Category Archives for Invest & Retire
Choosing a Bank – Part 3 – Checking Account vs. Savings Account
In Part 2 of the “Choosing a Bank” series (My Money Blog – Choosing a Bank – Part 2), I discussed the four basic options for savings accounts available on the financial markets today.
However, what I did not address was 1) how to decide if a checking account or savings account is right for your needs and 2) how to choose the correct checking account (if that is the route you decide to take). These topics will be what we’ll investigate together in today’s posting.
Let’s get started! This is definitely an exciting topic because there seem to be new options available every day.
Deciding Between a Checking Account or Savings Account
At a high level, whatever banking instrument you choose needs to be able to fulfill four basic requirements – 1) allow unlimited transactions for daily living expenses with no fees, 2) have checking writing capability (for paying bills, and unexpected expenses directly to people who cannot take credit cards), 3) have an ATM card tied to the account / have ATM access capability, and 4) offer a competitive interest rate of return on your cash savings.
Please always keep these requirements in mind as you are exploring your options. Now that we know what is required, let’s take a look at our options:
Savings Accounts – In general, traditional savings accounts:
- Do not allow check writing.
- Do not feature ATM cards.
- Have restrictions on maximum numbers and quantities of transactions per month.
- Do offer competitive interest rates on your account’s cash balance.
Clearly, traditional savings accounts at brick-and-mortar banks are not a good sole choice for your banking needs.
Non-traditional savings options come a little closer to fulfilling some of the requirements, but still fall short. For example, Vanguard.com – Money Market Mutual Fund Accounts offer check writing capability on your taxable money market mutual fund balance, but do not offer ATM cards.
My two favorite online savings accounts (at the links shown below) offer no fees and unlimited transfer each month, but do not offer checking or ATM card capability.
IngDirect.com Savings Account
DollarSavingsDirect.com Savings Account
Note: if you are looking to open up a savings account with IngDirect.com, email me your name and email address at irwin.jacob@gmail.com, and I’ll send you a code to give you $25 of free money, when you open the account with a $250 minimum opening balance.
Checking Accounts – Traditional checking accounts offer:
- Unlimited transactions/transfers of money
- Checking writing
- ATM/debit card capability.
- The only pitfall is that traditional checking accounts do not offer any interest rate on the money kept in the account. Recently, interest bearing checking accounts have been created (see information on this below). However, the interest rate offered on these products is significantly lower than for savings accounts with the same minimum balance requirements.
Summary – As it turns out, it looks like a multi-account system of checking and savings accounts are required in order to manage your money most effectively. Since we already explored choosing a savings account in Part 2 of this series, let’s look at our options for checking accounts.
Choosing a Checking Account
To recap what was stated previously, we are looking for a checking account that meets the following requirements:
- No fees / unlimited transactions.
- ATM/Debit card capability
- Check writing capability
Please note that having a competitive interest rate is not required for a checking account since we will use a savings account to grow our cash savings.
Step 1-
The first step to choosing a checking account is to decide between a local bank or a national/online bank (an online bank has almost the same pluses and minuses as a national bank when it comes to choosing a checking account). Take a look at Part 1 of this series for more information on that topic at the following link – Choosing a Bank – Part 1 – Local vs. National.
Step 2 –
Once you have decided between a local or national/online bank, the next step is to decide what type of account you want to open. For this, you basically have two choices: interest bearing checking accounts and regular checking accounts.
Choosing between an interest bearing account and a normal checking account can be a little tricky. All else being equal, you will want to lean towards the interest bearing account. However, if there is a monthly maintenance fee associated with the account or other restrictions, you would want to revert to the normal checking account.
For example, click on the link below to look at Bank of America’s checking account options. In doing this, we see that the normal My Access Checking account is totally free if opened online. We also see that Bank of America offers an interest bearing checking account. When we click on the details for the interest bearing instrument, we see that they are offering a 0.05% interest rate. However, we also can see that if the balance is under $10,000, there is a monthly maintenance fee associated with the account. In this case, we would want to go with the normal checking account.
