Monday Schoolhouse Rock--Dollars and Sense

For today's Monday Schoolhouse Rocks, it is time to learn about the concepts of interest and loans with Dollars and Sense. Yes, Dollars and Sense teaches you about the concept of interest, and how interest applies with saving money and earning interest on that money, or with taking out loans, and how you pay interest on top of the loan. In the Schoolhouse Rock video, Becky-Sue is going to need "a guitar, an amp, and some quadraphonics. And several hundred dollars' worth of electronics," if she is ever going to make it as country western star. And as simple as the concept is, I thought I would look at the real world situation with "Dollars and Sense." It is not as innocent and simplistic as Becky-Sue learned from her banker.

First, let us look at the interest paid, by the bank, on savings accounts. I'm going to look at four banks here--Bank of America, Citibank, Wachovia, and Wells Fargo. I have chosen these four banks simply because they were the top four banks listed in the Yahoo search. First, I looked at the interest rates being paid on a standard passbook savings accounts for these four banks.

Here are the APY interest rates for standard passbook savings accounts:

Bank of America..........0.20 percent.
Citibank........................0.70 percent.
Wachovia......................0.45 percent for balances between $0.00 to $9,999.00.
Wells Fargo...................0.10 percent.

So in other words, for the entire year that you keep your money into these four banks' standard passbook savings accounts, you will earn between 0.10 to 0.70 percent compounded interest on your money in these accounts. You are basically parking your money into these banks for free. Now I know that the banks also provide some checking plus interest accounts here, but even the APY interest rates here are especially low:

Bank of America............0.05 percent.
Citibank........................0.25 percent average balance of $6,000 across any of these linked Citi accounts.
Wachovia......................0.16 for balances between $0.00 to $7,499.00.
Wells Fargo...................0.05 percent for balances of $500 or more.

And lest I forget, while you are only earning between 0.05 to 0.70 percent interest per year, on any of these passbook savings or interest checking accounts, the annual rate of inflation in the United States in 2007 was 2.85 percent. If you had parked your money in any of these interest-bearing savings or passbook accounts, you would have lost 2.85 percent of the value of your money in these accounts due to price increases in 2007. The interest you earned in these savings or interest-checking accounts for the 2007 year were pretty much wiped out by the inflation rate.

Becky-Sue will never become a country-western star today, just on the interest savings of her passbook account.

So where are you going to find a savings rate in a bank account that is above the rate of inflation? How about a Certificate of Deposit? Here are the APY rates for a one-year CD:

Bank of America............3.10 percent, 9-month CD, minimum $5,000 deposit.
Citibank.........................2.40 percent, 12-month CD, minimum $500 opening deposit.
Wachovia......................1.90 percent, 12-month CD, $1,000 to $9,999 deposit.
Wells Fargo...................2.0 percent, 12-month CD, minimum deposit 2,500.

What surprises me here is that Bank of America has the best rate for a CD here--3.1 percent APY for a 9-month CD. Bank of America did not offer a 12-month certificate of Deposit. But aside from Bank of America, a 12-month CD return for the three other banks are still possibly below the rate of inflation, if the inflation rate stays at the 2007 level of 2.85 percent. You are never going to get ahead putting money into any bank savings or CD account. The banks are paying you crap for using your money for free.

So let us look at the other end of Dollars and Sense. Instead of putting your money away at the bank to save up for your music equipment to become the next Dolly Parton, you can always get a loan to purchase your equipment now, and pay the bank back later. Now here is the fun part about loans. The banks offer all sorts of loans--home loans, auto loans, business loans, personal loans. You can go crazy just looking through all the different interest rates, fees, loan balances and such. So in keeping with the spirit of Becky-Sue getting her several hundred dollars worth of electronics, so she could become the country music star in Dollars and Sense, I'm just going to look at the personal loans, and what the APR interest rates are for the banks:

Bank of America............8.99 percent APR, $10,000 borrowed, 60-month term, $216 per month.
Citibank........................10.55 percent to 25.99 percent APR with up to $10,000 borrowed.
Wachovia......................No information available.
Wells Fargo...................14.36 percent APR, $10,000 borrowed, 60-month term, $234.55 per month.

Well, the banks are paying anywhere between 9 percent to 14 percent APR for a $10,000 dollar loan for a period of 5 years. The monthly payments are ranging between $216.00 to $235.00 per month. They are charging about 3-5 times as much in interest on their personal loans as they are paying interest on their CDs. That is a pretty hefty interest payment Becky-Sue is making on her electronics loan--especially compared to the pittance the banks are charging on their savings accounts, let alone their CDs. And remember, this is just for the personal loans here--I won't even go into their credit card APRs, which you can find here for Bank of America, Citibank, Wachovia, and Wells Fargo. I know that banks are out to make a profit, but comparing the difference between what the banks are paying in interest to savings accounts, and what they are charging for loans (and even credit cards), I have to wonder if the banks are out to completely screw the customer here. Or was I just too naive in believing the simplistic explanation of interest and loans from this Schoolhouse Rock video? Either way, it doesn't matter. The banks have already screwed us. For now, let us enjoy the reminiscing of our childhood with this great Schoolhouse Rock song. Music and lyrics are by Dave Frishberg. The song was performed by Val Hawk and Bob Dorough. From YouTube:



Are you sure Dolly Parton started this way?