Category Archives: Savings

What to do with Extra Paychecks

Many people are paid every two weeks, so August may be one of the two months this year you will get an additional paycheck. If you are married and your spouse works outside of the home and paid the same way, then that may mean 2 extra paychecks this month.  However, if you don’t plan, this money will just get absorbed by your spending. 

What to do with extra money: tax refunds, bonuses and extra paychecks: Here is your great opportunity to get ahead in life. This doesn’t happen often, so take serious advantage of it.

  1. Invest $100 in a financial class: Take a financial class; it will only cost you $100, such as Dave Ramsey Financial Peace University. Go to his website and search by your zip code for a class near you. I promise you, your investment of $100 will return you many thousands of dollars. I am not kidding you: you will get much more back than you will ever receive in tax refunds.
  2. Put the money in a savings account, all of it!  If you need to remove the temptation right away, open up a separate account at a bank where you don’t have any accounts; otherwise, you will spend it, maybe all at once, or slowly transfer it into checking and it will dwindle away.
  3. Plan for needs and not wants: Do not spend it on vacations, large screen TV’s or vacationing if you have debt and no savings. If you have been doing without for quite a while because finances have been tight, this extra money will make you feel a sense of elation. When we feel this way, we end up spending more money. Our emotions tell us that good times are back for good, even though it is a temporary thing.
  4. Make a list of all of your savings and debts.
  5. Make a list of the things you really need:  If your car’s tires are bald, or you need money for upcoming things for medical, children’s needs, savings for Christmas in 9 months–set it aside. Now prioritize your list. Don’t forget to include tithe (10%). If you do all of these things right, you will have more money every month in the future, not just once per year.
  6. Put $1,000 in savings, if you don’t have any. This is to be used if you have a real emergency, for example, the car is on fire or a family member is bleeding. I’m exaggerating of course, but this is not for the emergency pizza. You will have a car repair or other emergency need in the future; this is your ‘rainy day’ savings so that you don’t have to borrow to make it–you see, we are trying to avoid the trap of debt.
  7. Now look at your needs list again and  prioritize the really immediate needs and debts. See how many loan payments you get get rid of by paying off some debt, and use that freed up monthly payment that you don’t have anymore to pay off the other debt each month until you are debt free (this is called debt snowballing).
  8. Put 6 months of expenses in savings for big financial setbacks like job loss. This is if all non-mortgage debt is paid off, and your $1,000 emergency fund is established. Every financial planning book says to do this, and it is really smart.
  9. It is okay to use a small part of the windfall for fun, but instead of blowing $100′s, take a few bucks a buy some steak and a nice bottle of wine and have a home date and watch a video.
  10. If you have done all of these things, you are ready to plan for intermediate things, like car replacements, or long-term needs like retirement and college education.
  11. Give money to a charitable organization or tithe.  Regular tithers may not think to tithe on this extra paycheck, but it is a good idea to tithe all bonuses, monetary gifts, extra paychecks, or if you win a drawing.

Just because you got a nice chunk of change, it isn’t time to live big, but by being wise you can make great decisions, and maybe this year you will advance to a stage in life of living smarter with less stress. This is what the wealthy have learned to do, and if you want to accumulate wealth, this is what you will do. Poor people blow it and a few months from now wonder were it all went; they never seem to get ahead.   You may get ahead if you do these things.

What Are the Best Savings Account Rates? Does it Matter?

Do you wonder what is the best rate of return that you can get on a savings account? Does it really matter? Toward the end of this article I will give you some rates I found, but even though it does matter, it doesn’t matter as much as you think, so don’t sweat it too much. Even though your savings account gets a poor rate of return, the idea is that the low rate is the cost of having insurance. I don’t mean insurance in the traditional sense, but self-insurance if something happens and you need to get your hands on your money for a health condition, lost employment, or car repairs, such as the transmission going out on your car. The cost of ‘insurance’ is the low rate of return. The benefit is having money readily available, insured by FDIC, and in something that won’t go down in value. Remember what Mark Twain said: “I am more concerned with the return of my money than the return on my money.”

