Managing your money can be one of the most important things you do when you’re just starting a job — but it also can be super difficult. We’ve talked about the importance of an emergency fund, but we haven’t really had a good conversation about where to stash your money in general — a high-yield savings account? CDs? Treasury bills? The stock market? (Pictured: Emilio Pucci Print Flap Wallet, available at Nordstrom for $295.) (As always, please keep in mind that a) these are huge issues with a lot of nuances, and many personal finance sites, magazines, and books do a much better job with them, and b) I am by no means a personal finance guru — this is just some common, fairly basic knowledge that I’ve learned over the past 10 years or so.)
Before you decide where to save your money, though, you need to know the answers to some important questions first, though:
1) How much money do you need to live on before your next paycheck comes? What money is needed to pay recurring bills that will come due before then?
2) What is your idea of an “emergency” — and how quickly can you get your hands on enough money to cover it? For me, I can’t imagine there being any sort of emergency where my husband or I would need more than $5K within 24 hours (with no advance notice). This matters because of the different options out there in the market. For example:
- an online-only bank will often provide you with a higher interest rate than a brick-and-mortar bank will, but most of those banks don’t offer a checking account — so it can take 3-5 days to get your money out.
- Money market funds. This is actually where I kept the majority of my money when I was saving up to buy an apartment. At the time, the interest rate was great (as high as 7% at one point!), I could invest it in stocks or mutual funds immediately if I wanted to, but I could get it to my checking account in 3-5 days or so if I needed it. The interest rates are not guaranteed, though — when I realized I was getting about 1/10th of the monthly interest that I used to get, I looked into it, and the interest rate was less than a percentage point. Another major downside: these accounts are not FDIC insured (although the institution does try to maintain their value at $1 a share) — but if something happens in the market, you have no protection. Some banks offer money market accounts that ARE FDIC insured, but the interest rate will be less. (Right now, the interest rate for both money market funds and money market accounts stinks.)
- Stocks and mutual funds often allow you to withdraw funds immediately (although your broker may charge a penalty if you’ve only held the security for a short while) — but you’re subject to the whims of the market. If the market is having a bad week (or year, or decade) you could lose a lot of money. It can take a day or more for the sale to go through, and then another 3-5 days to transfer the money to your checking account.
- CDs, treasury bills, and bonds are all “safer” than stocks and mutual funds — you know the interest rate up front and shouldn’t be subject to the whims of the market — but for the best interest rates you consign your money away for 6 months (at a minimum) to 30 years, with huge penalties for taking it out early. (And of course, the best rates are for the longer Which means you can’t rely on that money in an emergency. Some people talk of “laddering” investments such as these so that every 6 months some of it becomes available. Let’s say you had $15K to invest — if you put $5K in a 6-month bill, $5K in a 1-year bill, $5K in an 18-month bill. In general, the longer you commit your money, the higher the interest rate, so after the initial cycle ends all of your money is earning the highest rate available, but you’ll have access to it every six months.
- Finally, 401Ks, IRAs, and other retirement vehicles pose huge penalties if you remove the money before you turn a certain age (I believe right now it’s 59 and a half). So: Definitely not good in an emergency.
Keep in mind that a true emergency (9/11, The Rapture, whatever) may require cash — and ATMs may not be working. So if you’re really concerned, you may want to keep some cash in your house, or even something like gold bars.
3) How comfortable are you with risk in general? Right now, most savings accounts will give you about 1.5% interest — which is a lousy, lousy interest rate. The last time I looked, CDs, bonds, and t-bills are providing only slightly better rates than that — and it wasn’t worth it to me to consign my money away for so long. (There may even be FDIC insurance for bank accounts and government-issued securities, so keep an eye out for that.) (Hat tip to commenters!)
Stocks and mutual funds may give you returns of 7-15% (the average is allegedly 10%) — but if the market goes down, you go down with it.
4) How often do you want to move your money around? Interest rates change really frequently, and it’s a pain to open and close different accounts (or to keep the minimum in each one). Don’t get me wrong, you need to stay aware of what a competitive rate is and whether your bank is meeting it — like I said, it was a huge shock to me when my money market fund went from 7% to like .025% interest. But is it worth it moving your money from an account providing 1.5% interest to one providing 2.5% interest? That’s a question only you can answer.
For my own $.02, I have a tiered system when it comes to my money.
- Checking account: I really keep just the minimal balance, plus the amount needed to cover any bills due that month.
- Savings account (attached to checking): Right now, I keep a fairly minimal amount of money here also — if it grows to more than $5K I tend to move it to the next level. Pros: We can move it to checking pretty much instantaneously, either if cash withdrawals are greater than expected, or to cover us if an incoming check bounces or is delayed. Cons: The money is earning next to no interest.
- Online savings account. I’ve said it before and I’ll say it again: I love using Mint.com. One of the nicest things about it is that you can always run a search for the best interest that a bank is providing — as well as the best interest for CDs, the lowest rates for credit cards (useful if you don’t pay off your balance every month), and so forth. This is where we keep our emergency fund. It’s a low interest rate, but if my husband were to lose his job or this blog were to suddenly go south, we’d be able to live on the money for quite a while. We chose Capital One, which was offering about 1.5% interest plus a quarterly bonus) at the time we were looking. Taking a quick look at Mint, it looks like that’s down to about 1.08% interest (joy), but none of the competitors are offering more than 1.35% interest — so I’ll stay put. Similarly, the 1-year CDs seem to be 1.3% at their best, and a 5-year CD is, at best, 2.40% interest — so personally, for any investments beyond our retirement funds and our emergency fund, I’ll continue looking to the stock market. If you’re not a fan of Mint, check Bankrate.com or even Kiplinger’s Personal Finance.
- Retirement vehicles. I kind of forget about the money we put in our 401Ks, to be honest, because it doesn’t feel like “saving” — it’s just money that we don’t get in our paychecks. (Last year was the first year I contributed to an IRA, which is a different story, and because I’m contributing as a business owner probably not one worth getting into in the context of this blog.) Stay tuned in future columns — we should have a discussion about retirement vehicles and why they’re important. The short version: if your employer matches, you are an idiot not to contribute at least that amount if there is any way possible for you to do so. Free money is always nice.
- CDs, bonds, T-bills: If interest rates here were at all nice this would probably be the next place my risk-averse self would go — but right now the interest rates are so low (see above) that I’ll either play it safe with my online savings account or invest it more aggressively.
- Stocks and mutual funds. I read an article years ago which crunched the numbers and determined that if you had bought stock on the eve of the Great Depression, but held onto the stocks for enough time (we’re talking decades here), you still would have turned a major profit. This one article shaped my view of stocks and mutual funds — when I put money here I know that I’m in it for the long haul. If my investments are performing poorly I may sell some, usually near the end of the year as a tax write-off — but I hate losing money! This one is also deserving of a longer post, because there are a number of ways to figure out which stocks and funds to buy (ranging from financial advisers (look for one who gets a flat fee, not a commission) to index funds and target-date funds to various research tools).
Readers, where do you stash your cash? How often do you reevaluate?