Do 'savings club' accounts really work?
Some banks offer accounts that offer bonuses for regular contributions, with certain restrictions. If you have the chance to get into one and can easily afford the consistent contirbutions it鈥檚 definitely worthwhile.
A money changer shows some one-hundred US dollar bills at an exchange booth in Tokyo. Some banks offer savings accounts that offer bonuses in exchange for regular contributions. Hamm argues that it's a good idea, provided you can easily keep up with the payments.
Issei Kato/Reuters/File
Carol writes in:
My local bank offers an interesting account each year. It starts on the first Saturday in January and the deal is that if you deposit the same amount each week for 49 weeks, they will make the 50th deposit for you and give you the money at the end of the year just before Christmas. You can鈥檛 take the money out of the account and if you miss any payments you don鈥檛 get the free 50th payment but they do set it up so you can pay in automatically out of your checking account. It seems worthwhile, but is it worth it?
I鈥檝e heard of this type of savings product before. It鈥檚 also been called a 鈥淐hristmas club,鈥� among other things. Let鈥檚 walk through this step by step.
I calculated the interest rate on this account as being roughly 4.15% I calculated this based on an account that you deposit money in each week and that compounds weekly, and on the fiftieth week you don鈥檛 make a payment and instead receive the total value of the account at the end of the week. In other words, the money you put into this account earns interest at a rate that鈥檚 pretty close to 4.15% per year.
That amount blows away pretty much every savings account available right now. There are some catches, however.
First, this account has a lot more in common with a CD than with a savings account. The biggest difference between a CD and a savings account is that you can鈥檛 withdraw the balance of a CD before it matures without suffering a penalty. The same thing is true here 鈥� if you withdraw the money before it matures (after fifty weeks), you lose that 鈥渇ree鈥� payment at the end, which reduces the interest rate you earn down to 0%.
There鈥檚 also the caveat of having to make a payment every week. If you can鈥檛 make that payment each week, then you suffer the same penalty as an early withdrawal 鈥� your interest rate essentially drops to 0%.
Not only do you have the money tied into the account, you essentially have to have the next payment tied to the account at least a day or two in advance (and even longer unless you鈥檙e really micromanaging things).
What about the return on your money, though? Given the restrictions on deposits and withdrawals, you should expect a return that鈥檚 similar to a CD and substantially better than a savings account.
Right now, savings accounts are earning at a rate below 1% in most places. You can find accounts that pay out 1% or, in a few cases, even a bit better than that, but they鈥檙e unusual cases.
12 month CDs, on the other hand, pay out somewhere between 1% and 1.5% at the moment, depending on the exact CD you find.
Naturally, both savings and CD rates vary over time. In a few years, when overall interest rates begin to rebound, the rates on both savings accounts and CDs will go up, making this type of 鈥渟avings club鈥� a bit less lucrative.
For now, though, it鈥檚 a very good deal. If you have the chance to get into one of these clubs and can easily afford the weekly contribution, it鈥檚 definitely worthwhile. In future years, you鈥檒l want to compare the return to savings accounts and checking accounts to be sure you鈥檙e getting your money鈥檚 worth, though.
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