Last updated: March 20, 2019
I recently opened a new Tangerine savings account to take advantage of the $150 in sign-up bonuses they're offering as part of their rebranding efforts. What I didn’t mention was that one of the main motivators for opening this new account, other than the sign-up bonuses and great features, is to start doing a little bit of interest rate chasing.
Interest rate chasing – what’s that, you ask?
Well, it’s almost exactly as it sounds. It means you keep a keen eye out for the highest interest rates and you continually move your money around from bank to bank to make sure that you’re always getting the best rate. Sound like a lot of work, right?
Well, it could be a lot of work if you are inefficient with it and always jumping ship for an infinitesimal increase in your rate.
It would also be a lot harder before the days of online banking, quick and easy electronic funds transfers, and nearly instant rate comparisons using the internet. Going into branches to open accounts, writing cheques to yourself or paying for money orders or wire transfers to move your money around, and then calling up every bank to keep on top of their rates would be a logistical nightmare.
Managing dozens of accounts can also be very cumbersome and stressful ... there must be a better way!
Chasing interest rates can be easy
Trust me, the last thing I need these days is a lot of work!
Fortunately, I’ve noticed a pattern this past couple of years with how online banks like Tangerine and PC Financial do interest rate promotions. Here’s how it works:
Regular short-term offers with big rate increases
There isn’t a big spread between the interest rates offered by the highest paying banks and the more average paying banks and to get the highest payouts you have to start giving your money to banks you’ve never heard of before like People’s Trust and ICICI.
While many people do it successfully, it does make you feel a bit uneasy.
However, short term interest rate promotions have become a very popular thing to both attract new clients and to get existing clients to either open new accounts or deposit more money. These promotions typically last for about 6 months and can sometimes add up to 1.65% to their regular interest rate during that period.
Right now, that's essentially doubling the regular interest rate you would get in a savings account and is much better than you would do with a GIC without having to lock in your money.
“New Money” qualifies
Even better, these bonus offers don’t typically just apply to new customers or even new accounts. It has become the norm to offer the rate increase for all new money deposited into any and all of your accounts after the promotion starts.
Yes, that even usually includes chequing accounts which typically pay almost non-existent interest.
They essentially take your total account balance across all your accounts just before the promotion starts and compare it to your average account balance across all your accounts for the duration of the promotion. Then, they give you bonus interest as a lump sum payment at the end of the promotion on the difference between those two numbers.
Now start bouncing your money back and forth like a Yo-Yo!
Since Tangerine and PC Financial both offer these promotions regularly and linking your accounts is easy, automatic, and almost instantaneous when you open a new Tangerine account – all you have to do is transfer your money to the other account when a new promotion pops up.
That’s right, in a few clicks using online banking you can go from earning 1.25% or less to 2.75% interest for 6 months.
Once you have this set up the first time, you can repeat the process over and over again so you are almost always earning much higher interest.
You could mix in a third or fourth online bank like Canadian Tire Financial Services as well to give yourself more options and catch more promotions, but for now I’m going to keep it simple and just use the other two I’ve mentioned.
How much extra money can you earn?
People will be quick to point out that on a balance of $5,000 for a period of 6 months, an extra 1.50% interest only works out to $37.50, or roughly $6.25 a month.
$37.50 for a couple of minutes of work is nothing to sneeze at, but this definitely might not be worth the effort for some people.
But, don’t forget, if you can do this every 6 months or so you can double that to $75.00 every year. Now we're getting closer to real money!
A great way to temporarily park large sums of cash
Where this strategy really starts to shine is when you find yourself with a fairly large lump of cash that you don’t want to invest and risk losing.
I now find myself in this very position because we sold our house and moved to another city. We are currently renting waiting for the right time to buy another house but we’re not exactly sure when that will be. As we all know, houses aren’t cheap these days and earning 1% interest on such a large amount of money while housing prices continue to rise is a bit of a depressing thought.
Related: It Pays To Plan Ahead
At least with this strategy, I can most likely beat inflation and still remain completely liquid so I can act immediately when the right opportunity comes along. That could be a priceless positive all by itself!
A $50,000 Example
Say you have $50,000 sitting in your account for a reason similar to mine or you happen to have a really large emergency fund. Let’s do the math on that:
Extra interest earned at 1.50%:
1 month = $62.50
3 months = $187.50
1 year = $750.00
That’s some pretty decent extra money for almost no effort.
So if you have some extra scratch lying around earning a pittance, why not give it a shot?