At the beginning of this year, I thought I had my financial life in good order. I was wrong! The more I search for ways to improve my finances, the more opportunities I find. Over the past few months, I’ve found a number of new ways to earn or save some money. One of my motivations to start this blog was to create an easy way to share these opportunities with family, friends and others seeking to optimize their finances.
This article is the first in a series of posts about the actions I have taken to save or earn more money. Please remember, these articles are being written from the perspective of one person. You should consider your own personal financial situation and discuss with your professional advisors before replicating anything described below.
Winning Personal Finance Move #1
My wife and I keep a decent amount of our savings in cash. Right now, we are a one income family so we keep about four months living expenses as an emergency fund. For me, the money is primarily a cushion to protect against job loss. It was held in a high yield online savings account earning 0.90% APY as of January 2017.
According to the Vanguard website, “most experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months worth of living expenses.” I feel obligated to point out that there is another, less conventional school of thought when it comes to emergency funds. There are some in the personal finance community that advocate for having no emergency fund or a tiny emergency fund. If your savings rate is high and/or you have access to money in other places – like a home equity line of credit and a taxable brokerage account – you may prefer to take this more aggressive approach. While the strategy described in those posts, is non-conventional, they make great points about the opportunity cost of holding cash. Their approach may not be right for you, so please consider your options carefully before making this decision.
In addition to our emergency fund, we have savings set aside to purchase a car, take a vacation, buy a couch for our newish home and lastly some savings for inevitable home repairs. This money was being held in a handful of checking/savings accounts that earned close to 0% interest.
When I took a look at my tracking spreadsheet, I realized that even though I wanted to keep this money risk-free and liquid, it was ridiculous to earn such a low return considering we were not planning to spend most of it anytime soon. I also decided that moving the emergency fund into the market as suggested in the linked articles above, seems a little too aggressive for my preferences today. I will certainly consider doing so if my risk tolerance changes in the future. For example: if we become a two income family again and can save one income, having a large cash emergency fund may not be necessary. In the meantime, here is how I maximized my return on my cash savings while keeping it liquid.
For the Win
I opened a Rainy Day Savings TM account at Baxter Credit Union. (Unfortunately, this particular credit union is not available to the general public. You can check here if you are eligible. If this Credit Union does not work for you, maybe a different one will). This account allows me to deposit up to $500 a month and pays 1.25% APY in interest the first year. The best part of this account is that after the first year, the interest rate doubles to 2.5%, which is fantastic in today’s low rate environment. I now automatically transfer the max each month from my high yield online savings account to this account. I will realize a slight $11 annual benefit this year from this account. Once the rate doubles after being open for 12 months, I will realize a nice boost on my savings. In year two, assuming an average balance of $9,000, this account will earn an incremental $144 per year compared to the online savings account. In year three, assuming an average balance of $15,000, this account will earn an incremental $240 per year compared to the online savings account.
I moved the money I was not expecting to need in the next 12 months from my checking account into my brokerage account. I then purchased CDs with a timeframe of 6 months to 2.5 years. The higher yield on these CDs will earn me a fistful of extra savings. CDs are insured by the FDIC, so my money is safe. If I end up needing the money before a CD has come due, it’s possible that I could take a small loss on it by selling early. That said, I don’t anticipate needing to sell early. One more bonus is that the interest earned on these CDs will already be in my brokerage account. I plan to invest the interest earned in equities with one click. The CDs I purchased had a yield between 1.2% and 1.9%. If you assume an average rate of 1.5% and a balance of $20K, this will yield an additional $300 in interest when compared to a 0% interest checking account.
I left a buffer in my checking account to pay current bills and moved the rest of the funds to the high yield online savings account that I already had. I quickly searched on Deposit Accounts to see what yields were currently available from other banks and decided that the couple of dollars I might save by changing to the account with the current highest yield was not worth the time. As of this writing, the difference in interest rate was about 0.2% between my online savings account and the highest yielding account. My account is consistently near the top of the charts but some of the others tend to have a rate spike to attract new customers and then drop soon after, and I decided not to switch. However, I did transfer $5K from my checking to my high yield savings account which earned me an additional $45 per year.
All told, I increased my interest earned by almost $356 in the first year, and $489 the second with just a little bit of time and effort.
I evaluated my cash position, realized it was not efficient and fixed it.
That’s it. In three quick and easy steps, my money will earn more interest this year and even more next year. I’ve also set periodic reminders to take a quick look at where things stand to make sure I don’t fall into the low interest trap again.
What about you? How large is your emergency fund? Can you do a little better on your cash savings? If you need to open a new high yield savings account or buy some CDs, you can compare your options at Deposit Accounts. Once there, check out the current rates on checking, savings, money market accounts and CDs to see if making a change is best for you. If you have also increased the return on your savings, congratulations! Tell us about it in the comments below.