That is the reason I don’t think it is too important to lose sleep over the low interest rate your savings account is earning. Also, the difference in rate of return isn’t going to add up that much anyway. For example, if your account is earning .50% and another one is offering .65%, the difference in accumulation in 1 year on $10,000 is only $15 dollars. However, as you save more money and you are going to have it in savings a long time, then you should do more homework to find a great rate.

Saving money is all the rage these days. In April of 2005 the US personal savings rate was .80%; today it stands at about 4%. More people are saving money as a result of the recession, now that they see the value of having a safety net. Hopefully the trend toward saving instead of spending almost all we make will continue and we won’t return to a spend-and-borrow culture that helped contribute to a recession. People are taking classes, learning from experience, and understanding the value of having an emergency fund of savings.

The challenge many people face is where to put their money. We are told to deposit it into a safe money market account, pass-book savings, or certificate of deposit, but the interest rates are horrible. We are supposed to save 3 to 6 months of expenses in case of a rainy day. If someone is self-employed, it may be good to have 12 to 18 months of savings in case of business slumps. If people are paying off debt, Dave Ramsey suggests they start with baby-step #1 and put $1,000 into savings, then start to snowball debt reduction with a gazelle run-hard mentality.

Basic bank and credit union savings and money market accounts are great, because they are easy to get to, they don’t go down in value like the stock or bond market, and they are insured against loss by the FDIC. Make note though–there are some money market accounts that are not insured.

I looked around the web and found some decent rates in the neighborhood of .65% to 1.05%; the best from my quick search was at CIT Bank and Sallie Mae. I found some institutions with rates as good as 1.50%, but they had requirements such as minimum balances and a checking account. At Bankrate.com the average money market account was paying from .50% to .70%, depending on minimum balance. Find a good institution, with a good rate, keep an eye on it, but don’t sweat it too much initially.

Are Young People Saving More Money?

Do you think your children are learning from their parents’ financial woes and are practicing better personal finances, such as saving more money? The Wall Street Journal yesterday reported on this subject in “Watching Parents Fail Sparks New Rebellion: Saving Money.”

I think this could indeed be true. I know we have been transparent with our kids about things we have learned, sometimes the hard way, and their attitudes about finances are very spot on. It seems as though for prior generations finances were sometimes more secretive. Today in light of the fact that parents perhaps have not saved enough or budgeted like they should have, the recession has exacerbated family financial problems; the kids have witnessed these problems first hand, and they don’t want to go through the same thing.

I know when we lead the Dave Ramsey Financial Peace University class it seems there are almost two groups of people: those in their 20’s who want to get it right for a lifetime, and those who are older who have gone through difficulty and have regrets. There are about 20% who actually are doing okay but just want to do better too.

Have you noticed teenagers and young adults trying to take control of their finances more these days?

Options for the Unbanked

Several media sources report that 1 in 12 households or 10% of Americans today do not use bank checking accounts, but use cash for everything. Most people have had checking accounts at some point.  Some have had to close them because they never learned to manage them well. Others closed accounts after life’s circumstances put them in a bind, resulting in bounced checks and accumulated fees and making it too difficult for them to try opening another account. Many banks don’t want to deal with people who have had bad checking account and credit history.

Not having a checking or other bank account makes it difficult for people to establish credit, which is often a barrier to home ownership or buying a car to get to work. Thus people remain economically depressed because of their failure or refusal to deal with banks. Many people with modest incomes, or those who have gone through terrible financial circumstances, as well as those in poverty, don’t have traditional bank accounts these days.  Bankless or under-banked people can wall themselves off to financial advancement by not learning good financial management and the knowledge required to manage bank accounts. This seems to be another consequence of our bad economy. The best thing these folks can do is to take a financial class, often held by non-profits in their community, or at a Dave Ramsey Financial Peace University course.

