saving #1: money in the matress

yes, yes, we all hear it- the mantra of our parents to "save, save, save". like much of the advice we get as children and teenagers, it is vague and virtually useless. no one tells you how, or how much, or where. if you try to do a google search, you'll turn up a million different companies that want your money to do who-knows-what with. well, that's all changing now. in the next couple of weeks, i'll lay out the various strategies you can employ in saving money, how to determine how much (and where) to save, and most important, EXACTLY how to do it. it's going to be a long haul, so be warned.

high yield savings accounts

right now, you've probably got a checking account at a regular bank that is linked to a regular saving account. mostly likely, your savings account is earning around 2% interest and that checking account is earning less than 1%. (you can check these numbers by calling your bank) currently, the inflation rate is around 3% on average (actually, right at this moment it is higher, but i'll explain this another time), and with the markets tanking, this is likely to rise soon.

what does this mean for you?
well, #1 is that volatile goods like food and gas are going to get more expensive. and #2, if you're currently earning less than the rate of inflation in your bank accounts, you're actually *losing* money; that is, over time your money will buy you less goods. people are encouraged to put their money in the bank instead of under their mattress because in return for giving the bank your money to invest, the bank pays you interest on your balance; basically you earn money just by having money- like the old saying goes "the rich just get richer". but if what you are earning in interest is lower than what you are having to pay in rising inflation, you are still theoretically putting your money under the mattress- i mean, it is safer in the bank because it is insured against loss and you can use online bill-pay and you don't have to sleep on a huge lump and you're making an teeeeensy bit of money, but it's basically the same.

so, what to do?
in subsequent posts we'll figure out how to craft your financial goals and your saving and investment strategies to match those goals. creating and keeping a budget is a important first step in the process. but right now, a good idea would be to open up a high-yield saving account, which is a regular FDIC insured savings account with a higher interest rate than average. with the Fed cutting interest rates left and right, opening one up now means you might still be able to take advantage of higher interest rates before they drop. you can transfer the money out of the account to a brokerage account or a CD, or even back to your checking account if you want, but having a chunk of money earning more than inflation is a good way to hedge your bets against the rising prices to come.

how to do this:
first of all, determine how much money you can put into this account. you can determine this by figuring out what you're comfortable with having in your regular checking account to cover all your budgeted expenses. i'm fine with just having $1,000- all the rest of my money is other accounts. other people might be comfortable with a different number; grace needs at least double mine to feel secure. this doesn't mean she spends more than me, just that she more comfortable with that number. money is inextricably tied to our psychology, like it or not. next, determine your liquidity needs. do you often have emergencies where you need to dip into your savings (and i don't mean that really expensive and delicious triple cream french cheese you saw at whole foods, andrea!)? if so, you might want to consider opening up this account with your current bank- most major banks offer these accounts as an add-on option to your regular accounts. always always always check about addition fees and minimum balances however! if you are the kind of person who, if they know they can walk to the nearest atm and hit the 'savings' button, will buy that really expensive (and truly delicious!) triple cream french cheese, then you should probably opt for an online-only account. this gives you a layer of protection from yourself, as you have to wait 2-3 days for the money in the account to be transfered to your regular bank, but it also means you have less liquidity. (confused about that word? don't worry, i'll explain it another time)

now you know where you want to open up the account (either your bank or online) and how much you want to put into it. by the way, this doesn't mean you have to close your savings account- you can still leave some money in there if it makes you more comfortable. here is the really hard part- go and open the account. if you take a look at this chart, you'll see all the different rates for various banks. note that these rates are for TODAY only, they often change (but not by a ton) everyday. to give you some perspective, when i opened my ING Orange account at the height of the market, the rate was 5% and there were even some banks offering 5.5% returns. you won't find that now, but growing your money at the 4% they are offering you now is still far better than what it will probably be in a couple months, and is obviously much better than the 2 or so % you make at your regular bank- so start today!

by the way, it is very easy, and safe to open one of these accounts, just make sure it is FDIC insured and don't put more than $100,000 (yea,right!) into one account. it takes maybe all of ten minutes and you can set up automatic transfers every month, which we'll get to next time.

if you have any questions, feel free to email me.

ps. i had to post this cute picture of wally so that you would be implored to read this post. if you got this far down, congrats!
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