Put Your Savings To Work
There are a lot of reasons to have a healthy savings account; peace of mind, liquidity, disaster preparedness. Wait, maybe those are all the same reason. In any case, you should save. And that saving should benefit you. Fiscally, as well as mentally. Save money to earn interest, at least at some level. I remember the days, not so long ago, of promotional 5% interest rates. Sigh. If only I’d had the balance then that I do now. Mooning for the time of milk and honey (or WaMu) won’t bring them back. We’ve got to work with what we’ve got, which best case scenario is an interest rate under or right around 1%. I don’t know about you, but I’m determined not to let my money be any lazier than necessary.
Curse you lazy money.
I tend to be a passive saver. I actively save the money, then I passively let it sit there are collect dust. I’ve built a big Emergency Fund that way. Probably too big, in actuality. It should be diversified. Or something. Stock and Bonds and Portfolios. Yep. Probably. Not gonna, though. I’ll leave such things to my 401(k), my IRAs, Roths, and other smart Jewish friends. The Emergency Fund is separate. Cash. No worries about mortgage backed securities or brokerage fees. Just money begetting more money. This has been the state of affairs for quite some time. My singular fat account, protected by a couple feeder accounts and some targeted savings. Comfort. Everything is fine. As long as I’m beating the inflation rate.
And there’s the rub. All that comfortable money could actually be losing value if it isn’t earning an interest rate to at least match inflation. Well, shit. Finance guru, I am not. But, I’m search engine savvy enough to find out the average inflation rate for 2011 was 3.2%. For 2012, we are looking at about 2.7%. I’m sure it’s more complicated than that, but out of curiousity, what rate you getting on your savings account these days?
I’ve got a promotional 6.0% at my Credit Union. I win. On one account. With a maximum balance of $500. Hmmm, less winning. It’s all down hill from there. ING Direct, to whom I’ve been loyal for nigh on these many years, they’ve inched me ever downward to a meager .80%. Yes, that’s point eight. I think they hope I won’t notice. All that passive savings is costing me money. Begging the question, what’s the point of having a big fat savings account if it’s losing purchasing power?
Lucky for The Emergency Fund, Stuff does not generally appreciate, and Shit inevitably happens. Factoids that keep my monies safely collecting dust. That doesn’t mean I’m not trying to mitigate the damage.
Chase Rates. Sacrifice Liquidity. At least a little. Two strategies I’ve historically been loathe to pursue. Switching accounts results in lost interest during days of transfer, not to mention hassling with some unavoidable paperwork, login credentials, and potentially closing old accounts. It’s not something to be done frequently, but I am considering longer term CD’s (with acceptable early termination fees even) at institutions I’ve not previously worked with. Still not going to beat inflation. With those longer term rates, I can get closer though. Having my money locked up for a year or two or longer is also not high on my list of saving pro’s. Why have it, if I can’t use it without a fee? .80% though. That’s a call to…
Leave Your Comfort Zone. Treasury I-Bonds get a little closer to inflation still, and update semi-annually. Terms are longer yet again, but with industry standard penalties after the first year, and let’s face it, I won’t be terminating The Emergency Fund in it’s entirety anytime soon. How about Peer to Peer lending? On sites like Prosper one could certainly beat inflation, with a heck of a lot more inherent risk. I love the idea of cutting out the middle man. However, that might put me closer to mortgage backed security territory than I’d like. The reality of all that depreciating money is just painful enough to inspire me to research and be on the look out for new options. Maybe even to try one.
One of our goals for 2012 was to find a better interest rate. It’s time I do that, build a proper CD ladder, and start climbing. All the while, keeping my eyes open for an opportunity with what I consider an acceptable blend of risk and reward.
Do you take inflation and interest rate into account? What’s your savings strategy?
Comments
Have you considered leaving a chunk of your emergency fund in you regular savings (whatever you feel you need to have available immediately) and then investing the rest in a CD ladder? It’s a bit more to manage, but at least you reduce the risk of losing money if you had to cash out a CD early.
