Welcome to Financial Spiderplant!

Many people have the misunderstanding that banks work for you. Many also have the understanding that banks won’t do anything to help you unless it is in their self interest but don’t allow this understanding to change their behavior or their overall beliefs. There are few people that are willing to take the actions needed to better their situation and that is ok.

You are reading this because you are interested in making your situation better.

So, in an effort to try something new, here is a rant about why you should open a high yield checking account.

Getting a decent rate for your savings account isn’t that difficult. The banks take your deposit and put it in a money market account which yields a high interest rate. Most checking accounts don’t do this because there is more account activity in checking account. This makes the task of having checking account funds in a money market almost impossible…doesn’t it? Nope. The fact is that that whether you are dealing with $100 or $100,000 in your checking account, it still doesn’t add up to much in terms of the overall business that banks handle. There is no reason why your checking account shouldn’t be paying you interest.

How much interest does your checking account yield?

Do you EVER pay ATM fees?

Do you ever pay for new checks?

Do you feel that the bank you hold your checking account with does everything that they possibly can to reward you for choosing them?

If your checking account doesn’t pay interest, your bank is taking advantage of you because you are providing them with interest free capital that your bank can lend out and make money.

Are you a patsy? (1)

If you pay ATM fees, your bank is taking advantage of you because most bank have chosen to form an imaginary barrier that costs anywhere from $1 to $4 per transaction when the actual transaction cost to the bank is $0. They are literally taking your money just because they can.

Are you a chump?(2)

If you pay for checks, fees because your balance is ‘too low,’ fees because you want to download your transaction into Quicken, Money, Yodlee, or any other money tracker…or any fees whatsoever, your bank is taking advantage of you. The plain and simple fact is that these services should be provided as a cost of business but they haven’t been. Why? Because no one said that banks have to be there to help you…in fact, the banks are striving to boost their profit margins to please shareholders; most banks aren’t there to help you.

If you put a frog in boiling water, it jumps out because it realizes that being in boiling water is a bad situation. If you put a frog in lukewarm water and proceed to heat the water until it boils, the frog will contently sit in the pot and boil to death. Why? Because a slow and steady rise in temperature keeps the frog unaware of the potentially harmful situation it is in. (3)

You are a frog and banks are heating up the water. They will continue to nickel and dime you because there is no alternative…is there?

Charles Schwab has a high yield checking account that pays 3% interest, reimburses you for all ATM fees, give you free checks, debit card, and still FDIC insures your money just like your current bank. Charles Schwab is taking the high ground, rewarding their customers and providing top notch service. I guess the question is whether or not you are going to continue to be a patsy, a chump, and a frog in boiling water OR are you going to come on over to the bank that actually rewards you?

You can easily link all of your account to Schwab and out of curiosity, I checked how long it takes to transfer money from a Schwab investment account to a Schwab checking account. Results? 1 second. Before I could even refresh the page, the transfer had taken place. I think that being able to quickly move your capital from one account to another is an absolute requisite in choosing an account.

If you think that all banks will start to offer these same perks, you are wrong. There are just too many individuals who pay too little attention to the little details and will stay with the current system that rewards the banks and their shareholders instead of the actual customers.

On second thought, don’t change banks, please continue to use a system that takes advantage of you and spends every waking moment trying to make more money from their customers. I will continue to put all interest from my checking account into the stocks of those banks. You will become poorer as a result and I will become more wealthy because I use the system to my advantage and you simply ‘can’t be bothered to spend a couple minutes improving your life.’ (4)

Please do your own research and compare your current checking account with the account options Schwab offers or you can take my word for it because I’m a geek that already did the research for you.

Get a better bank account and be rewarded for your loyalty instead of shunned and taken advantage of.

Open a Charles Schwab checking account. Today.

Please e-mail me with any questions you have. My e-mail address is david113@gmail.com. You can also sign up for my RSS feed here.

Hope everyone is having a great week!