Bank of America Checking Accounts
On the other hand, interest bearing checking accounts from online banks are an AMAZING DEAL. Just take a look at the link below for INGDirect’s checking account!
IngDirect.com – Electric Orange Checking Account w/ Interest
This account offers:
- No fees
- An ATM/Debit Card
- Free checks
- An interest rate of 0.24%. Awesome right?!
Note: if you are looking to open up an interest bearing checking account with IngDirect.com, email me your name and email address at irwin.jacob@gmail.com, and I’ll send you a code to give you $25 of free money, when you open the account with a $250 minimum opening balance.
As it turns out, other online banks offer interest bearing accounts similar to ING’s. Take a look at the link below for more details about those.
Bankrate.com – Checking Accounts with Interest
What works best for me
For my personal needs, the following system works best for me:
- I have a MyAccess Checking Account with Bank of America (no fees, free checks, free ATM/debit card access). I use Bank of America because I tend to move/vacation around a lot, and they have branches everywhere. Additionally, many of my friends and family have their checking accounts with Bank of America, and therefore, we can do instant money transfers between our accounts.
- I only keep around $700-$800 in this checking account at any one time because I do not earn interest on my balance.
- Any additional money I transfer out to either my stock equity accounts or my high yield savings account with Dollarsavingsdirect.com
Out of curiosity, let’s just take a look at how much more money I would be earning if I used an interest bearing checking account (INGDirect). Assuming that I maintain $800 in the account throughout the year and earn 0.24% interest, this equates to $2.92 per year. It’s probably not enough to outweigh the benefits I enjoy with Bank of America. But, if all else is equal in your situation, it is something to consider!
Please let me know if you have any questions.
Keep on learning!
Jacob
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My Current Asset Allocation and Net Worth Growth – March 2010
From February 6th (when the last portfolio update was published – see link below) to March 5th, the S&P500 index went up 6.8%.
My Money Blog – February 2010 Portfolio and Net Worth
During that time period, my net worth increased 8.16%. I am now only 4% off of my short term target net worth for this year. Almost there! Additionally, I have now contributed $4300 of the $5000 allowed for my Roth IRA.
Currently, 26% of my net worth is invested in fixed income instruments, and 74% is invested in equity. This is just off of my targets of 25% and 75%, respectively, for these categories.
While the overall percentages for these categories are looking good, a detailed look (table below) at the allocation breakdown reveals that I still have some room for improvement.
Remember: a red flag goes off if your current % allocation in a category is greater than +/- 5% off of the target allocation.
% Cash (money market target 5%) 12%
% non-inflat Bond Funds (target 15%) 15%
% TIPS Bonds (target 5%) 0%
% International Equity (Target 11%) 12%
% International Emerging Markets (Target 11%) 7%
% Domestic Large Cap (Target 8%) 30%
% Domestic Small Cap (Target 9%) 6%
% Domestic Small Cap Value (Target 13%) 6%
% Domestic Large Cap Value (Target 13%) 7%
% REIT (target 10%) 6%
In the past month, I’ve been working very hard to move money to my emerging market mutual fund account. The progress can been seen because I now have 7% of net worth in that category. This is a good thing!
Also, as mentioned before, I currently have a VERY large percentage of my portfolio in Domestic Large Cap stocks. This is due to the fact that I was contributing 100% of my 401k contributions purchase S&P500 index fund shares for 1.5 years. I am now moving towards allocating that money to international and bond funds.
My next move for the March/April time frame will be to do the following:
- $700 contribution to my Roth IRA for the Vanguard Emerging Markets Index Fund
- Since I can no longer invest in my tax-sheltered IRA, I now shift to contributing to my individual Vanguard mutual fund account and online high yield money market accounts. This is only because I have fulfilled all of the higher priority items on the My Money Blog – Account Hierarchy. I’m never going to let you all forget that hierarchy!
- Purchase an inflation adjusted bond mutual fund (TIPS)
- Begin contributing again to the small-cap value and large-cap value funds.
Keep on learning!
