, because it's separated from your main checking account.

Betterment's survey showed that the higher the income, the more likely a respondent was to switch banks for higher yield. Overall, 61% said they were earning 3% or less on savings, while 18% weren't even aware of what their interest rate was - and this was particularly true for women.

It's a hassle to move accounts

Is it really? When mortgage rates were at record lows, the refinancing business boomed. Now more than 80% of mortgages have rates below 5%, even as average national rates for 30-year mortgages are over 7%. The number of those switching to higher-yield accounts should be even higher, logically, because there's no way that opening a high-yield savings account, which takes minutes, could be harder than refinancing a mortgage, which requires stringent underwriting and can take weeks. While neither is pleasant, you do get money out of the effort you put in. You can justify your time as being worth $50.

For those worried about having to change their automatic deposits and payments, that can be solved online simply by inputting your new routing and account information in a few places. People do this all the time when they open a new credit card. It could be solved globally, too, if banks adopted account portability. That would make changing bank accounts more akin to switching cell-phone carriers, where you get to keep your number. Consumers would have to demand the change, however.

I want to be able to easily transfer money between accounts

The way banks handle transactions now, you can link up any two bank accounts to transfer money between them, and you can use services like Venmo and Zelle to get money immediately to other people. At most financial institutions, you can see balances at other institutions as well, so you can easily consolidate all of your holdings in one view.

I've been at my bank forever and I'm a loyal customer

You're loyal to your bank, but they probably care little for you. Banks want deposits, because then they can loan out the money to others - they pay you a little back, charge a lot more to the borrowers and take the profit. The major banks offering low rates are betting you're in the half of users who aren't going to move.

The banks offering higher yields typically are online-only institutions and so have less overhead, and they're also aggressively looking for new customers. That's why you should be wary of banks offering top-tier teaser interest rates, because they figure newcomers won't notice when rates drop.

"Banks don't like to offer teaser rates that rate-chasers will want," says Egan, because rate-chasers will leave as soon as the top rate expires. "There's a cat-and-mouse chase that happens. They want your money to be sticky and stay there for a long time."

The bottom line for you is that if you stay put, it should be worth your while. If it's not, you should join the ranks of those moving their money to greener pastures.

Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put "Fix My Portfolio" in the subject line. You can also join the Retirement conversation in our Facebook community: Retire Better with MarketWatch.

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06-29-24 0851ET

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