Absolutely, should’ve included that. Good catch! I’m uncomfortable without a little (or a lot) of readily accessible cash. I’ll keep my feeder accounts and targeted savings, plus a little something extra in traditional accounts and suffer those pitiful interest rates. That’s worth pretending I can’t spell inflation.
I agree with Jenny — that’s what I’d do if I had savings to invest (or not) right now.
Although we’re actually in an unusual situation, having timed our lives to the greater economic reality with uncanny accuracy. We saved for my daughter’s college through mutual funds until 2007, doing predictably well during that decade, then switched to CDs, then paid for college. In 2008, we had spent our savings down but took out a massive home equity loan to insulate and air-seal our home, thereby “investing” in lower energy costs. By wrapping what remained of the mortgage in that loan, we also lowered our mortgage rate substantially.
Now our emergency fund, such as it is, is really that line of credit, plus the security I have from having tenure. So we won’t actually start having savings to invest for another year or two when we’ve finished paying off the home loan . . . and by then, hopefully, the market will have recovered. Hope?
Not that I’d recommend my own path to others, but by sheer dumb luck it’s worked well for us.
Nice! That couldn’t have worked better had you planned it.
If I’m paying attention to inflation rates vs. interest rates, then I’m definitely ignoring home values, even post refinance. Can’t compute multiple discouraging numbers at once. Will they recover? That is a question worth a heck of a lotta dinero.
I also have been looking at the .8% interest at INGDirect and thinking I need to do something else with my emergency fund.
But then, as soon as I get ready to invest my “surplus”, something inevitably happens that drains part of it: an unexpected chance to refi my underwater condo was the latest.
Having the liquid funds in case of emergency makes me feel better, especially watching the bumpy ride of the stock market, even though part of me knows I would be much better off with at least part of it earning above inflation … and don’t forget taxes on that paltry interest amount!
Oh the taxes! I do tend to forget those because they only pain me once a year. The .8% I look at several times a month. Way more in my face with its lack of performance.
I just pillaged some money for a refi too. Another thing that pained me, but was the right thing to do.
I have my emergency fund in municipal bonds, which can be liquidated in 24 hours. I don’t know if that’s a good strategy or not, but my investment guy recommended it.
It very well could be, and probably is. Any idea what kind of rate of return you are getting on those bonds?
Before investing in municipal bonds, I recommend becoming conversant with their ‘callable’ nature and what that means. If interest rates rise, you don’t get the bump, but if interest rates fall, they get to start over at the new lower rate. Great deal for the issuer, not so much for the investor.
Your credit union sounds like BECU, and if that’s true, you should have a checking and a savings account there, each of which gets the $500 at 6%. (I know that’s not a huge difference, but I figure every little bit helps.)
Without going into great detail — I’ll probably write a whole post on it someday — I’ve researched (and lightly tried) the peer-to-peer lending thing and decided that it was a bad idea for anyone who is moderately risk-averse. That said, if you want to go there, Lending Club is a more favorable setup these days than Prosper.
I have started to use I-bonds — they’re better than any of the other current options, including even new 5-year CDs. If you also want CDs, I recommend Ally — good rates, good customer service, and the lowest available early termination penalties.
I had a good interest rate run for 9 months with a rewards checking account at an Illinois credit union, but they’re pulling it back in July so it’s no longer such a great deal. (Up to $5k at 3.09% starting July 1, down from $10k at 4.09%.) Still, if you use a debit card regularly, it’s not onerous and again, every little bit helps.
Generally, though, .80% is about the market rate right now. Boo.
Those are some very accurate guesses on establishments.
3.09% on 5k is none too shabby either. Although I hate having my money spread hither and yon. Still… What bank is that?
Consumers Cooperative Credit Union. Read this post before signing up to avoid a couple of the bumps that I encountered. (Sadly, the referral bonus is no longer in effect.)
Oh, and for the record: you can essentially ‘ladder’ I-bonds just like you would CDs — put in a certain amount every six months or a year. Not good for a baby emergency fund because of the one-year unavailability, but great for someone in your situation, I would think.