David

(1)
pat·sy (pts)
n. pl. pat·sies Slang
A person easily taken advantage of, cheated, blamed, or ridiculed.
A plain sucker, someone who expects nothing and is granted nothing in return.

(2)chump 1 (chmp)
n.
A stupid or foolish person; a dolt.

(3)
I have never tried this experiment. I do not suggest you try this experiment. I heard it on a nature show or something and I think that it serves as a good example.

(4)
Of course I am joking. I desire what is in your self interest. Seriously…open a Charles Schwab checking account.

The are a couple of great ways to accelerate your path towards financial security and economic freedom. One of the easiest ways to accomplish this is by increasing your contributions towards investments and debt reduction; you could pick up a second job or take a new position, you could adjust your risk/reward tolerance and hope that it works out in your favor, or you could cut your costs.

Some of the largest costs we all encounter are housing, transportation, food, debt payments, and entertainment. We also have costs like the morning cup of joe, the occasional 6 pack, gym membership, cell phone plan, insurance, and the annual Christmas/birthday presents. Most of us spend money on things that provide a return on happiness or self worth rather than a return on capital. That great, those returns are generally why we save for the future, to help other people, or to buy their own island. The issue brings difficulty in determining the optimal balance between time and enjoyment, what are you willing to sacrifice today for a better tomorrow. Trimming up your expenses is a great way to free up money for other uses…whether it is for the pleasure of today or the dreams of tomorrow. I’m an expense trimmer and I’m proud of it.

One of my bestest buddies in the whole wide world recently made a move that will dramatically improve his quality of life and his ability to save for tomorrow. He moved from an apartment costing him ~$1,000/mth that also included ~$200/mth in cable tv and utility charges to one that is a little smaller and only costs $600/mth. The landlord, who is also my landlord and a complete badass, is kind enough to keep rent costs fixed and picks up the utility/cable costs. Immediate bottom line savings: $400/mth in rent and ~$200 in additional expenses.

He was facing commuting costs of ~$200/mth in parking, metro, and gas costs after the consumption of employee provided transportation funds were depleted each month. He was also spending about an hour and a half commuting to and from work every morning. Since his new place is within walking distance to work, he saves not only money, but time. Immediate bottom line savings: ~$200/mth in commute costs and ~3 extra hours every day to read, sleep, hang out, and avoid the convenient yet stinky metro.

Cons: Smaller place, need to pay rent for two apartments for one month, landlord lives upstairs when he comes down to DC every other weekend or so.
Monetary loss: $1000 in additional rent costs

Pros: No ‘wasted time’ commuting, reduced rent, elimination of utility costs, personal pool/hot tub access (pro for me too!), and of course, the ability to metro/walk home on.
Monetary savings: $400/mth rent, $200/mth utility, $200/mth transportation. = $800/mth

With the extra $800 in his budget, he has made allocations to fully fund his ROTH IRA contributions each year, put some money in taxable accounts, and some additional money for his fishing gear.

Most people aren’t able to find and extra $800 in their budget but here are some great savings ideas:
1) Take a look at your cell plan. I don’t have a home line (it doesn’t make sense to me to call a location instead of a person) and took on a plan that makes sure I have more than enough minutes to make any calls I need without getting charged over-minute fees which are insane. I cut my data plan which saved ~$40/mth after I realized that I’d rather have some extra cash than 24/7 access to e-mail.
2) Ever been charged an overdraft fee? Ever? If you have, you might want to think about switching over to a bank that can link your checking account to your savings account. You’ll avoid the occasional $10-$30 fee and also have an easier time transferring your funds between accounts.
3) Gym membership. You can buy about $400 in gym equipment and do most of the exercises you do at the gym. Saving of $40-$100/mth and you can exercise outside! You can recoup initial equipment costs after less than a year and then you’ve got your own gym for life. Potential loss in social aspect of a gym…but for savings of ~$1000/yr…it was worth it to me.
4) Coffee. I drink 2 cups a day at ~$2 a pop. Over the course of a year, I make about 500 trips down to the coffee shop. I could save anywhere in the realm of $600-$1000 by either making my own coffee or just giving it up… I like coffee and the opportunity to walk around the block early morning/afternoon so I personally won’t be giving it up…works for some though!

