“Why should I save?” That’s a good question… It’s even better when you consider all the scary things I’ve said about money and banks. Well, the truth of the matter is that you should save because there isn’t a goddamned thing you can do about the banking system. There, I said it, you are powerless and your opinion and voice are worthless against them. You can hold your breath until you are blue in the face, you could shout from the treetops as I try to do, and at the end of the day it doesn’t matter one bit. In light of that, it is obvious that the only thing we can do is play their game. And their game, at the end of the day, is making money. And if we play our cards right, we can end up making some money as well.
Sure, savings accounts pay interest, and the power of compounding interest is nothing to laugh at… But in truth, the rate of inflation often times ends up eating into your ‘profits’. In fact, we should be happy to keep up with the pace of inflation in our savings accounts! But even if we don’t, we will still be better off than had we left it under the mattress or in checking. When my mom was a kid, school lunch cost a quarter, when I was a kid, it cost a buck, now I bet it costs more! Inflation is the slow moving spectre that creeps into our lives in little ways, making our money worth less and less as we get older. By saving, we are helping to combat some of that loss of value. But that isn’t my biggest argument for saving. My argument for establishing a savings plan is simple, saving, builds discipline.
It is almost certain that one day you will get sick, and that even if you have insurance, you will get sicker than your insurance coverage. It is also a possibility that one day you will want to buy a home, or have some kids. Or… maybe you’ll have some kids you didn’t choose to have. Whatever the situation, you will need MONEY to deal with these events. Building a small savings, slowly, over time can give you the money you need later in life!
Before we begin talking about savings accounts, I must say one quick word about workplace sponsored retirement plans. If you are lucky enough to work at a place where they offer one TAKE ADVANTAGE OF IT STUPID! If they have a contribution match and you aren’t taking advantage of it then you are losing out on free money! But even if they don’t have a match, you could be realizing some nice tax savings as a benefit of storing some of that money away. We’re going to do a whole chapter on this, but I needed to say this right now because that should be your FIRST and PRIMARY form of savings. However, after that, and after you’ve paid your bills (Eliminating debt is priority #1), after you’ve put away your heroin money for the week, after you’ve given the pope his 10%, you should put the rest into a standard savings account or money market savings account. No question or doubt about it.
So what’s the big difference between a checking account and a savings account, and why do we get more interest for placing our money in one instead of the other? There are a few reasons, first, savings deposits have NO reserve requirement, so a bank can basically lend it all out to make more fake money (as we explored in an earlier blog) instead of only 90%. Second, there is a little rule called Regulation D (Reg D) that limits the amount of transfers and withdraws from savings accounts. In other words, banks incent you put your money in there and not move it or take it out. This is good for both parties. Because we don’t WANT to take money out of our savings account.
Paying interest sucks. Earning interest, does not suck! Let’s look at an example… For arguments sake, let us imagine that Johnny Q Public reads this blog and decides to test our theory, but he doesn’t make a whole lot of money. After doing his finances, Johnny realizes that after all his expenses he is left with more or less $40.00 a week extra. Never knowing if he’ll have to take some good looking lady to Arby’s for a roast beef sandwich, he decides that $25.00 is all he is willing to set aside. Johnny goes down to his local bank and opens up a savings account which yields 2% forever (just to make things simple) and sets up an automatic deposit of $100 a month to go into the account. Being one smart cookie, he asks that the account not be accessible through his debit card to cut down on the temptation to ‘blow his load’ but DOES set it up as overdraft protection. After a few months, Johnny forgets about the $100.00 and learns to live without it. He likewise forgets about his savings account and just allows it to appreciate as he grows older and wiser.
Johnny Q Public has a younger brother named Emokid McDouchebag Public. Emokid watched Zeitgeist at his friend’s house and now believes that all the banks are here to rob him of his money and that the world is ending in 2012. Because of these facts, Emokid refuses to keep his money in a bank, but still believes in saving some cash for the coming apocalypse. He, likewise, does his finances, and realizes that after his Hot Topic allowance and the cost of his anti-depressants, he can save $25.00 a week. He does this, by investing in a fireproof safe and storing his cash inside it. Emokid may be a total dick, but he is disciplined and keeps his money and doesn’t spend it on extra piercings or anything else. He forgets about it, and grows older, though not necessarily wiser.
