When it comes to giving advice on saving money on college, our first advice is pick a college with a long name.You want to avoid schools with names like “Harvard,” “Duke” or anything with well-known initials, and suggest colleges like “West Oakdale Community College For The Commercial Transportation Arts.” For that matter, if essays are involved, you should probably suggest skipping it, as you want to look for a one-page application where three quarters of the page is focused on the utilization of how to use major credit cards. If the above advice doesn’t work out, we can at least suggest the utilization of a goal-oriented savings account.
A popular trend from large and regional banks is goal-oriented savings account. These accounts, offer a cash bonus from $50 to $5,000, with an average of $100 when a particular savings goal is reached. The goal-oriented savings account can be for any purpose, but college costs, home buying, vacations and new car replacement are some of the most popular.
Let’s take an example, let’s say you want to offer an $800 bonus if you save $20,000 for college over five years. Never mind if that amount will barely cover the text book and Starbucks bill and many colleges, let’s assume your customer has a state school in mind. Now you could offer an approximate 1.59% rate on an account but that would not get you the performance of a goal-oriented savings account.
For starters, the goal-oriented account has higher satisfaction rates. It turns out that if savers feel like they have to invest $333.33 each month to achieve their goal that often creates greater anxiety in times of tight cash flow. By contrast, the goal-oriented account offers greater flexibility so that come bonus time, tax return day or holiday season with the grandparents, money could be added to the account in periodic lump sums and the $800 interest bonus could still be achieved (Banks have annual minimums to prevent end of period lump sum deposits).
Because goal-oriented accounts are less interest sensitive as regular savings or CDs with similar rates, duration is about 20% longer and positive convexity is much greater. This provides better performance in higher AND lower rate environments. When rates are higher and the economy is doing better, more money often flows in thereby increasing performance. When rates drop, the opposite tends to happen, further helping bank performance.
Goal-oriented account holders tend to be more loyal to the bank and have higher retention rates. While the lifetime value of a customer in a CD is just over two years, the lifetime value of a college savers goal-oriented account is more than seven.
Goal-oriented accounts have an additional special attribute – they tend to have higher cross-sell rates. Whereas, your average CD holder most likely just uses a fraction of an additional product, goal-oriented savers use over 3.0 products. Remember, that anyone that opens a particular savings account, by definition, provides data on their lifestyle and choices. As such, more effective marketing can take place for items like car loans, home equity lines, and retirement accounts.
The end result is that goal-oriented accounts are almost 50% more profitable over time compared to other depository accounts with the same APY. Not all depository accounts are created equal and goal-oriented accounts are one tool that larger banks tend to utilize that community banks often don’t consider. As rates are low, now is the time to lock in customers into goal-oriented accounts and help your customers save for that long-named college.
Submitted by Chris Nichols on August 12, 2014