There are tons of ways to trim your costs and end up with some extra cash in your pocket each month. Keep your eyes open for new ways to save and I guarantee you’ll be grateful for the changes that just a few small sacrifices can make.

As a favor for Aaron, here’s the potential progress if you save all the immediate savings you gained through the move.

I won’t advocate for living in the same place for life but by choosing to live one step below your means, it appears that you will save quite the chunk of change over 20 years. And just for fun, here is where Bankrate’s compound interest calculator says you’ll be by 65 if you keep the momentum.

Until next time,

Dave

Additional Information:
66 WAYS TO SAVE MONEY

When I was out this weekend, someone asked me what they thought the rates on a new 2007 Lexus IS 350 would be. I was slightly confused as to why a stranger would be asking me about car insurance rates until I realized it was because I was wearing my Allstate ‘Catastrophe Team’ shirt. When I explained that I didn’t actually work for Allstate and that I’d only bought the shirt at Goodwill because I thought that it was neat, she stared laugh and apologized for asking.

I asked her a couple questions about her friend and said her friend would end up paying around $150/mth if she got basic coverage. Her response: “Yeah, but you’re older.” While that was the first time I’ve ever been referred to by someone younger as ‘old,’ it was actually a pretty funny experience. I asked her a somewhat rhetorical question, “Is she going to be paying cash for this vehicle, or take out a loan?”
When it was confirmed that her friend would be taking out a loan to purchase the vehicle, I just had to question the motive. Why would someone take out a massive loan on which they paid interest to purchase a depreciating asset?

The kicker? “My friend is a business major.” I gave her my card and asked her and her friend to check out my site. As promised, here’s my analysis.

A 2007 Lexus IS 350 has a MSRP of $35,705. Its estimated residual value after five years? 46% of the purchase price or $16,424. I ran a few figures through the loan calculator that my current auto insurer, USAA, provides. If one were to purchase this magnificent, yet rather expensive vehicle, with a $5,000 down payment, the end payment on a 72 month (or five year) payment schedule would be $507.73 at an interest rate of 6.74%

If instead of making loan payments, an individual were to put that $5,000 down payment and the additional $507.73 a month into a conservative stock index fund earning 8%, they’d end up with $45,949.94. Even if that $5,000 down payment was used to buy a ‘beat-up’ car, the $507.93/mth alone would still total up to $38.603.29.

So, the simplified decision that must be made:

Purchase a $35,705 vehicle that will only be worth $16,424 in five years.

Or

Purchase a $5,000 vehicle and invest the car payments to end up with $38.603.29 in five years.

Maybe it is just me, but I don’t see the point in making a new car purchase when coming out of college.

Thomas Stanley provides an analysis of 1,371 millionaire households in his book The Millionaire Mind. One of the subjects that he surveyed these households on was on what factors they believed contributed to their financial success; near the top of the list? Purchasing used cars. I highly recommend reading this book, the results of his findings are presented in formats that are easily understandable.

I won’t try and argue against someone who has the desire to purchase a new car whether it is with cash or through one of the available financing models out there. I will try and point out that statistically speaking, you decision won’t be the smartest decision towards ensuring your financial success.

Oh, by the way, in five years when you’re getting close to 30, if you ended up leaving that $38.603.29 that you’d end up with in five years if you invested the car payments instead of purchasing a new car, you’d end up with $388,451.66 after 30 years at 8%.

Whether you decide to purchase a new car or a used one is an important decision that shouldn’t be taken lightly; whichever way you go, I wish you luck!