For those that continue to go the non-bank route, they might be victims to high charges for the only options that are available to them:

  1. Check-cashing stores are the first option many choose when they have problems with bouncing checks. These unscrupulous enterprises provide a payday advance {loan} until the paycheck arrives, charging high fees and interest, sometimes several hundred percent. They provide a handy service to the person who gets stuck and needs quick cash, yet they charge exorbitant amounts of interest. Many people get stuck, unable to catch up, and have a hard time breaking the pay-day loan, cash advance, check-cashing store cycle. I recommend that people avoid all these if at all possible.
  2. Some people cash their paychecks and then buy everything with cash. If they need to send a bill, they pay for utilities at a local bill-paying place such as some grocery stores offer, or they buy money-orders. Money orders aren’t cheap if you calculate the cost throughout the year, and having cash can make security an issue and budgeting a challenge. I recommend that people who do this use the envelope system until they can get re-established with a bank checking account.
  3. Pre-paid credit cards are another option that people may use. Companies like RushCard provide a nice way for people to pay bills easily, as their paychecks are automtically deposited and they can use these debit-like cards to pay bills. Some of these services have high fees that really add up. Some of them have an annual fee, monthly fees, and per-transaction (bill paying and ATM) fees. Searching these companies on Google, I found numerous complaints, often concerning the quality of service, money not being deposited on time, and mis-used account numbers (theft of account numbers). Some users of pre-paid cards hope to establish good credit by using them, but I am not sure they accomplish that. What I do like about the RushCard is the budgeting tools and bill managing capability. This feature might teach some to get back on their feet and to practice and learn good personal finances, thereby helping them build a bridge back to financial health.

Those with modest incomes and those who are in or near poverty are a vast population under-served by most mainline large financial institutions. It would be welcome news if just one of these institutions made it corporate policy to design a plan to serve this population. They could start by offering new creative services and education and customer support especially designed for the under-served population, all with an affordable cost structure.

How Does Inflation Affect Savings?

People are aware of inflation, since it is talked about all the time on the news and they see gasoline prices increasing astronomically and erratically. You may have heard someone talk about loss of purchasing power, but what does that mean?

As a quick review, when you invest or save money, and you pull it out later, it should be worth more. This is because it either pays interest (e.g., bank pass-book savings, money market account, certificate of deposit [CD], bond), or earns dividends (e.g., stocks), or appreciates in value (e.g., stock, real estate).

If you invested in a savings account, CD or money market account, you are typically going to earn 0 – 1.5% annually.

Inflation (increase in the cost of goods), on the other hand, averages about 3.5% over time. If the money you deposit in an interest earning account earns less than the rate of inflation, you won’t be able to buy the same amount of goods when you take your money out to buy something as you could have bought before you invested the money. You have lost what is called purchasing power.

If you buried the money in a coffee can in the back yard or hid it in your mattress, it would not appreciate in value at all. Each year you left it in the ground or in your mattress, it would actually go down in value an average of 3.5% per year, since you can’t buy the same amount of goods with it when you take it out as you could have bought with it when you buried it or hid it.

Some people are very risk averse, meaning they are afraid stocks or bonds may lose value. However, as you can now see, even by taking no risk, your money can go down in value if not invested wisely.

 

Higher Bank Yields

Interest rates continue to plummet for borrowers, with mortgage rates dropping below 4% for 30 year fixed, and less than 3% for shorter term mortgages like 15 year plans. Conversely investors continue to see interest rates drop for their investments and savings accounts. For conservative investors and those wanting to put emergency savings in a FDIC insured accounts, it is common to earn less than 1%, making these accounts loose purchasing power due to inflation. A few days ago the Wall Street Journal had a good article about banks and credit unions that are paying much better rates than those in my neighborhood, and may be worth considering.

