The pitch sounded too good to be true. While most bank accounts in the United States are paying a piddly 4% interest, and rates are more likely to go down than up, there’s another country whose economy is booming, is one of the safest places in the world for your money, and routinely pays 9, 10, or even 14 percent interest on three-month CDs.
I clicked the banner ad. I read what the guy had to say. But I didn’t sign on the dotted line. Here’s why.First, there’s no shame in checking out what the guy has to say. Maybe he does know something nobody else knows. That’s fine. What’s wrong is signing up without checking out the claims in more detail.
In this case, the sales pitch was for 3-month CDs in Iceland. Icelandic banks offer tantalizing interest rates, but there’s a catch.
The salesman said the reason is because Iceland’s economy is booming. Do some more research, however, and you’ll find the real reason for the outlandish interest rates is because the Icelandic Krona isn’t a very stable currency. They offer these tremendous interest rates in hopes that foreign investors will pump their currency into the Icelandic economy.
I did some more digging, and the value of the Krona versus the dollar varies wildly. In the same year, it can be as high as 80 Kronas to the dollar, and as low as 50. Doing a little math, if your timing is perfect and you buy low and sell high, your $10,000 investment could be worth more than $17,000. You make about $900 off your interest, and $6,000 off market timing. But if you time it badly, your $10,000 investment could drop to $6,800 in value, in spite of the high interest rate.
This is what my dad used to call a "Las Vegas investment." If it wasn’t inherently risky, they wouldn’t be paying these kinds of interest rates. And it’s pretty clear to me why everyone isn’t doing it.
But here’s another problem: The U.S. banks that sell Icelandic CDs charge you a 1% fee on the front and back ends. So they charge to convert your dollars into Kronas, and then when you pull your money, they charge you again to convert back to US dollars. In effect, that 9% CD immediately becomes a 7 percent CD.
The other problem is there’s a $10,000 minimum. You should never tie up more money than you’re willing to lose in a risky short-term investment, and for the average person, 10 grand is a lot of money.
If you’re looking for a safe place to store money for a short period of time and get a good interest rate, a lot of banks and credit unions have started offering so-called "extreme checking" accounts to attract new customers. These accounts often pay in the neighborhood of 5.5 to 6 percent, have a small minimum and a $25,000 maximum, and usually have a few other requirements you have to meet, such as making a certain number of transactions per month with your debit card. But otherwise it just acts like a plain old checking account that lets you add and withdraw funds at will. The rate isn’t that much lower than what you can get in Iceland once you pay the conversion fees, and you have easy access to the money in case of emergencies, and best of all, there won’t be any unpleasant surprises in three months if the exchange rate isn’t favorable.
Unless you can afford to tie up $10,000 until some random, future date when the dollar happens to be low against the Krona and your CD is eligible to be cashed in, I can think of a lot of better ways to invest. If you’re looking for a long-term investment, this is a good time to buy stock index funds because stock prices are in the toilet right now. The long-term returns will be good, and you don’t have to be nearly as precise about your timing. For a short-term investment, a high-interest checking account looks better to me. You don’t need as much money and there’s much less commitment.