Jacob
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"Play" Money – What Is It and How Much Should I Have?
In the previous post about penny stocks (see link below), I discussed how penny stocks (stocks trading under $2 per share) are a very risky investment instrument, and as such, intelligent investors should not invest their retirement nest-eggs in these low priced stocks.
However, if you do feel inclined to trade penny stocks for learning or the excitement (both are OK), I recommended only investing what I call “play” money in these stocks. I gave a general explanation about what “play” money is, but I didn’t have a chance to get in to the details of 1) what is it, and 2) how much play money should a person have? These two topics will be the subject of today’s post.
1. What is play money?
So first, what is the concept of play money exactly? In T. Harv Eker’s book, “The Secrets of the Millionaire Mind,” he recommended that your paycheck should be split in the following way, because it is the way millionaires do as well. Please note that this is your paycheck that you receive, after pre-tax deductions have been extracted.
If you haven’t read T. Harv’s book, pick up a cheap used copy of it at Amazon. I’ve pasted the link below if you’re interested! It’s worth the read!
- 50% of your paycheck should be kept in your checking account for monthly living expenses (food, childcare, gas, etc)
- The remaining 50 % should be split as follows: (The %’s below are % of your total take-home income)
- 10 % given to charities (My Money Blog – Donating Money)
- 10% spent for you or your family’s education (My Money Blog – Invest in Your Education)
- 10% placed in to a “financial freedom account” – This is also known as your Traditional or Roth IRA. (My Money Blog – Roth IRA vs. Traditional IRA)
- 10% should be placed in a savings account and marked as long term savings for spending. (My Money Blog – High Yield Savings Accounts)
- 10% should be used as Play money.
2. What is the correct amount of play money?
As the bullet point mentioned above, T. Harv recommends setting aside 10% of your total take-home income for play money.
For example, if your gross salary is $5,000 per month and we assume you pay 28% taxes, and contribute 15% of your income to your 401k pre-tax, this would give you a take-home pay of $3060 ($5000 – $750 to 401k = $4250 – 28% taxes = $3060 take home pay).
You would then keep 1/2 in your checking account ($1530), and allocate the remaining 1/2 according to the bullets above.
This would translate in to $306 play money (10% of your take home pay). Sounds like a good, reasonable amount right? Now, naturally, you can adjust this number down as it best suits your situation. I usually end up spending less than this each month and have money left over. If that happens, no sweat! Just transfer it to one of the other allocation categories.
Hope this post was helpful and let me know if you have any questions.
Keep on learning!
Jacob
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Does It Pay To Know Another Language?
An important decision that many people face in life is whether or not to learn another language. However, is it really worth the effort financially, and which language does it pay the most to learn?
These are both questions we’ll investigate during today’s post.
Does Knowing a 2nd Language Earn You More Money?
As it turns out, the answer to this is a resounding “Yes.”
In the article I found at the link below from the Aol.com job section, it states that 67% of business executives (one the highest earning work group classifications) surveyed knew more than one language. Addtionally, a CareerBuilder.com search yield over 6000 job results requesting bilingual applicants. This sounds like a promising market!
Why It Pays to Be Bilingual – Aol.com
In fact, I learned that on average, bilingual pay ranges between 5 and 20 percent per hour more than the position’s base rate, according to Salary.com. This is quite a signficant find.
There are two additional cases that I wanted to make from my personal experience that prove the benefits of being bilingual.
First, if you work in a multi-national corporation (as I do) with offices in almost every country in the world, you are more likely to have increased job flexbibility to move different places if you already know the language. This can result in several things; either avoiding being laid off by downsizing in a certain country or gaining valuable experience at different locations, thus accelerating the promotion process.
In fact, from what I’ve seen so far, people that get promoted the fastest are individuals that have worked at many different locations, and are therefore, able to provide a lot of depth in their perspectives. This definitely benefits the company.
The second case that I wanted to make for being bilingual is that in my experience, you immediately gain much more respect from people you are dealing with if you are able to at least try to speak their language. This will enhance your professional success and personal happiness.