Personal Savings Rate Decreases

Source: Wall Street Journal

The U.S. personal savings rate has been decreasing this year. Looking back at 2011, it has been steadily decreasing from 5.2% in January to 4.30% in September, but it began to increase by the end of the year to 4.70%. Although March showed a slight increase to 3.80%, the overall savings rate is not good from the perspective of individuals accumulating reserves for emergencies and other needs. This might be a good indication of individuals paying off debt since debt has high interest rates, and saving accounts, CD and money market accounts are paying less than 1% these days. Short sighted economist see this has having positive ramifications for the economy that consumers are spending more money.

Dave Ramsey FPU Week 1: How to Accomplish Baby Step #1

The 1st of 9 Dave Ramsey Financial Peace University classes is Super Saving. This is an excellent class to start with and begin to set the goal to accomplish  Baby Step number one; saving $1,000 in an emergency fund. The emergency fund will provide the safety net, or insurance, when something happens in life like a car repair or the hot-water heater going out. When you have money set aside for emergencies, you will not have to go into debt, fall behind on bills, or pull money out of long-term investments. However some people commented after class last week, since they are living paycheck-to-paycheck how are they going to come up with $1,000?  Here are 15 things that you can consider doing to help you accomplish baby step #1:

  1. Follow a budget and track spending, so that you know where your money goes and you have limits when you shop (you will learn more about this in Lesson #3 “Cash Flow Planning.)”
  2. Tear up credit cards and use cash. Research indicates that people who use plastic end up spending more money than those that don’t- it is a psychological thing (this is covered extensively in lesson #4 “Dumping Debt.)”.
  3. Refinance your home now that interest rates are lower than ever, and a lower rate could lower your payment. Be careful, take your time before pulling the trigger, read this post for more information. This will be covered more in lesson #12 “Real Estate and Mortgages.”
  4. Change tax withholding if you usually get a tax refund. Talk to your tax advisor about the right amount of exemptions for you to take that make sense for you. Your paycheck will go up, and you can use that money for important things.
  5. Shop for lower insurance rates, this may save you $20 – $100 per month.
  6. Reduce grocery spending $100 this month. Most people who don’t pay close attention to this area, can save a lot by becoming a more frugal shopper by using coupons and other means. Your local library has dozens of books about how to save money. We like anything by Mary Hunt of Debt Proof Living.
  7. Cut back on your Cell phone data and time usage, or shop around for better rates. We were able to save $30 per month for two smart phones by switching to Cricket from Verizon. Cricket is owned by AT&T and their network is the second largest, so coverage is pretty good.
  8. Reduce cable to basic or eliminate all together until you are back to where you need to be.
  9. Lower your real estate taxes, start by calling your county auditor and talk with them about how you can go about adjusting the valuation of your home down for real estate tax assessment purposes.
  10. Downsize your home or automobile if you can, this will help you have lower payments, maintenance and utilities.
  11. Obtain a second part-time job.
  12. Use tax refunds to fund, or for debt re-payment, and don’t buy anything unnecessary with those monies.
  13. Do freelance or side work. This has been helpful to me, in the past I painted a friends barn and did other work, and now I do freelance writing.
  14. Sell something: In the last few years we sold old gold jewerly (read this article first), and I sold a few items that I only used a couple of times per year, including Ping golf clubs and a Specialized road bike.
  15. Pray for miracles, they sometimes happen. Also, be sure to pray for strength, perseverance, wisdom and guidance along the way, you need His help and He is willing to help you.

You can have a successful year, it takes ingenuity, hard work and prayer.

Savings, CDs, Money Markets and Linked CDs

Many people ask me about savings accounts, money markets and CDs, and the latest version of CDs, market linked or index CDs:

Q. Most financial experts say that we should accumulate 3 – 6 months of income or expenses in a safe savings account, for emergencies, such as job loss, uninsured damage to property or health care, for example. What kind of savings account or investment account should that be put into? A. The type of account should be 1. easy to get to, in a moments notice that provides check writing capability, or the ability to move funds electronically very quickly, without waiting for a delay for investments to be sold. 2. It should be FDIC (bank) or NCUSIF (credit union) insured, so that if the financial institution becomes insolvent, your money is guaranteed to be there. 3. The type of account should have no early withdrawal penalty, also know as a CDSC or contingent deferred sales charge unless very small. 4. The account should not be set up as a tax qualified account (e.g., IRA) because they usually have taxes and tax penalties to get your money.

