Uncommon Cents

I received the following email from a reader:

“Any suggestions on what to do with money that I’d like to have earning at least a little interest but need to be able to access quickly? I’m thinking perhaps a money market, but I’m not sure where to find a good one.”

This kind of money, which commonly is an emergency fund, is what is called “chicken money”, a term I credit to Terry Savage of the Chicago Sun-Times. Chicken money is money that you cannot afford to expose to the risk of the stock market (or any other kind of similar fluctuation).

Chicken money is commonly in either money market (or similar high yield) accounts or certificates of deposit. The issue with using CDs is exactly what our reader cites–the need to be able to access it quickly. While you certainly can get money out of a CD, you pay a penalty if you do it when the certificate hasn’t matured.

That mostly leaves a money market or similar account. Local banks here have been paying pathetic rates; credit unions are a bit better, Internet only banks tend to be even better (to check out current rates as well as any special promotions, consult with Bankrate and Bankdeals). Internet only banks have their advantages, but due to their lack of physical branches that can make access difficult. Having a debit or ATM card associated with the account is beneficial (although there tends to be limits on how much you can withdraw during a day and the network of no charge ATMs might be limited), and check writing would give about as close to “full” access of an Internet bank’s account as possible.

Two options I have personal experience with are ING Direct and Capital One Direct. ING Direct’s Orange and Electric Orange accounts tend to have decent rates (and if you would like, I have bonus referrals available that will give you a few more dollars, contact me for details) and provides a debit/ATM MasterCard; they also have a network of “no fee” ATMs. The good news for me is that there’s such an ATM within two miles of home; the bad news is that there might not be such a situation for you. They do not, however, give you a checkbook (for my Electric Orange account I can have checks issued by them; they mail them out, which takes a few days). Like most online banks, they prefer to deal with money transfers online, which is instantaneous between accounts at ING Direct, but takes a few days to other institutions.

For accessibility, Capital One Direct adds a checkbook to its ATM card (which, unlike ING’s, is not a debit card). This is helpful for me, as I often make deposits from that account into a local bank. However, their ATM network seems very limited compared with ING’s–I cannot find a single no charge one within 75 miles of me, which is basically the entire island, and likely the entire state. The checkbook in many ways makes the money more accessible than the ATM card and does not subject the user to the typical $500 (or so) per day limit on ATM withdrawals. I was offered a special interest rate when I opened my Capital One Direct account as a Costco member but I was not able to find such an offer perusing Costco.com.

So there are two options for chicken money; both are quite safe, pretty liquid, and pay about as high a rate of interest as can currently be found. Capital One Direct has a checkbook which can be quite useful in terms of liquidity; both have ATM cards; ING Direct’s ATM card doubles as a debit card and they appear to have a larger network of no charge ATMs. Take a look at these (and other) options if you have a need to stash away these kinds of dollars.

Many investors worry about stock market risk when dealing with their money, and admittedly, very few investments are without risk. The risk in the stock market tends to be around the market declining and the volatility the market often displays. These factors many times scare investors out of the market and into “safer” investments, like money market accounts, government issued bonds, and FDIC insured certificates of deposit.

While there certainly is a place in any investment account for bonds and cash, these investments only isolate you from certain types of risk. They have their own risks, as well, the biggest one being that your investments will not keep up with inflation.

With the current low interest rate environment, many investors (or just people with an emergency fund) are seeing evidence of just this. If headline inflation is 4% right now and your “high yield” account pays 3.5% (which is a pretty decent rate these days), your money not keeping pace.

This does not mean to pump every dollar you have into stocks; quite frankly, there are good reasons to have other types of investments (see our articles on asset allocation). What it does mean, however, is to be aware that what are considered “safer” investments are not totally safe; there are still risks involved, and in some ways, the risks are more dangerous than those in the stock market. Consider other ways (like diversification, asset allocation, and tax advantaged means of investing) to reduce your risk and help your dollars do better than the rate of inflation–hopefully far better!

Welcome to your Link Payday for May 20, 2008. After a really rough 10 day stretch of work, I now have a few days off to try to get ahead on the blog. Let’s take a quick look around and see what the best of the Internet has to offer us in the way of personal finance:

While not from a personal finance blog, RankingsAndReviews.com discussed hybrid payoff time–how long someone needs to own a hybrid car vs. an equivalent gasoline only car before the increase in gas milage outweighs the increased cost. Obviously, this is highly dependent on the cost of gas.