Note: Learning a foreign language is exponentially easier at an early age because the brain is willing to accept new knoweldge without question. So, do yourself and your children a favor, give them a financial head start on life by exposing them to foreign languages early!
What Language Pays the Most to Know?
The short answer to this is that speaking the language that is used by the majority of the market where your particular business is conducted will make you the most money.
What does this mean exactly?
For example, if you are in the service industry in the USA, the two most common languages are English and Spanish. In fact, Latinos are now the nation’s largest minority group, accounting for half of the nation’s population growth since April 2001, according to the U.S. Census Bureau. In this case, knowing Spanish as a 2nd language would benefit you greatly. It is estimated that the buying power of Hispanics in the USA could reach as much as $1 trillion by the end of this year (2010). That is a big potential market to capture!
On the other hand, if you are in the manufacturing industry, it might be better to speak Japanese or Chinese, since so much business is shifting to that region nowadays.
Keep on learning!
Jacob
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Are Penny Stocks A Good Investment?
Wait…Really? I can buy 200 shares for $20. Wow! Just imagine what would happen if the stock started going up in price a lot. I’d be rich!
Boy, those penny stocks sure are attractive! But, are they worth their salt as investments? Are they too risky? Do penny stock newsletters work? These are all topics we’ll try to tackle during this post.
What is a penny stock exactly?
According to Wikipedia.org (see link below), a penny stock is any stock that trades for under $5 per share in OTC (Over-the-Counter) fashion. OTC is basically a forum in which lower-volume stocks can trade. It is outside of the normal stock markets, such as NYSE, AMEX, or NASDAQ.
What is the historical performance of penny stocks?
After extensively searching for any evidence of studies conducted on the historical returns of penny stocks without success, I then came across the article below from Fool.com (see link). The article states that penny stocks, in their true form, aren’t subject to the disclosure rules that apply to larger companies. Therefore, you really can’t safely use their disclosure filings. They also aren’t followed by analysts or the financial press.
Wow! This explains a lot as to why I couldn’t find any solid historical return information.
What this means to me is that no one really understands them. Since I am not overly smart, why should I even try to understand penny stocks when I have all of the clear evidence of returns with index mutual funds and asset allocation? That’s right conscience. I should not.
Fool.com – Penny Stocks
Are Penny Stocks Too Risky?
Absolutely. As stated above, they aren’t subject to the same filing requirements as companies traded on the regular stock exchanges. This is enough for me to stay away from these OTC stocks.
But, what about stocks traded on the AMEX, NASDAQ, and NYSE for $5 or less?
Good question! Let’s take a look.
Another search for a comparison of average returns for this type of investment instrument also yielded nothing. Due to this lack of data, I would not buy them for myself as long-term, retirement nest-egg investments.
However, as I have mentioned in other posts, I believe that having “play money” to invest to keep you interested in investing and learning finance is a healthy exercise.
How much would qualify as “play money”? Naturally, this amount will change from person to person. For me, it would be no more than $100-$200, and it would be looked at as more of an entertainment/education expense than a money saving exercise.
In the beginning days of my investing career, I was slightly more naive and eager to experiment with different things. One of the things that I did experiment with were the “penny stocks” listed on the regular exchanges, selling for less than $5.
To guide my efforts, I used some birthday money to purchase a subscription to the Penny Stock newsletter at the link below. It was the best, most-unbiased, legitimate, and least hyped-up newsletter I could find. I then began to invest in the stocks recommended.
Even though I was slightly naive back in those days, I still was aware that this would only be play money. And, as such, I never invested more than a couple hundred Dollars in these stocks.
How was my track record with this newsletter? No so good. I ended up losing about a third of my play money. However, it didn’t hurt anything because those funds were marked as entertainment, and I was ready to lose it to begin with! It was also a valuable learning experience because I learned portfolio management, how to buy stocks, etc. The key was that it kept me interested in learning! See my point?
So, the bottom line here is that OTC penny stocks are not good to buy at all. Penny stocks on the AMEX, NYSE, and NASDAQ exchanges are not good investments, but can be fun to use your “play money” with.
