As previously discussed in Bank Account Bonus Churning, banks often offer bonuses for direct depositing, depositing, or making debit card transactions after opening a new account. The required deposit amounts usually determine the bonus amount, but often not in a linear fashion. For example, a $1,000 deposit can earn a $200 bonus while a $5,000 deposit may only bump the bonus up to $300. When looking at competing offers, or deciding whether or not to pursue a bonus at all, you should take the opportunity cost of the deposit into account.
In enterprise capital allocation, the base opportunity cost is called a hurdle rate. This is the rate that an investment must return in order to make investing in the company worth it to investors over risk-free assets or an index. (WACC is the typical technique a company uses to derive the hurdle rate) The same principle can be applied to consumer banking. You should only try to get a bonus if it returns more than the money would have returned in another investment.
Most American banks compound interest monthly, so it is relatively easy to calculate what you would earn if the money is coming out of a bank account. If pulling the money from a brokerage account or index fund, the calculation may need to be risk-adjusted. Money deposited in a bank account is hypothetically risk-free up to $250,000 through FDIC insurance. There is risk that you won’t accomplish the necessary steps to a bonus, though. If moving large amounts of capital to chase bank bonuses, you should make sure that that risk is reduced to as close to zero as possible.
If you’re planning on moving money from another bank account, first look at what interest rate you are currently receiving. Let’s take 0.5% (compounded monthly) as an example. The new bank’s bonus offer is $200 after depositing $5,000 for three months. The formula that we will be using is A = P(1+r/n)(nt)
P = $5,000
r = 0.005 or 0.5%
n = 12 (number of compoundings per time period)
t = 0.25 (3 months is 0.25 of a year)
A = $5,000(1+0.005/12)^(12*0.25)
A = $5,006.25
The total interest earned in this period would be $6.25, so the bank bonus makes very good sense to pursue, since it earns $200 on the same amount of money. Of course, your personal time involved in achieving the bonus should be taken into account, if it distracts from other more valuable activities. (Monetary or social) The basic framework underlying the hurdle rate still applies, though. The opportunity should only be pursued if it returns enough more than the default earning opportunity to justify the risk and effort.
The calculator available here will do the math for you.