Oh say can you CD?

Healthy finances - August 2006


Susan Beacham


Summertime is always a great time for kids to earn money. Lemonade stands are as prevalent as sunburn and babysitting calls hit all-time highs. So, as you watch your mini-capitalist count that currency over and over, try suggesting that he or she think about turning that nest egg into something a lot bigger than an iPod mini.

Luke Donovan does. The Lake Forest resident is 13 and will enter eighth grade this year with $1,000 in the bank. That's because Luke "pays himself first" with most of the money he earns or receives by making a deposit in his savings account.

Having reached the magical four-figure mark in his passbook savings account, which pays less than 1 percent interest, Luke decided earlier this summer that he was ready for bigger returns.

That meant Luke had to make some decisions about what he was willing to trade in terms of safety and liquidity.

He could opt for a potentially higher return in the stock market, which I wrote about last month, but would risk the possibility of losing his entire stash of cash. Or he could opt for a slightly higher, but still very safe, savings vehicle such as a certificate of deposit. The downside to a CD is lack of liquidity-unlike a savings account that allows withdrawals at any time, a CD requires the money be locked away for a defined period of time.

On a recent Saturday, Luke donned his businesslike attire-a pair of khakis and a collared shirt-and walked over to his community bank to see a personal banker and explore his options.

He met with Heather Wicklund, a personal banking officer at Lake Forest Bank & Trust. She opens a lot of savings accounts for kids, but "Luke was a first," she says, because he came on his own, seeking to take his savings account to the next level. "He had a very simple goal: He wanted his money to grow faster," she says.

"Ms. Wicklund pulled out a piece of paper and showed me my current interest rate on my savings account," Luke says. "It was 0.90 percent. Then she explained that if I opened a [three-month] certificate of deposit account that I would more than triple my interest rate to 3 percent."

The price to pay for the higher return was that he couldn't have the money for three months. If he withdrew it sooner, not only would he lose the higher rate of interest, he could even lose some of his original stash through penalties and fees for early withdrawal.

Luke and his personal banker settled on the short-term CD so Luke could take advantage of the higher interest rate but not lock his money away for too long. Wicklund also recommended Luke keep $1 in his savings account to keep it open so he could continue to sock money away over the next three months.

Needs mom's OK

Because Luke is under 18, his savings account is set up as a custodial account he opened with his mom. To make the transfer from his savings account to the higher earning CD account, Luke's mom had to sign off on the transfer.

Luke had the minimum deposit for the CD-$1,000-and already had the necessary information on file, such as his Social Security number and birth date, to complete the transaction. All he needed was mom's permission and her signature.

"Not a problem for me," says Luke's mom, Theresa Donovan. "Luke kept after me until we got this done. Luke worked hard for that money and I think it's great that he wants that same money to work hard for him."

Luke's a happy guy. He is still saving and thinks he will look for a few more babysitting gigs this winter. And he's thinking about what to do with his money once the three-month CD matures. He's not sure, but he thinks he'll take another look at interest rates and probably open another short-term CD.

"You have no idea how good it feels to open a CD," Luke says just moments after getting the job done.

"Why?" I ask.

"Well, at first when you take your money out of savings and put it in a CD, you kind of feel like the money is disappearing since you can't take it out and spend it. But then, you feel pretty good because you know that when the three months are up, you'll have more money than if you just left it in the savings account."

Would he really renew the CD once it matures?

Absolutely, Luke says without a moment's hesitation. He explains it this way: "This was kind of like soccer. Once you start playing, you just don't want to stop."

Susan Beacham is the founder and CEO of Money Savvy Generation, a financial education company that provides innovative products and services to help parents and educators teach children the skills of basic personal finance, www.MoneySavvyGeneration.com. E-mail her at Susan@MSGen.com.

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