Get Money - Saving & Investing
When you're starting out financially, you need to take three steps:
. Find a low-cost checking account.
. Build an emergency fund.
. Start saving for long-term goals.
Step One: The Checking Account
These days, checking accounts offer a confusing array of features. Here's what you really want: A no-frills, free checking account that offers:
. No minimum balance, or the lowest possible minimum.
. No monthly service charges.
. Unlimited deposits.
. Free online banking and online transfers to other accounts.
. Free use of ATM as often as you need, and a wide ATM network; (some banks will even refund you the fees you pay to other banks' ATM machines).
. No per-item service charges; the ability to write as many checks as you need.
. Minimal fees for bounced checks.
. Balance alert e-mails; with this nifty feature, offered by some banks, you can get a daily email from the bank stating your balance, or an email that's sent when you dip below a number you specify.
Once you open the account, set up online bill pay. The bank will give you a login and password; sometimes you have to choose a new password when you login for the first time. Then it takes all of 15 minutes to set up. Just find your major bills from last month. For each bill you pay monthly, click "add a new payee" (or a button similar to this) and fill in the form that appears with the company name (Acme Electric, etc.), address, phone number and your account number. When your bill comes in and says it's due in three weeks, you jump online, tell the bank what date you want the bill paid and click. (It's best to leave at least five business days before the actual due date to make sure the payment goes through on time). Write the date and amount of the bill in your checkbook register. You're done. No checks to write, no stamps to buy, no random utility bill diving into the bottom of your purse to be discovered floating there months later. You'll still have to balance your checkbook (but you'll have the added ease of going online whenever you want to see if a particular check you wrote has been cashed or a payment you deposited has cleared).
Step 2: The Emergency Fund
The traditional "rainy day" fund contains three to six months of living expenses in case you lose your job. First, add up your basic monthly expenses: Rent, utilities, food, auto/commuting costs, toiletries/household items, gym memberships, etc. Multiply by three. That's the minimum number you're trying to save. If you can't realistically ballpark your monthly expenses are, track every penny you spend for 30 days. (For more tips on tracking your spending, see Money & Happiness, Chapter 5.)
Start your emergency fund even if you are paying off debt. Try this: For every $1 dollar you can save, funnel 75 cents toward reducing your debt and 25 cents toward your emergency fund. (So if you can save $100, put $75 toward your credit cards and $25 into your savings.) When you get two months' worth of emergency funds in place, switch back and put all your capital into paying down your debt. When the debt is paid off, return to building your emergency fund. Stash your savings in an account that you can access quickly and easily; where there is no risk of losing your money; and where you can earn some interest. Here are three options:
. savings accounts or money market accounts;
. certificates of deposit;
. savings bonds.
Savings and Money Market Accounts (MMA)
Shop around for a savings account and get the best interest rate you can find - web sites like www.bankrate.com make this a breeze. It's easy to open a savings account at a different institution and link it to your checking account electronically. Internet banks generally offer superior interest on savings, mainly because they don't pay for bricks-and-mortar branches. Many of these Internet bank savings accounts have no minimum requirements either-you can open your account with $10. To link your checking and savings accounts electronically, you just fill out a form instructing the Internet bank to transfer a specific amount from your checking into the savings account at a specific time (say $25 a week). Click-you're building your emergency fund without thinking about it, and earning interest immediately.
Your other savings account option is a money market account (MMA), also known as a money market deposit account. Money market accounts can also be linked to your checking online, allowing for easy transfers from checking into savings.
On the upside, these accounts are FDIC-guaranteed, usually give you a higher interest rate than the standard passbook savings account, and you can write checks against them. (So if your emergency fund is in a money market account and your car's transmission dies, you can just write the $1,000 check to fix the damage right from your MMA; you don't need to transfer the money into your checking account first.) On the downside, MMAs require a minimum balance in most cases, and there's a limit to the number of checks you can write. Most importantly, don't confuse the MMA, which has the FDIC guarantee, with a money market fund, which is a type of mutual fund-a relatively safe investment but not a government-guaranteed one.
Certificate of Deposit (CD)
CDs are investments that allow you to lock in a specific interest rate for a certain period of time, usually three months to five years. The longer you are willing to lock in your money, the higher the interest rate you will receive. Of course, this limits your flexibility. If you buy an 18-month CD and your car transmission dies a year later, you'll have to pull the money out of the CD before it matures. You won't lose your principal, but you will forfeit a few months' interest. Some investors "ladder" CDs of different maturities to get a better return on their emergency fund savings. (To learn how to do this, see Money & Happiness, Chapter 6, or look at the resources listed in this section.)