Keep on learning!
Jacob
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Retirement and Time Value of Money Financial Calculators
In previous posts (see link below), I have talked about several types of financial calculators available on the Internet to calculate asset allocation and emergency fund goals. However, what I realized I had not yet addressed was a tool that I use almost daily with this website: Retirement / Time Value of Money Calculators!
My Money Blog – Financial Calculators
The Time Value of Money
First, what is the concept of The Time Value of Money? Basically, it is the idea that by saving a Dollar today and investing it for the long-term with compound interest, the money will grow exponentially over time.
The basic equation for the Time Value of Money is shown in the graphic below. Essentially, it is computed by multiplying the present value (PV) x (1+ interest rate)^(number of years).
Exponential growth of money sounds very good right? Let’s now see how it can be applied to your retirement calculations.
Essentially, there are two methods to do the calculations regarding your retirement nest-egg (both employ exponential growth): using Excel Spreadsheets and using pre-built retirement calculators.
Personally, I favor using Excel Spreadsheets because they are quick and highly customizable to my particular analytical needs. However, let’s look at each tool one by one.
Pre-Built Retirement Calculators
Pre-made calculators essentially do all of the things that a spreadsheet can do, except that the calculations take place automatically at the click of a button.
My favorite pre-built retirement calculator can be accessed using the link below. The reason I favor this one is because it allows you to enter information about your specific situation both before and after retirement.
Pre-Built MSN Money Calculator
However, one thing that I do not like about these calculators is that many do not take in to consideration the decrease in buying power of money over time (aka inflation).
Calculations Using Excel Spreadsheets
Once you master the art of making Time Value of Money spreadsheets, the sky is basically the limit with how detailed you can make it. However, for the sake of keeping things simple, I wanted to only discuss two basic applications of Excel spreadsheets that I use all of the time: compounding interest and discounted monetary quantities over time due to inflation effects (these are also known as calculating future value and present value for you finance geeks out there).
To demonstrate these two applications, let’s build a spreadsheet to calculate the amount of money you will have at retirement. An example of the finished spreadsheet can be found at the following link:
TVM and Retirement Calculator Spreadsheet – Google Docs
After checking out the example, just follow the steps below to create your own:
1) Open Excel
2) Create 5 columns (Columns A-E). In Row 1 of each column, type in the labels “Age,” “Current Amount,” “Annual Amount Contributed,” “Salary,” and “Percent Salary Contributed Each Year” from left to right for Columns A-E.
3) In the age column (Column A), type in your current age in cell A2. Using the addition function (=A2 Cell + 1), copy the code until you have ages listed from your current age until the retirement age of 65.
4) In the Current Amount column, Column B, type in the Dollar amount that you currently have saved for retirement in cell B2.
5) In the Salary Column (Column D), type in your current salary in cell D2. Next, you will type in the formula to let you grow your salary, assuming an annual raise of 5%. To do this, type “=D2 Cell*1.05” in cell D3. Next, copy this code down the entire column until your retirement age.
6) In Column E, type in the % of your salary you currently and/or plan on contributing to retirement for all of the years until age 65.
7) Complete Column C by copying the following formula down the entire row: “=D2 Cell * E2 Cell.” This will give you the amount that you plan to contribute each year, based on the % specified in Step 6.
8) Now for the most important step!
In cell B3, you will type in the Compound Interest formula. This sounds scary, but it really is very easy. So, in cell B3, type in the following, “=B2 Cell*(1+ rate of return) + C2 Cell.” You can choose the rate of return that best suits your investment portfolio. The average return of the stock market that I use is either 12.4% (aggressive) or 9% (moderate). Next, copy this formula down the entire column until you fill out the table. In words, what this formula is doing is growing your previous year’s balance by the interest rate and then adding the new money you contributed during the year.
9) You can then view what balance you will potentially have at retirement in the last cell in Column B. You have just completed the compounding interest/calculating future value portion of the exercise! Congrats!
