Which Account Would You Choose?
Thanks to my colleague, Jessica, for letting me know about this phenomenon of a 10 year CD with an interest rate below a regular savings account. So, the question for your students is this:
Some good points for a discussion:
- Locking into a 10-year CD hurts your option value to invest in a CD with a higher interest rate which may appear as interest rates rise.
- Federal Reserve has announced that they will be raising interest rates sometime in 2015 for first time in over six years.
- You would only make the decision to invest in the CD if you believed that interest rates were going to fall so there was an advantage to locking in a higher interest rate NOW. Looking at this historical chart of T-bill rates (a proxy for interest rates on savings accounts) suggests that interest rates have no place to go but up.
- “Bricks and mortar” banks traditionally offer lower interest rates than online banks. Why? A very different cost structure.
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.