$100 from Washington Mutual for Opening an IRA (with a bonus math problem at the end)

I don't know if this is a company wide promotion, or just at my local branch.  The other day, I walked inside to deposit some funds.  Yes, I'm one of those guys who actually prefers to go inside rather than use the ATM.  Just don't trust those gosh darned newfangled gizmos!

As I waited in line, a sign caught my eye.  "Open a Wamu IRA with $100, and we'll give you $100!"  And right in the middle, in someone's messy handwriting, "and deposit $100 per month automatically."  So, when I got to the teller, I asked her for more info.  She took my name and number and told me that the woman who handles that is out.

The next morning I get a call from the "woman who handles that."  I asked about the restrictions.  None apparently.  It can be a traditional or Roth IRA.  You can open a savings account, CD or opt for one of the mutual funds that they offer (all load funds).  The only requirement is that I set up an automatic transfer from my checking to my new IRA of $100 per month.  The $100 bonus will be deposited to my account after the first 30 days and will be credited as a current year contribution.

I went in that afternoon to set up a Roth IRA in a 10 month CD.  It was their highest rate with an APY of 5.10%.  I made my initial deposit of $100, and signed the automatic transfer form to make $100 monthly transfers.  Here's the way I see it.  In order to fulfill my commitment, I will have made $1,300 in deposits.  $100 for the initial deposit, and 12 months at another $100.

At 5.10% and an additional $100 deposited after the second month, my balance at the end of 13 months should be $1,444.12.  That's not exact, as the CD is only a 10 month.  At the end of the 10 months, I'll have to put it in something shorter term.  But for the purposes of calculation, we'll assume 5.10% for the life of the account.

If that is my balance at the end of the 13 month commitment, I will have effectively earned a IRR of 47.69%.  Obviously, this impressive rate is due to my making the minimum deposits and taking advantage of the $100 bonus.  I am considering adding my 2006 Roth contribution to the same account, substantially reducing my effective rate.  However, I'll just engage in a little mental accounting, and tell myself that I am earning 5.10% on the 2006 money, and 47.69% on the 2007 contributions.

Heck, even if I add the $4,000 to my calculation, my IRR is still 15.63% for the entire account for the 13 month period.  Of course, this assumes that my calculations are correct.  Maybe I should write to Frank to verify my math.

Actually, here it is for Frank or any other math/excel geeks.

Without the $4,000 contribution, here is what I did.

I assumed 13 $100 monthly contributions.  Contributions are made at the beginning of the month and interest is credited at the end of the month.  Interest is computed at 5.10%.  In the second month, in addition to the interest credit, I added $100.  This is the bonus cash.  Based on that my monthly cash flows were:  $(99.58), $0.85, $(98.29)... $1,444.12.  Let me know if you need the (...).  This is the one that I calculated the IRR at 47.69%.  My formula was =((1+IRR(f3:f16))^12)-1.  Of course f3:f16 is the series beginning with (99.58) and ending with 1,444.12.

The next one included a $4,000 contribution in the second month.  My monthly cash flows became:  (99.58), (3,982.15), (81.22)... 5,652.95.  Same formula, resulting in an IRR of 15.63%.

Comments

[frank]

My gut instinct tells me you're off, but from a cursory glance, I can't tell why. It could be that you're not off, but I will need to take a longer look and think about it to figure out which one it is. :)

[tanyetta]

what?????????

[ALM]

When I signed up for a Wamu account a couple of months ago, I signed up hastily and didn’t put the full amount that qualifies you for the $100 bonus.

I did nothing else with the account, except for one purchase and one deposit, and I check my account two days ago, and I received a $100 bonus! I checked to see if I actually qualify, but I don’t, so this is interesting.

I’m not complaining!