Additional Information:
Laura Rowley’s 13 Pieces to Help Solve the Wealth Puzzle
Getting the first car loan: Bankrate

When Paying Off Doesn’t Pay
By Ben Stein

“I get many letters asking whether it’s better to pay off your mortgage or invest the money in the stock market instead. This is a complex question, but I’ll offer several ways of thinking about it.
First, no one ever spent a sleepless night because she had millions in the bank and stocks but didn’t have her home paid off. On the other hand, if you pay off your mortgage and deprive yourself of liquidity, you could be in for some miserable times.
As I see it, if money is even the slightest bit tight, hold onto it and pay off the mortgage month by month. There’s nothing magically good about having a paid-off mortgage, but there’s something seriously bad about not having ready liquid assets even if your home is paid for.”
Strongest Argument Point:
-Paying off a mortgage at 6.5% interest just isn’t as profitable as the alternative of putting those funds in a broad index fund which yields historical returns of ~9%

Your home may serve to be an excellent vehicle for maintaining surplus cash, it may have even made you an accidental millionaire. (Someone who has over a million dollars in assets, most of which is tied up in their home equity.)

Just what is the difference in returns in paying down your mortgage vs contributions to a broad index fund?

Using the compound interest calculator, I plugged in the effect of extra payments vs investment of $100/mth over a ten year period.

Paying down mortgage (6.5% return) Versus Investment in a broad index fund (9% return)
The results:
Ten Year Effect: $17,245.87 Versus $19,872.35 Difference:$2,626.48
Twenty Year Effect: $49,618.74 Versus $66,917.44 Difference:$17,298.70
Thirty Year Effect: $110,387.08 Versus $178,290.26 Difference:$67,903.18

And, although most mortgages don’t last 30 years, may of us will be homeowners for 40+ years of our lives.

Forty Year Effect: $224,457.59 Versus $441,950.24 Difference:$217,492.65

Does a 2.5% difference in the return of investment make a difference?

I guess that depends on how much you are looking forward to burning your mortgage.

My stance in this case is depending on the simple math, I’d rather take advantage of the long term higher returns of a broad market index fund than to pay off my mortgage just based off the ~$200,000 difference of a 40 year $100/mth investment.

While many financial professionals such as David Bach have written books such as The Automatic Millionaire Homeowner and have recommended accelerated mortgage payments, I don’t personally agree with their proven, and a little too conservative, method of building wealth. I greatly admire David Bach and find his passion for spreading his financial views truly inspiring, I just don’t agree with him on this matter. (My latte factor happened to be the unlimited data package on my cell phone, savings = $40/mth)

When looking at the traditional method of paying down a mortgage early, one payment every two weeks instead of one payment every month yeilds you with a full extra monthly payment each year.
Lets take an average mortgage payment (without taxes and PMI for this observation) of $1,000/mth. If you were to make bi-weekly payments equal to half of your mortgage payment, your cost would be $500/2 weeks or $13,000/yr. ($1,000 or one extra payment per year) That $1,000 extra payment would have almost been enough to make an alternative $100/mth investment. If you lived in a more pricey home, ESPECIALLY in the California, NYC, Washington DC area, the extra mortgage payment would be significantly higher; that extra payment towards a conservative investment in the stock market would yeild much larger returns than a ‘mere’ $200,000.

It is all in the math.

On a side note, I would like to once again apoligize to my mother and father for once believing that “I would never need math in REAL life.” I do ‘need’ math in real life, you were right and I was wrong. To anyone who believes you’ll never need math, you are wrong, but I wish you luck.

“Mathematics allows for no hypocrisy and no vagueness.” -Stendhal

Car vs. House, good perspective : It’s Just Money Blog

Source: Dave Ramsey Radio Show
A caller called in with the current situation:
-Had just purchased a $31,000 car
-Bought land for $20,000 ($4,0000 downpayment)
-Income of $43,000
Caller wished to know whether or not it was a better idea to rent an apartment or to build a small house on her land.

Dave’s advise? Sell the car. The car’s purchase price represented 72% of her annual income.
Summary provided by Dave: “You’re 25 years old today, right? Let’s say you wake up tomorrow and you’re 35. Let’s pretend that you’re still single for the sake of simplicity. You may be married with a bunch of kids, but that doesn’t matter. At 35, would you rather have a house that you are ten years into payments on, or a ten year old car?”