When you buy a savings bond, you're loaning money to the U.S. government, for which the government pays you interest. A good bet for a rainy day fund is the Series I bond.
You can buy them from most banks, credit unions, and savings institutions. But the easiest way is to set up an account online and buy them direct from the U.S. Treasury at www.treasurydirect.gov . You can open your account for as little as $25 online ($50 if you go through a bank). Savings bonds are a great way to save on a regular basis: You can set up the account so a regular amount is transferred right to your account to buy more bonds. These bonds will never lose value, and start earning interest on the first day of the month they are issued. The interest compounds every six months, and is exempt from state and local taxes. You only pay federal tax on your earnings when you cash in the bond, or when it reaches maturity. There are some restrictions: You can't touch the money for one year. If you cash out and sell your bonds before five years, you lose the last three months of interest earned. (So if you buy a bond and sell it two years later, you'll get your principal back plus 21 months of interest, instead of 24 months.) Since the monthly interest on the bond accrues on the first day of a given month, time your sales accordingly. For instance, if you sell your bond on January 31, you won't get any credit for interest in the month of January. Wait until February 1, and you will receive interest for January.
Series I bonds are issued at "face value"-meaning you pay $500 for a $500 bond. Also, I-bonds have a unique feature: A portion of the interest you receive is a fixed rate that never changes; another portion is based on the rate of inflation. Inflation can be loosely defined as a rise in the cost of living. It is measured by a little tool called the Consumer Price Index (CPI). The government examines the prices of a basket of stuff-food, housing, apparel, transportation, education, various services, and so on-to figure out how much costs are rising. The government translates what's happening into a percentage measurement (or the CPI). Why should you care about what's happening to inflation when you invest? Think about it: If you're only getting 2 percent a year interest on your investment and the cost of living is rising 3 percent a year, you're actually going backwards: You've lost 1 percent in terms of what your money can buy. I-bonds protect your earnings from inflation. The inflation-indexed part of your interest rate changes every May 1 and November 1; the other part stays fixed for the life of the bond.
Why do I like I-bonds in particular for beginning investors?
. There are no transaction fees or management fees on your investment.
. The rate of return is better than savings accounts, MMAs and one-year CDs (at least for now; that may change in the future so be sure to compare the vehicles before you invest).
. The tax benefits allow you to keep a little more of the interest you earn for yourself, rather than handing it over to your state and local governments.
. If you need the money for an emergency, you can cash out any time after 12 months.
Just one caveat: Even the safest investments have a risk. The risk for I-bonds is if inflation goes in reverse-if the country experiences "deflation." This is when the prices for goods and services are dropping. It's great for your shopping cart, but bad for your I-bonds. Since the inflation-indexed portion of your interest rate adjusts every six months, the rate would adjust downward if the cost of living moves down.
Step 3: Save for Long Term Goals
One you have saved an emergency fund, focus on your other goals - a house, more education, a trip around the world - whatever it may be. The sooner you start saving, the more options you'll create for yourself later in life. Imagine you've just graduated from college and landed your first job. You've got school loans, rent, a car payment, an appetite for adventure, and memories to make. Who can possibly think about saving? You can. At age 22, you have an incredible economic power in your hands-even if you haven't got a dime in the bank. It's called time.
Consider this: Would you trade $5.50 a day, for nine years, for financial independence later in life? Give me $5.50 a day, and I'll give you half a million dollars for retirement. And I only want your daily donation for nine years! Here's how it works: You set aside $5.50 a day ($38.50 a week or an average of $167 a month) starting at age 22 and stop at age 30. That's $2,000 a year in a Roth IRA, an individual retirement account that allows your money to grow tax-free. You don't touch the money until retirement. You'll have more than $500,000 by age 65. And get this-you'll have a bigger kitty than someone who starts at age 31 and contributes for 35 years! As Albert Einstein once said, "There is no greater power known to man than compounding interest."
For these longer-term goals - those that are more than five years away - investing in mutual funds will help you earn a better return on your money. Money & Happiness offers an introduction to investing in Chapter 7. Some good online sources include www.smartmoney.com (see SmartMoney University , Investing 101) and www.morningstar.com. Also check out the many resources listed in this section.