Q. What types of accounts meet all of these 4 qualifications? A. Bank or credit union savings account, sometimes referred to as a passbook savings account qualifies. The second most common account is a money market account, or also known as a money market mutual fund. Dave Ramsey recommends this for most people’s emergency fund in Baby Step #1, because they have check-writing privileges, pay a little higher rate than pass-book savings accounts, and no penalties like CDs. However not all money market accounts are FDIC insured, so make sure you find out. Short term CDs or certificates of deposit may also qualify, but they may have an interest penalty if you withdraw the money before maturity.

Q. Which account pays the highest rate of return?A.  Typically insured accounts are paying interest in the .50% – 2%, the same goes for CDs. For CDs usually the longer term and larger amount you have to deposit correspondingly pays a little higher interest rate. For all of these accounts most rates are much less than 2%, and their isn’t a great difference between accounts. Savers should check with several financial institutions to find the best rate for these accounts. Some banks and credit unions in our area offer interest rates closer to 2%, and you might find one where you live too.

Q. Why are the rates so low, and are they any ways to get a better rate of return yet still maintain the requirements of safety, access, and no penalty, for example I have heard of Linked CDs? A. The accounts discussed so far are all safe accounts that earn a low rate of return for a few reasons, one being that the institution where you are making a deposit is legally required to invest your money in very safe investments such as highly rated government securities that don’t pay much interest, and the institution is required to pay a higher premium then they used to have to pay for the insurance protection. Since financial institutions like banks and credit unions are paying such a low rate on savings, CDs and money markets they have come up with some creative ideas to provide the possibility of higher rates of return yet maintain safety.  These hybrid CDs provide rates of return based on an underlying stock, bond or commodity index, or basket of them, and a percentage of the performance to the CD holder. The upside performance at maturity is limited to a specific percentage, and the downside is limited to 0% at maturity. These go by a number of names such as index or variable rate CDs to mention a few. They may have surrender charges too, which might make them not a fit for an emergency savings account, unless the saver has a lot of liquid assets. Before investing, obtain full materials and thoroughly read it and ask many questions of your investment advisor, as well as obtaining information about prior performance if available, even though past performance is not an indication of future results. As with all decisions, seek the advise of trusted advisors, and pray before you choose which way to go.

Lawn Tractor Saga

A couple of weeks ago my 1998 42″ Sears Craftsman Lawn Tractor model # 917.271021 with a 15.5 hp Kohler engine, decided to empty its transmission fluid on my back yard. The transmission case somehow got a crack in it, and it is too old and costly to replace. I was not happy with the thought of forking out over $1,000 for a new riding lawn mower to cut 1 – 2 acres. I’ve become a decent mechanic learning how to replace many parts on this mower over the years, from deck parts, several batteries, belts and blades, steering linkage,  and various other parts and pullies. I was just glad I made it to the end of the season, and I’d worry about it next Spring.

Driving down a country road a guy had a mower identical model to mine sitting on the curb with a “For Sale, Has Issues,” sign.  Basically in need of a battery and front axle. So flash forward after my buddy Bruce helped me by hauling it, and a greasy Saturday, I’ve combined the parts of two mowers into 1 pretty good one and a supply of many extra parts for only $75 minus the $14 I got for the metal I recycled.

I’m feeling good having saved some money on parts, and having a good working tractor, and no big outlay for a new one come Spring. Sometimes saving money is making due, and waiting to see what crosses your path while waiting. I’m feeling blessed that the Lord provided for me by coincidently putting in my path an identical tractor for hardly any outlay.