When I was young I knew everything.
I read the books but never took advice.
Now I’m guilt stricken, sobbing with my head on the floor,
Stopping spending, eating just a shoe full of rice, yeah
I do feel like a freshman in finance. It feels like I’m starting over so late in life. It can be quite frustrating. Finally, I’m getting on the right track. I’ve just opened three different savings accounts at three different institutions. I already had my Chase Savings account which gave me a whopping 0.01% apy. erg. Unfortunately, I’ve had that for years and just never paid attention to how insignificant that percentage is. I missed all the good years of 5% interest rates.
Now, the best interest rate you’ll find is 1.15% and I opened an account at that level with American Express Savings. I also opened an ING Direct Savings account at 1%. I’ve heard a lot about ING so even though they have a lower interest rate, I want to see if they’re more consistent in their service than others.
But Fi, why so many savings accounts? Well, anonymous inquisitor, you should always have three different savings accounts. Into them, you should try to put 30% of your pay check. I’m starting out at 15% until I can work my way up, putting 5% into each account. Here they are and which are which for me:
1. Emergency fund. How much does it take you to live every month? $2000? $4000? Figure out the minimum you would need if you lost your job tomorrow, round up and multiply it by six. That’s how much money you should have in your emergency fund. That’s 6 months of living in hard times. If you do lose your job or renters move out (god forbid), you’ll be covered, but remedy the situation quickly, it’s amazing how quickly the reserves run low. NEVER EVER tap into this account unless catastrophic events have occurred.
For me, I’m using the Amex account. I currently have $500 in it right now and will be putting in $200 per month. My min monthly expenses are around $3000. Six months would be $18,000 total. At $200 a month, it will take me 90 months or 7.5 years to build up my emergency fund to where it should be. Oh wait, with compound interest, that will actually only take 6 years. I used this compound interest calculator. That’s still a long time, but better to start now. I would’ve already had it covered but because I dipped into my one savings account to start my failed company, I used ALL my savings instead of having them dived up. Baby steps, my friends.
2. Investment Account. When investment opportunities come around, you want to have the ability to take advantage of them without endangering the rest of your lifestyle. This account will give you that opportunity. Use it to pay off loans, contribute to an IRA, or even start a business (it’s preferable, you don’t use your own money to start a business).
I still have a little ways to go with this. Currently I have it in the low yield Chase account. I’m not sure if there’s a fidelity or etrade account that pays you interest, but for now I’ll just keep it at Chase. My plans for it are to contribute every year to my IRA or student loans. If my IRA is giving more yield than my interest rates for student loans, then I’ll put it in the IRA. But typically, my rule of thumb is if my current interest rates for my student loans are greater than 5%, I’ll add it to the loan principles. I currently have $1100 in the account and by the end of the year, i’ll have about $2000, so it’s still not as much as I used to have when I contributed $5000 a year to my IRA.
3. Savings Account. This is to be used as you would normally use a savings account: save up for things you want or need, for a trip, to contribute to investments of loans in addition to your investment savings account, etc. It’s a little more discretionary than the other two accounts, which is good cause we all have to live right?
I am using the ING Direct Savings account for this purpose and contributing $200/mo just like the other 2 accounts.
In total, these three accounts will amount to a lot of savings, but it’s important to see them as three different entities, meant for different purposes. This is why it’s so important to separate them out into different accounts, so you don’t get tempted or confused and spend money that you should be saving. It’s easy, fast, and free. Do it. Do it NOW! I’M HEEYA! KILL ME! (Predator? Anyone?)
Some things to pay attention to
When looking for a good savings account, there is more to pay attention to than just the APY. You should also pay attention to the minimum balance restriction as you could be charged a fee for going under it, compound frequency (is the interest compounded daily, monthly or yearly?), how often the interest is credited to your account (usually monthly), and the rules for your interest rate; often the banks can change the interest rate at any time without telling you. Unfortunately, the only real way to know this yourself is to watch your accounts and read objective customer experiences from others. All of this information can be found in the fine print of your account terms. It will probably look something like this:
High-Yield Savings Account
Minimum Balance to Open the Account. There is no minimum deposit required to open your high-yield savings account.
Rate Information. The current interest rate and Annual Percentage Yield (APY) on your account will be disclosed in your account-opening documents and on your periodic statement. The interest rate and APY are established at our discretion and are variable and subject to change at any time without notice to you.
Compounding Frequency. Interest on your high-yield savings account will be compounded daily.
Notice the line I put in read. erg. This is from my Amex account. I’ll keep an eye on it every month and see if it changes.