Author Topic: Citizensbank CollegeSaver® Account will pay $1,000 your child's 18th birthday  (Read 391 times)

Livingthedream55

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https://www.citizensbank.com/savings/savings-accounts/college-plan.aspx

CollegeSaver® Account

Open a CollegeSaver account before your child’s 12th birthday.

Save at least the required monthly minimum amount every year. $25 if child is under 6 years of age at opening, $50 if child is 6 or older but under 12 years of age at opening.

Receive a $1,000 bonus plus interest when your child turns 18.




Hargrove

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This is brilliant on the bank's part. The program effectively kicks the interest up to 2.36%, assuming you open a day before your child's 12th birthday, deposit $25 until he's 18 every month, never miss a deposit, never add additional money (thereby effectively realizing a lower interest rate), then close out. So instead of a CD, where depositors can only risk a few month's principle, the bank pays only if depositors make 12 years' uninterrupted deposits and don't compound the money (because it's all paid at the end - the least valuable moment for the cash). "Plus interest" sounds great but the interest rate is 0.05% - so, you can also buy breakfast out after 12 years. On the bank's side, if a quarter of the people manage to do it, which is probably a high estimate, the bank gets a ton of additional funds to loan out for very close to the regular awful savings rate of 0.0059.

You're better off with a CD for better returns and no cliff of risk.

https://aaa.discoverbank.com/aaa/cd.html

Or better yet... bonds! Or, you know, index funds.
« Last Edit: September 23, 2017, 12:23:29 PM by Hargrove »

Paul der Krake

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Where is the 2.36% interest coming from?

$500 to open the account.
Then 25 * 12 * 6 = 3600

For simplicity, assume you deposit all $4,100 upfront, and get $5,100 after 6 years.

That's 3.7% rate over 6 years, but in reality a little more than that since you don't deposit $3,600 upfront.

Not that it's a particularly good deal, mind you.

Hargrove

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Hahaha still crunching. Brb.
« Last Edit: September 23, 2017, 01:44:52 PM by Hargrove »

Hargrove

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Ok, we're both wrong. And I have to apologize to the bank! This actually looks pretty good.

We can't assume total initial investment as cost, because you don't really have to let the total balance sit there.

We would have to reduce compounding, because the reward's "interest rate" would be different if properly compounded, quarterly, as an alternative investment would be.

So I went about this the other way: I figured out the alternative.

Opening options:

A: $500 to open before age 12 but after age 6:: 50/month deposits (final result $5100, from 50*12*6+500+1000), close at age 18

B: $25/month to open before age 6: No other opening deposit (final result $4600, from 25*12*12+1000), close at age 18

What you would need to replicate results of these options:

Option A:
$500 initial deposit
50/monthly deposit
6 year duration
6.3886 interest compounded quarterly (not the best stock run, but pretty damned good for guaranteed!)

Option B:
$25 initial deposit
$25/monthly
12 year duration
3.8405 interest compounded quarterly (not a good stock run, but good enough that it beats many bonds and any modern CD!)

http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx

(these numbers assume starting the account at the latest possible moment, and never missing a payment. The bank's disclosures allow you to miss one payment a year, and actually, doing so will increase your effective interest rate, because it doesn't change the payout other than from the account's regular 0.05% interest. The bank is obviously betting more than half their customers will miss more than one payment in one of the years and/or not calculate and execute the optimal plan)

Final calculation: 6.3886 interest and 3.8405 interest need to be multiplied by the inverse of your tax bracket, because these do not appear to have tax advantages. IF you start saving at the moment the account is the most advantageous to you, use the first option, and have a 25% tax bracket, you're still getting 4.79% interest over a 6-year term, which is still pretty good and completely ignores stock volatility. If you could have a rough patch and fail to make deposits, or haven't taken advantage of tax-advantaged accounts already, this account is a bad bet. If you have the means to save elsewhere, this account, timed properly, is a fine boost to your savings plan at the 6-year horizon. The 12-year option is not ideal, but is better than any CD currently available, and competitive with many bonds, at the 25% tax bracket. Doing either option earlier than absolutely necessary further reduces returns against a potential alternative vehicle with the properties and results listed. Because my fantasy "alternative vehicle" has no listed expense ratio, assume your results using the bank have interest "results" higher than the ones I gave by the amount of your expense ratio on, presumably, a low-cost index fund.

If you're in a lower tax bracket, say 10%, multiply 6.3886*0.9 = 5.75% - not bad at a 6-year window!
« Last Edit: September 23, 2017, 03:41:09 PM by Hargrove »