How often do we weigh our financial decisions? What effect does your Latte Factor or large purchase have on your long term financial future? I’m certainly not a financial Nazi (except when I’m in lockdown) but why do short term benefits so often outweigh much greater long term results? Where is the appropriate balance?

The primary financial solution this brings to mind is planning. I’d be more interested in what the difference in her rent vs home payments would be. I am currently a renter but am saving for the downpayment on a house via specified large cap stocks in my portfolio. The $800 in rent for an apartment within walking distance to work far outweighs the purchase of a home with associated costs of $1,200/mth and would require a 1+ hour commute. (Transportation costs can really hurt you too…)

What benefits/costs can you find behind your current financial decisions? Change may not be needed, but you should be aware of the impact your decisions have in all matters. Does putting only 4% in a 401K that provides a potential 6% match make for the best decision. That’s a universal no on giving up on free money, but what about the increasingly large number of college grads that are moving back in with their parents? I have heard of many individuals who have greatly used their reduced/eliminated rent costs to come up with a house downpayment in 6months-2 years. Is that a benefit? Sure! Is it worth living with your parents after finishing your ‘path of discovery’ in college to simpl wind up back where you were in high school? My stance is no.

We all face thousands of decisions everyday; try and take some time with the important ones to try and realize where your actions have you headed and how to you can maximize both your short term AND long term benefit.

“Be aware of wonder. Live a balanced life - learn some and think some and draw and paint and sing and dance and play and work every day some.” - Robert Fulghum

After doing a little more research, I’ve decided to join the ranks of those playing the balance transfer game with the banking industry.

Balance Arbitrage - taking advantage of bank’s introductory offers for balance transfers. They often charge an upfront fee, generally a percentage of the balance you transfer, give you a lock in rate for a specified period of time, and then start charging you the ‘normal’ interest rate.

Goal: Transfer existing credit card debt to another credit card at a lower interest rate. After taking an immediate hit by upfront banking fees meant to deter balance transfer arbitrage, I will put the difference in interest payments into other forms of investment which will then be used to pay down the principal balance on the credit card.
Largest Risk: Not paying off the balance by the end of the introductory rate will cause the rate to jump to high levels which would quickly eliminate my savings. I plan on either paying off the principal balance or repeating the loop via another balance transfer.

The majority (90%) of my credit card debt is currently held in my USAA account. The balance is just under $5,000. The offer that I am currently being provided via my current Washington Mutual card is for a 1.99% interest rate after until February 2008. The balance transfer fee is 5% of the balance with a minimum of $5and a maximum of $150.

Cost of transferring $5,000 = $5,000 * .05 = $250 but the costs are capped at $150. My USAA card is currently charging me 10% (prime +1.75%) Without taking into account minimum payments etc, the interest payable on a $5,000 balance is $500 or $41.67/mth. The interest I will be charged by Washington Mutual will be at 1.99% so I would pay $99.50 or $8.29/mth. The difference between these two amounts is $400.50/yr or $33.38/mth. The offer is good for 8 months so I will save a total of $267 on interest charges. Since I’m only charged a $150 fee for the balance transfer, I’m coming out $117 on top after 8 months. That might only be $14.63/mth or $0.48 per day…but I’m grinding!

Just remember the catch: “After that, your balance transfers will be at a variable rate of Prime + 11.74%. Using the Prime Rate in effect for billing cycles beginning in May, 2007 as an estimate, this APR would be 19.99%.” That’s the tricky part. One month carrying the balance and most of one’s profit wiped out. Solution: put a sticky-note in my planner to remind me of the upcoming changed to my balance transfer offer in February. You can always use the system to your advantage; it just takes a little thought.

I’ll keep updates on the balance transfer game on ‘My Goals’ page.

“Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.” -Niccolo Machiavelli

How to Save $1 Million for Retirement

“If you’re a newly minted college graduate, the $1 million-plus needed for retirement might seem impossibly large.”