Twenty years later, Emokid McDouchebag has saved up $24,000! Enough for him to begin hormone replacement therapy to actually make him INTO a Jonas Brother. Very respectable, and a good example of the kind of discipline I am talking about! You don’t stop to think about it, but $25 a week can really add up. And that’s great! Bravo Emokid! However… the world didn’t end… Shoulda put that shit in the bank buddy. Why? Because Johnny Q , with his meager $100.00 opening balance and his $25.00 a week contribution finds himself with $29,628. Yes, an extra $5,628. It is the magic of compounding interest.
Compounding interest is great! So what is it exactly? Simple, it is nothing more than the interest you made making you interest! SIMPLE interest is just that, simple. If I want to calculate 5% gain on $100.00 it would be $5.00. That is a simple interest calculation, but compounding interest (which is time based) adds those $5.00 to the $100, making it $105.00, meaning that next time interest is paid, it is paid on $105.00 instead of $100.00, etc, etc, etc.
Another question… do you prefer tapes or CD’s?
CEE DEEZ NUTZZZZZ!
Sorry… I couldn’t help myself. Let’s talk about certificates of deposit for a second, as they are a form of saving. Right now is NOT the time to open a CD. I will tell you that right now. CD’s can be great, because they lock in your rate for a term, but when interest rates are near ZERO it isn’t advantageous to tie your money up in an instrument promising you next to nothing. Banking, interest rates, the economy, as we all have learned are ‘cyclical’ and right now we are at a place in the cycle where rates are low. It’s a GREAT time to get a loan, but a horrible time to earn money on interest. Even the promotional rate CD’s out there are not paying as much as high-yield savings accounts. If the economy picks back up and the fed balloons rates up to 7-8% THEN it would be wise to open a CD. Think about it, had you locked in a 7% rate for ten years, five years ago, you would be making a shitload of interest today compared to all your other options, it would have been a wise choice. Now, the opposite could occur… if you opened up a long term CD at 2% and the economy improves in 3-4 years you are screwed, because if you break that covenant you are going to pay out the ass.
So the question remains, WHERE exactly can we get the best deal today? As with most things… Online.
Our parents and grandparents are suspicious of the interwebs… they fear the hackers and the crackers and the phreakers (maybe not so much anymore) and those able to hack the Gibson. But we of the computer generation know that our textbooks can be (seriously) up to 10x cheaper if we buy them on Amazon, and that we don’t have to pay taxes on online purchases out of state. We have paypal accounts, we have ebay accounts, we have myspace, facefuck, shitter, linkdick, etc. In other words, we are not afraid of a computer. We should extend this line of reasoning to banking, because with their low overhead and no need for a brick and mortar location, online banks offer some of the BEST rates, and here’s the kicker, they are 100% PERCENT FDIC INSURED! In fact, even traditional banks like HSBC, Toronto Dominion (TD), and ING have online only accounts with excellent yields and very low (if any) balance requirements and opening minimums.
If you, like your grandparents fear the online bank, let me tell you something that is going to blow your mind… All banking is computerized. What, exactly, do you think a wire transfer is? Do you think a midget runs across a wire with a sack full of cash, hence the name? All of our transactions have been given over to the computer. It’s already happened at an institutional level! So WHY would you, an individual, be afraid to open an online savings account? *crickets* Thought so.
I have created a handy tool to help you find the best online savings accounts… http://www.lmgtfy.com/?q=The+best+online+savings+account+rates. I think you will find once you go there, that you could have done this yourself, but I digress. Just look into it, because IF your money is indeed fake, as I believe it is, why would you care if it is stored online or at a bank? As long as it buys me a bushel of bananas when I need it, it’s all the same to me.
Now, most online savings accounts have a 1-2 day transfer time, in other words, you can’t just get your money out of an ATM when you feel like it. I think this is a benefit honestly because you shouldn’t have ready access to your savings, lest you decide to waste it on something frivolous. In addition, most of these online accounts allow you to set up auto debit from your checking account, allowing you easy ways to implement a disciplined savings plan!
So, to sum up… Save (even if it’s only $5.00 a paycheck), save the money in the best possible institution by doing your research, don’t TOUCH your savings, keep up to date on rates, don’t fear the internet (or the apocalypse). Do that, and I promise you, I swear, that you will come out ahead in the end. In our next chapter we’re going to get a little bit more complex, we’re going to discuss interest and credit cards. And if the numbers are any indication, a good 80% of you should READ that chapter!
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