To Dollarmite, Or Not To Dollarmite? That Is The Question
You will have seen in recent weeks a scandal around the Commonwealth Bank’s Dollarmite accounts. The headlines have not been pretty and are just the latest in a long-line of bad press.
Scam – does that mean my child lost money?
But from the headlines Dollarmites Scam, you could be mistaken for thinking that money had gone missing from these accounts and Daisy and Jack’s Christmas money had been swindled. While its not a good look I’m happy to report that while it speaks volumes to the banking culture, money has not gone missing. In fact there are a few children with $1 more than they had before.
Then what really happened?
Essentially some bank branches were putting in loose change into otherwise empty accounts to activate them and therefore achieve their sales targets. It’s unlikely that these staff financially benefited in any meaningful way. Instead I think this bank scandal which speaks more to the sales pressures put on frontline staff to keep their jobs than it was about personal greed.
Have the individual account holders been financially disadvantaged? Probably not. Have the staff involved benefited financially from this? Unlikely except in the most minor way. What does it mean? That the culture of the organisation needs fixing, but then that’s not really a surprise.
Is that all?
Well no, there are a range of stakeholders out there calling for a review of the school banking system. The consumer group Choice has called into question the commissions that are paid to schools to encourage sign up to these accounts. While the banks claim they are providing financial literacy, others claim that the quality of the financial literacy is not what it should be, rather high on the froth and bubbles and low on the meaningful content. Dollarmites are said to be worth around $10b to the Commonwealth bank, largely because a high proportion of children with these accounts stay with the Commonwealth bank for their credit cards, persona loans and home loans for the rest of their lives. Unfortunately that loyalty often comes at a price in higher fees.
So are Dollarmites a good idea then?
Well, there are pros and cons.
Having a bank account for the kids can help you keep money aside that is dedicated solely to them. This might encourage grandparents to put some money aside. If family members tend to give large cash gifts at birthdays and Christmas it can also be a way to manage the kids spending ‘some for now some for later’.
Dollarmite’s may not give the best rate of interest. A Dollarmites account has a base rate of interest of 001%. If you make a deposit and no withdrawals for the month you are able to get bonus interest of 2.29% giving you a total of 2.3%. However if you don’t make a deposit, or happen to make a withdrawal your child will only receive an interest rate of 0.01%.
What are the alternatives?
If you are going to make semi-regular withdrawals, such as using the account to fund school books and supplies, then you may like to consider an account that offers a better base rate of interest. A high interest savings account that only pays 1.8% every month is better than an account with a near zero bas rate of interest that only pays the bonus one month in every 6.
If you are saving a significant amount ($200+ per month), you could consider one of the high interest savings accounts with a much better rate. There are a number of accounts out there that pay a base rate of interest 1.8% with a bonus rate of 1%, provided you make a minimum withdrawal of $200 per month. If you look carefully you can even find ones that have no fees and no penalty for withdrawals.
If you are fairy disciplined with your finances, you could set up an offset account on your home loan. That way you could save money on your mortgage and split the savings with your child. A guaranteed saving of say 5% is better than you can get in any bank account. Grandparents may not be as comfortable with this as a dedicated bank account, but as a family unit you’ll be better off financially.
Once you’ve saved a decent amount, you could consider investing for the long-term (10 years +) in something like a share portfolio. There are a great set of managed funds around that are low cost and low maintenance. You typically need a balance of around $5,000 to get started. You could then make additional savings into it on a regular basis or on an ad hoc basis when the bank account gets above a certain level.
If your child is sitting on a Dollarmite account, there is no need to panic. But it may be worth having a think about whether you could help their money to work a little harder for them. When they start thinking about getting together the deposit for a house of their own, they may be very glad you swapped the plastic pig for a something with a little more substance.
Get in contact if you would like to have a chat about the different options for building finances for your children.
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