10) Now, in order to get a more realistic picture of the buying power we will have at retirement, the amount at age 65 in Column B needs to be discounted by the rate of inflation, which can be assumed to be 3.2%
To do this, type in the following formula below the last calculation in Column B: “Column B Cell @ Age 65 / (1.032)^(65-Your Current Age).” When you do this, the amount should go down signficantly. That will then give you an idea in today’s Dollars how much you will have!
So, congratulations! You have just learned a very powerful financial tool that you can use to calculate anything that involves the Time Value of Money (house values, costs of living, opportunity costs, etc). The opportunities are endless!
I know this topic is a little dense, so please let me know if you have questions.
Keep on learning!
Jacob
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Innovative Ways to Obtain Cash for a House Downpayment
“I want to buy a house, but I just don’t have the cash for the downpayment.”
This phrase is a familiar tune that people hear around the world. However, there are some innovative ways to get access to cash you probably didn’t know you had that I wanted to share with you today!
Glossary – The IRS’s definition of a first time home-buyer/purchase is that you, or your spouse, has not owned a principal residence in the past two years. You don’t actually have to be buying your first house. Awesome!
For first time home-purchases, the IRS allows you to tap in to two retirement resources of yours at an early age, without penalty: Your IRA(s) and 401k retirement accounts.
So, let’s look at the all-important details that you will need to know to access these funds to buy your first house.
Cash from your 401k Retirement Fund
As stated previously, the government allows people to withdraw money from their 401k account to buy a first-time residence. This cash will be given in the form of a loan to yourself. Generally, the loan must be paid back over five years, although this can be extended for a home purchase. You are usually allowed to borrow up to 50% of your vested account balance to a maximum of $50,000.
Additionally, loan payments can be deducted from payroll checks (another added benefit). While interest rates vary by plan, the rate most often used is what is termed the “prime rate” plus one percent. The current prime rate is 3.25%, meaning that an estimate for the current interest rate you would pay on the 401k loan is 4.25%. Again, you have to remember that this is a loan to yourself, and therefore, the interest you pay is to yourself as well!
Another great thing is that money obtained from 401k loans are not subject to income tax or the 10% early withdrawal penalty, unless you stop your employment with your 401k employer.
See the link below for a great list of pros and cons to mull through before taking out a 401k loan.
Get a Loan from Your 401k
Cash from Your IRA (Individual Retirement Account)
According to Bankrate.com (Using IRA’s for Home Buying), both Roth IRAs and Traditional IRAs can be used for homepurchase expenses. However, they are treated a little differently. So, let’s address the stipulations for each individually.
Roth IRA-
With Roth IRAs, the IRS rules dictate that you can withdraw up to $10,000 from your account for first time home-purchases, provided that you have had the Roth IRA account open for a minimum of 5 years.
Hint – this is another benefit that can be created by getting your children to invest early!
If you meet these qualifications, the $10,000 will be tax and penalty free.
Traditional IRA
For Traditional IRA’s, each individual can withdraw up to $10,000 towards the purchase of that “first-home” tax and penalty free. However, the IRS’s rules are even more lenient for Traditional IRAs. The IRS says the “first-time homebuyer” using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild, or a parent.
Just be careful about the timing of withdrawing the funds. If the funds are not used for an eligible home expense within 120 days, taxes and penalties will apply.
What are eligible expenses?
Turns out, you can use the funds from your IRA for more than the downpayment; you can also use them for closing costs, financing costs, settlement costs, and construction costs.
So, all in all, it turns out that Uncle Sam does want us to own our own houses after all!
Keep on learning!
Jacob
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Online Money Market Savings Account Applications
In a previous post (see link below), I detailed the reasons why I use online money market savings accounts for my cash saving needs. However, what I didn’t discuss in that post was applications the online money market savings account should be used for.
