Which Account Would You Choose?

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Aug 31, 2015
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Question of the Day, Savings, Current Events

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:

Suppose you had $500 that you didn’t think you would need for a long time.  Would you invest in a 10-year CD earning 0.90% or a regular savings account earning 0.75% interest?

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 Ranzetta

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.

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