The other day, a friend asked me how she can earn higher interest on her money in the short-term.
My reaction? I laughed.
Maybe that wasn’t the right response, but the sentiment would have been the same if I told her it’s nearly impossible right now, unless you want to take a risk. And like me, she’s the financially conservative type. You can gamble on the stock market — which does seem to be on an upward tick — for now — but there’s no guarantee you won’t lose your investment, never mind actually make a buck or two.
Interest rates on savings accounts and certificates of deposit are so minuscule, they’re almost non-existent. I remember getting 5.5% interest on a 180-day CD a few years ago, but you’ll be lucky to get 1% on a 2-year CD. And those online banks everyone was heralding a few years ago? Same thing. Now that Capital One’s buying up famed Internet bank ING Direct, fahgeddaboudit!
Our Current Interest Rates
Interest rates at banks are laughable right now. Here’s a quick breakdown of the interest we’re “earning” at our community brick-and-mortar bank (the rates are compounded daily):
Youth Account: .45%
So what is a cautious investor to do? If I wanted to lock up our cash in a 2-year CD (certificate of deposit), it’d earn a paltry 1.095%. Five years? 1.735%. Money market accounts aren’t doing much better, and novice investors aren’t going to be comfortable with ETFs and REITs.
The only thing left is gambling on the stock market, and you have to hold those investments for a year or be subject to higher taxes because of short-term gains — which could negate any profit you’ve made.
In a nutshell? There’s really no surefire way to earn high interest on short-term investments. At least, not for conservative investors like myself and my friend.
Are your bank’s interest rates so low that they make you want to cry? Where are you putting your money these day so it earns some interest?
There are so many great articles on PF blogs about emergency funds, and I can’t stress enough the need to have one. But how exactly do you go about creating one? Is it just a savings account that’s off-limits, or do you set up an entirely new account in addition to your savings and checking accounts?
Investopedia‘s definition of an emergency fund:
An account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to use high interest debt, such as credit cards, as a last resort.
We have a savings account that we only touch in times of emergencies. It’s a simple bank account, separate from our retirement savings accounts (which are also hands-off until that blessed day we say “adios” to our jobs… you know, when we’re 80). So that savings account is our emergency fund. We make deposits when we can, and do not take any money out of it unless we have to.
We’ve been lucky enough to never have had a true emergency, but we have used money from the account for large purchases, such as for our upstairs carpeting job. I only had to “borrow” a bit from it when I was on my six-month maternity leave, which I repaid as soon as I could when the paychecks started coming in again.
But I’ve always replenished it, and it’s continued to grow. Worst-case scenario, there’s enough to cover about 8 months of expenses — mortgage, bills, car insurance — if we ever find ourselves without jobs or in dire financial straits.
J.D. Roth of Get Rich Slowly has this take on emergency funds:
I think it’s wise to keep your emergency money someplace that’s not too easy to access. (Ignore this piece of advice if you know you’re disciplined enough not to use the money for other purposes.) You might, for example, open an account at a bank across town. Or deposit the money with an internet bank. Don’t carry a card tied to the account. You’ll still have access to the cash when you need it, but you will be forced to consider your actions before making a withdrawal.
When CDs were paying 4-5% interest, I had some of our money in those. But now, I could only get 2% interest — if I tie it up for 5 years. Thanks, but no thanks.
So we’re happy with using our savings account as an emergency fund. I don’t know how other people do it, but this method works for us. If you aren’t good at keeping your paws off your emergency fund, it might be better to look into putting it into a CD — that way, it’s harder for you to access it.
While the little one is sleeping, I’m going to try to catch up on my blogging!
On Saturday, I managed to sneak out of the house for an hour — okay, I really didn’t “sneak out” — and left 5-week-old Baby Frugalista home with Daddy so I could head to our local bank and open up a savings account for our daughter. She’s gotten some generous cash gifts from family and friends, so I wanted to start her on the road to saving. And who knows how much college will cost in 18 years!
I needed her birth certificate and Social Security card to open the savings account, which is especially for children under 18. I’m the custodian of the account, so both our names are on it. The account gets better interest than the one for adults! It’s still only 1% interest, but that’s better than the paltry .65% we’re getting. The bank associate even gave me a gift bag for the baby, a little green piggy bank, and a coloring book with crayons. Obviously, she’s too young, but it was nice of them.
So now there’s the start of a nice little nest egg, and we’re going to keep it growing by making a deposit every month.
Did you open a savings account for your child right away? How long did you wait to do it?
Now here’s something I haven’t had to do in ages — write checks to pay our monthly bills.
Don’t get me wrong, I still write out checks once in a while, but usually only for gifts for birthdays, weddings or christenings. Other than that, I can’t remember the last time I filled out a check, put it in an envelope, wrote in my return address (or affixed an address label) and put a stamp on it. And THEN toss it in the mail and hope that it gets to its intended destination on time. How archaic!
I use online bill pay through our bank, which has notified us that it’s changing over the system in October. So there will be a 5-day blackout period from Oct. 8-12 when you can’t schedule payments. The bank claims you can schedule payments up until Oct. 8, but I’m a bit wary of doing that, since almost all of our monthly bills are due by Oct. 12.
Looks like I’ll be writing out the checks for those bills instead. Which means I’ll have to send them out Monday or Tuesday in order to be sure they arrive in time.
I’ll also have to re-input all of the payee information — name, address, account numbers — from scratch. But the upside is that our bank will be depositing $30 in our checking account for the trouble.
The bank also had Customer Appreciation Week this week, which I didn’t know until I went to make a deposit on Wednesday morning. I got a compact flashlight (with batteries!) in ‘appreciation’ for my loyalty. I actually needed one of those!
I figured I’d let a family member know that they’d get the free flashlight if they went to the bank branch through Saturday. And the family member responded, “How are you supposed to know it was Customer Appreciation Week?” Well, at least I relayed the information!
Someone might be making an unnecessary deposit or withdrawal to get their flashlight, methinks.