Jan wants to save a $2000 gift from her grandparents, and add $50 per month as emergency funds. She has narrowed her search for a savings account to 2 banks, Bank A and Bank B. Bank A pays a fixed rate of interest, and Bank B pays a variable rate, but both rates are currently the same. What advice would you give Jan about how to choose an account based upon her own needs?

Question

I. The fees and services will make a much bigger difference than the type of interest while your balances are small.
II. The more that you expect to save, the more you should think about what effect the interest rates might have on your finances.
III. Choose the variable rate, because no matter what the fees are, if it goes way up, you could become richer.
a.
I
b.
I and II
c.
I, II, and III
d.
I and III

Answer 1

To provide Jan with the best advice based on her situation, let's analyze the statements:

I. The fees and services will make a much bigger difference than the type of interest while your balances are small. - This is a valid point, especially since Jan is starting with a relatively small balance and making small monthly contributions. High fees could significantly eat into her savings.

II. The more that you expect to save, the more you should think about what effect the interest rates might have on your finances. - This statement is also valid. As Jan builds her savings, the interest earned becomes more significant, and understanding whether she’s in a fixed or variable interest situation can impact her future returns.

III. Choose the variable rate, because no matter what the fees are, if it goes way up, you could become richer. - This is somewhat risky advice. While a variable rate could offer higher returns, it's accompanied by uncertainty. If the interest rate falls, it could yield less than a fixed rate, and the mention of ignoring fees is risky, as they could negate any potential gains.

Considering the context in which Jan is saving and the statements presented, the best choice for her would be:

b. I and II

These options highlight the importance of understanding fees in relation to small savings and the growing impact of interest rates as savings increase.