Do 'savings club' accounts really work?

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’t take the money out of the account and if you miss any payments you don’t 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’ve heard of this type of savings product before. It’s also been called a “Christmas club,” among other things. Let’s 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’t 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’s 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’t withdraw the balance of a CD before it matures without suffering a penalty. The same thing is true here – if you withdraw the money before it matures (after fifty weeks), you lose that “free” payment at the end, which reduces the interest rate you earn down to 0%.

There’s also the caveat of having to make a payment every week. If you can’t make that payment each week, then you suffer the same penalty as an early withdrawal – 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’re really micromanaging things).

What about the return on your money, though? Given the restrictions on deposits and withdrawals, you should expect a return that’s 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’re 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 “savings club” a bit less lucrative.

For now, though, it’s a very good deal. If you have the chance to get into one of these clubs and can easily afford the weekly contribution, it’s definitely worthwhile. In future years, you’ll want to compare the return to savings accounts and checking accounts to be sure you’re getting your money’s worth, though.

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