My Money Blog – Choosing a Bank – Part 2 – Savings Options
I use an online money market savings account for the following three purposes:
1) Accumulating cash for the 5% cash portion of my target asset allocation (this was described in a previous post – My Money Blog – Index Funds and Current Asset Allocation)
2) Saving for long term spending
3) An emergency cash fund – “saving for a rainy day” (most important)
Note: In my opinion, even though all three of these accounts are with the same bank (Dollarsavingsdirect.com in my case); I believe it works best to have three separate accounts, one for each use above. It is a lot easier to keep an eye on what is going on this way!
Since No. 1 above was already explained in the Asset Allocation post on My Money Blog, let’s investigate the other two uses.
Saving for Long Term Spending
This is the account that is designated as cash needed for future large purchases. Examples could possibly include house down-payments, cars, boats, a wedding ring, vacation, etc.
The key here is to make sure that the money you dedicate to certain future purchases remains dedicated to those items. For example, you wouldn’t want to save for a house down payment for 10 years, and then spend it all on an expensive trip to Paris one summer. See what I mean?
Emergency Cash Fund
This is, hands down, without a doubt, the single most important use of the online money market account. It is also one of the reasons why I wanted my account to be FDIC insured. As my previous post mentions (My Money Blog – Account Hierarchy Order), having an emergency cash fund is the 2nd highest priority on your financial hierarchy list.
Why do you need an emergency fund?
The purpose of this account is to have enough a safety cushion to cover your monthly living expenses in the event that you lose your job or cannot work due to an injury for an extended period.
How much do you need to put in it?
The most widely excepted answer for how much you need in the account is 6-9 months of living expenses. However, there are possible exceptions to this rule. For example, if you are in graduate school and still receiving monetary support from your parents, you could probably get away with less than the 6 month minimum.
However, no one should under any circumstance have an emergency fund with less than 3 months of expenses in it.
Calculating how much you need for the emergency fund is a fairly simple exercise, provided that you are comfortable tabulating your monthly expenses. They are some really handy dandy calculators out there on the internet for this very purpose. One of my favorite ones can be found at the link below:
Calculate Your Emergency Fund Quantity
Once you have calculated how much money you will need, you can use the calculator at the link below to figure out how long it will take you to save/reach your emergency fund total goal:
Bloomberd Calculator – How Long to Reach Emergency Fund Savings Goal
There you go! You are on your way to wisely saving cash! That wasn’t so painful was it? Let me know if you all have any questions.
Keep on learning!
Jacob
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Choosing a Bank – Part 2 – Savings Options
Should I choose a regular savings account, money market savings account, money market mutual fund, or CD?
The short answer to this is that, personally, I believe that money market savings accounts are the best option at the current time. To outline my reasoning, let’s take a look at each product individually.
Regular Savings Accounts
• Are FDIC insured.
• Provide flexibility to add and withdraw money, generally as many times as needed
• Many can even have checks written against their balances.
• Typically offer very low interest rates (example – Bank of America’s current return is 0.1%).
CDs
• Locks in your money for a set period of time
• Fees are incurred if you withdraw money before holding period is over
• Typically, CDs have higher minimum balance requirements than other instruments
• Offer a slightly higher national average interest rate of 1.386% with an average minimum deposit of $5,171 (Bank of America’s current 12 month CD interest rate is 0.8%)
• Are FDIC insured
Money Market Mutual Funds
• Not FDIC insured. However, these are considered VERY safe. In fact, no instituation has ever defaulted on a money market mutual fund, to my knoweldge.
• Will have an expense ratio associated with it since it is a mutual fund
• The returns that I have found so far are generally lower. Example – Vanguard’s current 1 year return on its Prime Money Market Fund (symbol – VMMXX – Vanguard Money Market Mutual Funds) is 0.28%.
Money Market Savings Accounts
• Most are FDIC insured.
• No fees or expense ratios.
• Deposits and/or withdraws can be made at any time without penalties.
• High interest rate returns
• Generally do not have check writing ability.
Obviously, as always, you have to pick the correct savings instrument suited to your needs. However, the thing that I would put my money in is the Money Market Savings Account.
To recap, so far, I’ve detailed the pros and cons of different savings instruments. Now, the choice becomes, where do I open the account?
Should I open a money market savings account at an online or brick/mortar bank?