Totally true. Looking at the average 2005 college grad’s starting salary of $30,337, it is almost hard to imagine a million dollars. A million dollars could earn more interest in a simple savings account than you make in a year. (I still get satisfaction when I get the occassional $100 bill from the 7-11 ATM)

Jonathan Clements sets a ’simple’ (in relative terms) initial goal of saving two times your annual salary. He makes the assumption of saving 12% of your pretax salary per year and gives investments a 6% return. Once you reach a point where your investments equal double that of your salary, your investments will earn more each year than your cumulative savings contributions. Baby steps. Once you reach this point, is it safe to say that you’ve reached ‘critical mass?’ No. Keep the pressure on.

“It can take people 12 to 15 years,” Mr. Farrell says. “The earlier you can start, the better. But if you’re close to two times pay by your early 40s, you’re probably in pretty good shape.”

Start when you graduate in your early 20s and you should have double your salary saved up by the time you are in your mid-20s. You’re in ‘pretty good shape!” Save more than 12% of your salary and you are golden.

Check out his story where he provides more information on investment ideas and also offers several savings tips.

An emergency fund is an important concept as I discussed in my last posting.

As with most things, I decided to tweak my emergency fund to give it a little spice.

My emergency fund is composed of the following:
-One month’s cash buffer in my primary savings account
-Emigrant Direct Savings Account
-Prosper.com loans
-Dividend yeilding investments

Cash Buffer
Not really an emergency fund as much as a safety precaution, my cash buffer simply serves as an immediatly accessible emergency fund without having to go online and transfer out any funds.

Savings Account
Savings accounts are the perfect way to build an emergency fund. I have 5% of my paycheck deposited into the account as well as an additional $25/paycheck in order to accelerate the growth of the funds. I keep the savings account as the funding account for my other emergency funds, only transfering out money for other emergency fund vehicles such as Prosper or Altria.

Prosper Loans
Since Prosper loans are unsecured loans to individuals, they might be considered risky. By lending to individuals that pass my lending criteria, it is possible for me to beat current savings account interest rates quite easily even if I were to have >10% of my loans default. I am taking a similar approach with Prosper that many prefer to do via CD laddering : re-investing all investment proceeds back into the investment vehicle and not withdrawing the funds for any non-emergency purpose.

Dividend yeilding investments
My current emergency fund is also partially invested in Altria which pays a ~4% dividend (equilavent to the interest rate I would recieve in a savings account) while also allowing me to take advantage of increases in their stock price. Should I need cash (for an appropriatly deemed emergency) that exceeds my other account funds, I plan on margining my Altria position in order to provide for my expenses. My hope is that I don’t have a large emergency in the near future (or ever for that matter) and I can continue to build my emergency fund while taking advantage of Altria’s impressive historical performance.

While stock investments are not typically considered ideal as emergency funds due to the fact that they can decrease in value rather rapidly, I view it more as a second line of defense just in case my emergency fund isn’t up to the task of fully covering me.

Interesting fact provided by the Montley Fool : If you’d invested $1,000 in Altria in 1980 and reinvested your dividends along the way, today you’d be sitting on shares worth about $155,000. Without dividends, you’d have a puny $50,000. Though back then you would have begun with a measly 29 shares of stock, you would now hold more than 2,180 shares through reinvested dividends and stock splits.

That’s not bad, but here’s the payoff pitch: From that single $1,000 investment, your shares would now provide an annual income of nearly $7,000! Twenty-five years may seem a long time, but consider that you would have begun receiving your $1,000 original investment paid out to you annually in dividends in little more than 10 years.”

If anyone has tweaked their emergency fund in a unique way, I’d love to hear the spin!

It can’t be said enough. You should have an emergency fund that is equal to 3-6 months of living expenses. Many financial gurus recommend having 6-12 months of emergency funding. If you are currently building up your financial base, the last thing you want to do is have to start deconstructing your hard work in order to pay for any number of financial emergencies.