Do clotheslines make people think poverty? Given that my family has used clotheslines forever (and about never uses the dryer), that thought has never crossed my mind, but Trent over at The Simple Dollar teaches us how frugality may give the impression of poverty and the social pressures that may prevent the choice of the frugal option.

JD over at Get Rich Slowly features a reader email that asks the readers what to do when I’m doing well financially but my family is not. This is a fascinating piece that makes readers consider their personal values around money and family as well as what it really means to help people.

Be careful when buying something that says, “no interest for twelve months,” wisely warns My Two Dollars, because No Interest For 12 Months Does Not Mean No Interest At All. The best way to buy something like this is to have the cash available when you want to buy it, then put it in an insured certificate of deposit until it’s time to pay it off!

Moolanomy explains what an annuity is. I am not a fan of them, but this is a much more impartial view of this financial vehicle (and I’m still not a fan!).

And there’s your link payday for May 20, 2008!

For fixed income investors who don’t think much of bonds, finding decent returns has become more and more challenging. Money market and high yield savings accounts have rates that have plunged in recent months, and certificates of deposit have not done much better. It’s become a real challenge to find decent returns, but since this question came up yet again this week, I thought I would go through some possibilities; some of these are similar to what we’ve discussed before, but some are new, or at least a new slant:

Check Credit Unions

Credit unions tend to have better rates than banks; sometimes you qualify to be a member through your employment, membership in an organization, or just where you happen to live, work, or worship. While I wouldn’t expect stunning rates, you certainly won’t harm anything by looking.

Go Online

Online banks (ING Direct, Virtual Bank, Capital One Direct, and others) may offer better rates than you have available locally (and don’t forget I still have bonus referrals for ING and Virtual Bank, contact me for details!). You can also check Bank Deals and Bankrate to see what might be available for you locally and on the Web.

Don’t Tie Your Money Up For a Long Period of Time

Conventional wisdom holds true–if you go with a longer term, you get a higher rate as far as a CD goes. However, given that a “higher rate” isn’t all that high, you’re taking a big risk by tying up your money when rates may increase before the term of the CD is done. Chasing rates in this way doesn’t appear to be wise; you may be better off staying in a high yield or money market account to keep things liquid.

Consider Other Options

If you have debt, consider paying it off or at least paying it down. Remember, if your debt is at 5% and you pay it off, what you’ve done is like earning 5% on that money. This might be one of the best things to do with money that you would otherwise have parked.

Yes, there is a need for even the most aggressive of investors to have at least some cash around, and finding somewhere secure and high yielding to plant it and watch it grow is a smart idea. In these challenging interest rate times, however, you may need to take a harder look around than ever to figure out just where you want to have your money sit.

Net asset value refers to the current price per share of a mutual fund or exchange traded fund. The net asset value is calculated by taking the total value of all the securities in the fund’s portfolio, subtracting any liabilities, and dividing that result by the number of shares outstanding.

Mutual funds compute their net asset value once daily. It does this using the closing prices of the securities in the fund’s portfolio. Every order, either buying or selling, involving the mutual fund is processed at the net asset value determined on the date of the trade, but the actual trade price is not determined until after the close of the trading day.

ETFs trade like stocks, meaning that while their value will be quite close to the actual NAV of the ETF, it’s possible that it will be trading at a premium or discount depending on market demand.

The concept of net asset value may be helpful in viewing a bond fund’s value versus owning an actual bond. If you buy a bond at face value and hold it to maturity, you get the money you paid for the bond back plus interest payments along the way. If you buy a share of a bond fund, while you hold the bond, you also get interest payments, but instead of dealing with the original face value of a bond and getting that money back at maturity, you buy the share at a certain net asset value and when you sell it, you get it at what may be a very different net asset value. Along the way, depending on how the fund performs, the net asset value is likely to fluctuate. If you have difficulty tolerating fluctuation in the net asset value of a bond fund (which tends to be considerably less volatile than in a stock fund), perhaps you would feel more comfortable with an actual bond or, for those who have virtually no tolerance for fluctuation, a FDIC insured certificate of deposit where you are assured of getting the amount of money put into it back–not a penny more, not a penny less.

Understanding the concept of net asset value can help you to understand changes in prices of various funds and how much volatility you are comfortable with.

A Certificate of Deposit, also known as a CD, is a savings certificate which entitles the bearer to receive interest. A CD is time limited in that it is issued with a specific time frame, typically somewhere between one month and five years. When a CD is issued, the interest rate that is paid is locked in until the CD matures; in return, the bearer agrees not to withdraw the principal without paying a penalty. CDs are typically insured by the Federal Deposit Insurance Corporation (FDIC) for American banks or the National Credit Union Administration for American credit unions (hint: if your bank or credit union is offering uninsured CDs, don’t take them up on it!).

