What the Death of Savings Account Interest Means to Me as a Parent

Interest and Parenting
I often have a hard time explaining to my kids why they should put some of their money in the bank.

My 9-year-old daughter -- the crafty genius of the family, really -- had me at one point when she asked how much she'd be paid for trusting the bank with her cash. The honest answer is that she'd get paid basically nothing.

That naturally led to her asking what the point was in putting her money in the bank, making it harder to get to, especially when she isn't already a spendthrift.

My answer was essentially what it had to be: because putting money away for later is a good habit. Rates will rise at some point and she'll be paid more. For now, let's just build the habit, I argued.

"But honey, you'll earn a whole 9¢ in interest!"

Let's be clear that I'm not talking about college savings in this article. My wife and I sock away some money in 529 accounts for each of our kids whenever we can. Instead, I'm talking about a savings account my daughter owns: a mechanism designed to help her save for stuff she'd like to have.

Therein lies the problem. Record-low interest rates make for laughable returns for the average savings account: The very best savings deal published by Bankrate (RATE) offered just 1.05% for balances above $25,000 as of this writing, and just 0.90% for other accounts.

Many big-name banks offer 0.10% or even less. Among the better-known names, American Express (AXP) and Discover Financial (DFS) offer accounts that pay 0.85% and 0.80%, respectively, Bankrate reports.

Banks aren't doing me -- or any parent -- a favor by offering my kids essentially nothing for their cash. Under the best of circumstances, my daughter's $100 would earn her just $0.09 per year -- nowhere near enough to buy anything matters to her or any kid.

But it's worse than that. Bankrate shows that most mortgages now cost about 3% annualized, which means the vast majority of institutions that pay well below 1% on deposits earn 3% or more on the funds they've borrowed to lend to others.

Tim Beyers

What's the Point?

Banks have a right to make money, of course, so that delta shouldn't surprise me or anyone else. Yet I have a hard time arguing that saving is a wonderful thing to do when I know from experience that there are plenty of other ways to earn more.

It wasn't always this way.

My parents opened a passbook savings account for me when I wasn't much older than my daughter is now. Double-digit interest rates were the norm then, transforming every $100 or so I stored away from income earned as a newspaper carrier into $10 or more for every year that I kept the cash squirreled away.

My problem wasn't a lack of savings options. My problem was that, in spite of the remarkable rates I was being offered, I too often chose to spend on fast food, movies, and comic books. Only one of those (i.e., the comics) still has any meaning or value to me.

I Fear for Her Future

That's why it matters to me that my daughter comes to appreciate savings as a habit now, while she's still young, in order to avoid growing up as a spendthrift who struggles with debt as I have.

The Safest Banks You Can Trust
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What the Death of Savings Account Interest Means to Me as a Parent

BOK (BOKF) is the smallest bank on the list with a $3.8 billion market value and $26 billion in assets. The bank holding company is based in Tulsa, Okla., but its branches operated under several names in other states: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. BOK is worth about 12.5 times earnings and is valued at 1.3 times book value. The return on equity is 11%, and it offers a 2.7% dividend yield to the common holders. Shares are trading around $56.00, and Wall Street analysts have a target above $59.00.

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Photo: Les Stockton, Flickr.com

KeyCorp (KEY) is the one exception in our list to our rule about share prices under $10. Its other metrics more than make up for this. It has a market cap of just $7.12 billion against some $87 billion in assets. It operates in 14 states throughout the Rocky Mountain, Northwest, the Great Lakes and Northeast regions. To make its appearance on this list even more impressive, KeyCorp is headquartered is in Cleveland, where a large number of now-troubled loans were issued. The bank has a return on equity of 9.2% and pays out a 2.7% dividend yield. Shares trade around $7.50 but have a target price of $9 from Wall Street.

By 24/7 Wall St.

