“Personal finance” is more personal than finance in the sense that financial decisions and choices reflect the investor’s style, temperament, and personality. Sam is better off with a choice that doesn’t require him to constantly manage his finances. His choice might not be the one with the maximum profit potential, but it would be something reasonable enough that he can stick with effortlessly. Promotional offers like the one Sam received sound lucrative on the surface, but the bait can eventually lead to suboptimal results, especially if the initial deposit sits in the checking account indefinitely, earning no interest and potentially being subject to new fees introduced later. While active investors can figure out how to game the system and make a profit, it’s unlikely that Sam would be motivated to spend his time and energy in this endeavor. Leaving his bonus in his existing checking account aligns with Sam’s style, but it’s not a reasonable choice for him to settle for a meager interest rate. With a little one-time effort, he can do much better—either by buying an auto-renewable short-term CD or by keeping it in a high-yield savings account. A short-term CD is expected to yield more than a savings account because it locks the money away and subjects it to an early-termination penalty. However, if kept long enough, the excess interest from the CD would soon surpass that of the savings account, even after paying any early termination fee. Since Sam has a couple of years before he needs the money, the CD might be his best bet. The correct answer is C.
Question 8 of 10 #FinancialLiteracyQuiz Sam is neither financially savvy nor too keen to spend much time managing his finances. As such, he prefers to keep things simple and leave his finances in auto-pilot mode as much as possible. He recently received a bonus of $12,000 that he wants to save for a future home purchase in a couple of years. He saw a promotional offer from a national bank to open a new checking account and deposit $10,000 to receive a $500 bonus. How should Sam save his bonus? a) Take the promotional offer: open a new checking account in that bank and deposit his bonus there to receive the free $500 bonus. b) Transfer it to his existing high-yield savings account earning 4% annual interest. c) Open an auto-renewable 6-month CD offering 5.5% annual interest, but with an early termination penalty worth 3-months’ interest. d) Just leave the bonus in his existing checking account where his salary gets deposited. What would you suggest Sam to do? Put your suggestion in the comments.