According to the link below, the current average national interest rate for Money Market and Savings Accounts is 0.902%, with a minimum opening balance requirement of $2,108. An initial review of the highest rate search results shows that most of the banks offering the highest rates are online-based. However, let’s dig a little deeper, shall we?
Highest Money Market Savings Account Interest Rates
I wonder how my favorite brick and mortar bank, Bank of America, stacks up against this average. By clicking on the link below, it is pretty apparent that it fails this test. The average interest rate you can earn on a money market savings account is 0.15%. Not good at all!
Now, let’s compare my two favorite online banks (Dollarsavingsdirect.com and Ingdirect.com) to see if their rates are higher, lower, or the same.
Dollarsavingsdirect offers a no fees, $1000 minimum to open, 1.40% interest money market savings account that is FDIC insured. ING Direct offers similar features, with a 1.10% interest rate with no minimum balance requirements. Both of these interest rates are significantly higher than what Bank of America offers.
Dollarsavingsdirect.com
IngDirect (click on the picture below to visit their page)
Note: to receive a $20 bonus for signing up for an INGDirect.com checking account, send me an email at Irwin.jacob@gmail.com with your name and email address, and I can send you a link to use to redeem your money.
From this comparison, it looks like online banks are the way to go for your money market savings account needs. This is provided that you are all right with limited-to-no face to face interaction with your online bank.
Key Takeaways
So, what’s the bottom line here? We have learned that online money market savings accounts typically offer higher returns than the other savings options.
I hope this helps get you on the road to saving your cash more effectively! Please let me know if you have any questions. Also, keep an eye out for a post coming soon about the reasons why you need an emergency cash fund available and the proper amount to place in it.
To view Part 3 of this series, click on the link below.
Choosing a Bank Part 3 – Savings Accounts vs. Checking Accounts
Choosing a Bank – Part 1 – Local vs. National
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Easy account access if you move. This was probably the biggest factor in my decision to choose Bank of America for my main checking account. They have branches all across the US, and if you have been moving as frequently as I have the past couple of years, it makes life a lot easier to not change banks.
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Easy account access on vacations within the US. National banks also have affiliations with foreign banks to avoid ATM fees when you are abroad. This comes in very useful if you are traveling out of the country!
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A top notch online banking system backed by a team of computer network geniuses.
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Money is safe and FDIC insured.
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Less personal service.
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Expect to be encouraged to use the ATM for deposits and withdraws, and be discouraged to go inside to the tellers unless you have a special circumstance.
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Super personal service. Many local banks even know you by name when you walk in the door.
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More likely to take a chance on you if your credit history is only “so-so” for loans. This is done because it is important for their future business to retain you as a customer.
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More likely to give you a personal loan to build your credit. See previous post on that topic at the following link: Part 3 – Build Your Credit History From Nothing
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Money is safe and FDIC insured.
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Essentially the opposite of the pros of national banks shown above. You will have to change banks when you move if you have your account with a local bank.
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You will not have your local bank’s ATMs available when you go on vacation. This could result in ATM usage fees at other banks if cash is needed in a pinch. However, local banks are catching on to this gap these days, and are setting up aggreements with other banks that allows you to avoid this ATM usage fee. Stay tuned for a future post about that topic!
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Relating to interest rates on savings accounts, unfortuantely, there is no clear winner here. According to this link Bank Rate Comparison of Savings Interest Rates, the highest interest rates in the country come from a mixuture of local and national banks.
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The verdict is also still out on where to go for the lowest interest rate on a home equity loan. The key here is to shop around as much as you can to compare the rates of different loans that met your specific criteria. For example, I performed an interest rate search on bankrate.com (see the following link Charlottesville, VA home loan rate search) to get a feel for the lowest interest rates available in the area. Then, no matter if you are working with a local bank, national bank, or mortgage broker, you would want to make sure you are getting a comparitive deal. It is also important to keep in mind that you do not have to get your home equity mortgage from the same place your checking and savings accounts are, although you sometimes can benefits from combining accounts under one institution.