PNC (PNC) is based in Pittsburgh and has almost $300 billion in assets, with over 2,500 branches and almost 7,000 ATMs in 14 states. It has a market cap of $31.01 billion, and its stock is valued at 10.6 times earnings and at less than 0.9 times book value. The return on equity is 8.9%, and the company pays out a 2.73% dividend. Shares are trading at under $59, but Wall Street is eyeing a price of $70.50. PNC was even strong enough financially to close its National City acquisition at the end of 2008 when there was so much fear in the financial markets. PNC also owns almost a quarter of the great asset-management firm BlackRock (BLK).

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M&T Bank Corporation (MTB) is based in Buffalo, N.Y., and now has more than $79 billion in assets. Excluding any small purchases made recently, M&T had nearly 700 branches, 2,000 ATMs and a presence in eight states. The market cap is $10.12 billion, its P/E ratio is 12.7, and its price-to-book value ratio is only 1.07. M&T has a return on equity of 9.5% and pays out a dividend of 3.5% to common stockholders. The stock is trading just north of $80 a share, but analysts have set a target price of about $90. Berkshire Hathaway owns almost 5.4 million M&T Bank common shares worth more than $400 million.

By 24/7 Wall St.

Photo: Afagen, Flickr

U.S. Bancorp (USB) is often overlooked as a money-center bank because it is a super-regional located in Minneapolis. But it's the fifth-largest commercial bank in the United States and caters to millions of consumers. With $341 billion in assets, more than 3,000 branch locations and more than 5,000 ATMs, its operations are spread out over 25 states in America. Berkshire Hathaway owns some 69 million shares worth more than $2.1 billion. The bank's market cap is $59 billion. It is worth about 10 times earnings and 1.6 times book value. The return on equity is very high at 16%, and it offers a 2.5% dividend yield to the common holders. Shares are trading around $31.50, and Wall Street analysts have a target of about $34.25 on this great, safe bank.

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Despite the media attention surrounding the JPMorgan's (JPM) multibillion-dollar trading loss, the firm is still in good shape compared to many of its peers. It has a fortress-like balance sheet with about $2.3 trillion in assets, and CEO Jamie Dimon has said the only thing that could lead to the bank's failure is a collision of the Earth and Moon. Despite a share price decline following news of the "London Whale" trading loss, the company still has a sizable market cap of $135.17 billion. Shares trade at less than 8 times earnings and only about 0.7 times book value. The return on equity is 9.8%, and the company pays a dividend yield of 3.4% on the common stock. While the bank shares are trading at just over $36, analysts value the company at $47 a share.

By 24/7 Wall St.

Wells Fargo (WFC) is the undisputed safest bank in America now that JPMorgan Chase & Co. (JPM) has come under scrutiny -- even if Chase has about $1 trillion more in assets. With some 6,200 storefront branches, more than 12,000 ATMs and an asset base of over $1.3 trillion, it has a presence in almost every state. Warren Buffett's Berkshire Hathaway owns close to $13 billion worth of the common stock, and his stake keeps rising. The market cap is a whopping $171 billion. The shares trade at less than 9 times earnings and at almost 1.2 times book value. The return on equity is just above 12%, and it offers a 2.7% dividend yield to the common holders. While shares trade at around $32.50, Wall Street analysts value the bank at almost $38 per share.

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I'm also concerned about external forces. Between deficits, deflation, and the incessant political bickering among politicians who at least partially control the financial future of the United States, I wonder if any of the financial systems that have been in place to support prior generations -- Medicare, Social Security, tuition assistance, etc. -- will even survive to her adulthood.

Paranoia, you say? I suppose that comes with being a parent. But if I'm right that long-held safety nets are in the process of failing, my kids will need to cultivate the savings habit as a means of survival. And I've got to do all I can to help.

My next article for DailyFinance will explore some ideas for helping parents build the savings habit in their kids. Care to contribute? Leave a comment below to share your own struggles, suggestions, and successes.

Motley Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. The Motley Fool has created a bear call spread position in American Express. Motley Fool newsletter services have recommended writing a covered strangle position in American Express.

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