Financial Emergencies ARE:
-Losing your job
-Car repairs
-Replacing your busted water heater/leaky roof
-Non-cosmetic medical expenses
-Things you absolutly cannot do without (No, the I-Phone doesn’t count)

Financial Emergencies ARE NOT:
-’Needing’ to take a vacation
-Funds for the instillation of your new hot tub
-A ‘great deal’ on a new car
-Anything else that you don’t need to survive

Start building it today! Whether its $10/paycheck or $25/mth, you should be putting something away for the eventual day you’ll need it. The good news? Once you build an emergency fund, you’ll never have to do it again, its like getting a fire extinguisher for your kitchen…hopefully you’ll never need it; but if you do…and you don’t have one…BAD THINGS CAN HAPPEN! The feeling of having that extra cushion around just in case is enlightening because the last thing you want to do is start flushing your 401K in order to make your rent payments.

According to Liz Weston over at MSN Money: “43% of households have less than $1,000 in liquid savings, according to SMR Research, a market research company.” AND “Just three in 10 households have a cash hoard that would tide them over for a minimum of three months, according to Ohio University researchers.” Thats a lot of people without fire extinguisher’s!

Where should you put your emergency fund? Start out with an Emigrant Direct or ING account and re-fill out your direct deposit information at your place of employment. Put just 1% from your paycheck in the account to start. I bet you won’t even notice. Continue to up the ante until you reach a point where you are comfortable. It may take you a while to build but once its done, you don’t need to do again, and you’ll be more prepared for hardship than 70% of the population.

“Sometimes, it’s the smallest decisions that can change your life forever” Keri Russell

Additional Information:
Emergency Funds : Why You Need One, How Much You Need, Where to Keep It
Building an emergency fund : Bankrate.com
Handling a financial emergency : 5 Tips: How to be prepared, and what to do if a financial disaster hits you : CNN Money

Where to invest emergency fund
By Don Taylor

Dear Dr. Don,
We have $10,000 in an emergency savings account at our credit union earning only 1 percent. We are thinking of putting it into a MMMF a MMA savings account. Which is the best way to go or are there other options? We would like to have access without penalty.

“Either a money market mutual fund, MMMF, or a bank money market account, MMA, is a great place to park your emergency savings.”
“The money market mutual fund invests in a pool of money market instruments — short-term debt securities with a final maturity of a year or less. You can choose between taxable funds and mutual funds that invest in tax-exempt securities. ”
“Getting your emergency fund to earn more than 1 percent (pretax) is a very smart move. You should be able in today’s market to earn over 5 percent on the money while still having the access to the funds that you require.”

Unfortunately, there are still many banks out there paying interest on principal that is just about criminal. It doesn’t even keep up with inflation.
A bank pays 1% interest for several reasons:
1) They know that many individuals aren’t looking even once at the interest rates at their interest account
2) Those that look at their interest rate yet maintain their account balance ‘Just don’t care.’
3) Most of these banks are established with many locations throughout the United States. They have rent payments and hundreds/thousands of employees to pay. They just can’t keep up with internet based banks with little/no overhead.
4) Why would they want to give you more money if they can give you less money?

Plugging a couple quick figures into the compound interest calculator over at moneychimp., we find that $10,000 invested in a savings account yielding 1% for 30 years gives us $13,478.49.

When compared against if the individuals were to keep their money in an EmigrantDirect savings account currently yielding 4.93% and we reach the figure of $42,363.34.

$13,500 vs $42,400 = $28,900 difference.
Or, in terms of a 30 year rate of return
35% vs 324% = 289% difference

More than worth the transfer in my opinion. If you are an individual out there with money sitting in a savings account earning ~1%, (or worse, the .25% crowd) you are a sucker. Plain and simple, you are getting robbed out of a HUGE chunk of change in the long run. It takes you 10 minutes to open up another savings account and the money is transferred over in 3-5 business days. Don’t throw in the loyalty card just because you’ve had the account for 10 years. You’re just being loyal to someone knowingly taking advantage of you. Your money is still FDIC insured and you can still access your money very quickly; you have no defense. Open another account.

Please feel free to write me an e-mail with any financial questions you have, the standard annual rate of free still applies.