CDs are considered among the safest of deposits and subsequently the interest paid on a CD tends to be relatively low. CDs along with money market accounts, government bonds and notes, and commercial bonds are all considered fixed income securities–they are less volatile than the stock market and typically pay a lower rate of return than you may expect with a stock but with less risk. Unfortunately, as they lack liquidity, CDs are not really appropriate for an entire emergency fund, although they could be part of an emergency fund–keep one month’s savings in a money market account and the rest in a one month CD that renews. This approach is a bit more complicated, but may yield a bit more interest.

CDs have a role in the preservation of capital; if you can afford the lack of liquidity and want to make sure you aren’t going to lose your money, get an insured CD at your local bank or credit union. You may not make a lot in interest, but you won’t lose anything either!

The term subprime refers to borrowers who have issues with their credit history. The credit rating and history of the borrower is what is subprime (meaning poor or non-existent), rather than the interest rate of the loans given to subprime borrowers, which are higher than typical. Subprime loans also carry more risk for both the borrower and the lender. The lender is lending money to a borrower who has not demonstrated through a healthy, verified credit history the ability and willingness to repay the loan, justifying the higher interest rates–just as a higher return is expected in investing for taking more risk, a higher rate on the loan is expected for the lender taking more risk. The borrower takes a higher risk of defaulting as the payments are higher and they have not demonstrated a history of being a good credit risk. While subprime lenders offer loans to those who would otherwise not be able to borrow enough money to, for example, purchase a house, the unfortunate downside of subprime is that many borrowers are unable to repay the loans.

In regards to the current subprime mortgage crisis, a subprime borrower would often take on an adjustable rate mortgage that usually starts with a low “teaser” interest rate for a few years then resets; combine this with a rise in interest rates over the past few years (prior to the last six months) and the subprime mortgage borrower often ended up unable to pay their mortgage, leading to defaults and foreclosures.

The subprime crisis is not yet over–it led to the fall of Bear Sterns last week and it is not yet known what effect it will have going forward. The lesson to learn from subprime is this: in terms of dealing with bonds, buy quality; build a healthy credit history so you do not have to engage in a subprime loan; and only borrow what you can afford. The next few months will tell us just how extensive the damage due to subprime has been.

As an extension of our previous discussion on online banking, how many of you use online bill pay?

Often online bill pay is offered by not just your checking or savings account provider (whether that’s a brick and mortar bank, an Internet only bank, or a credit union) but often also by the creditor (like the credit card company). Online bill pay offers the promise of lower cost (look, mom, no stamps!), quicker delivery (often payments are credited the same day they are made), and avoiding the variance of the otherwise wonderful system known as the United States Postal Service.

Despite these advantages, for a long time, I was a holdout. I believed that sending paper checks in the mail helped me to hold onto my money longer and generated more interest, although it wasn’t all that wise in retrospect. Even in “high yield” accounts there’s not enough lag time to make up for a 41 cent stamp, and the dangers of late payments (and their associated fees and interest charges) got me to wise up.

Still, online bill pay has not been without its glitches; one month I swear I made a payment but it never got credited. Another time I neglected to specify the date I wanted the payment made as the payment’s due date and immediately had to rush over to the bank to cover the $350 I didn’t have in my checking account. And finally, while I typically use the automated bill pay on the creditor end (like DiscoverCard.com to pay my Discover bill), this isn’t offered with all of my bills; I used to use Netbank’s electronic bill pay, but am not so thrilled with ING Direct’s version.

Do you use online bill pay? What are your experiences like? Are the drawbacks outweighed by the benefits? Have you had issues like I have?

This is what is known as a “money hack“; a kind of financial trick to play that may end up helping you a bit in terms of keeping money in your pocket for a longer period of time. This is covered in the linked article above as “Plastic High Finance”, but I thought I might be able to explain it a little better.

I have a number of credit cards for a number of purposes, but primarily I use one of two cards that have staggered closing dates (the closing date being the day that the bill for the month is finalized and sent to me)–one is the 2nd of the month and the other is the 17th. For card timing, what I do is try to “time” any large purchases for the 3rd or the 18th of the month.

How does this help?

With these particular cards, I have an almost month long “grace” period–the time between when the bill is shipped (the 2nd, in one case) and when the bill is due (the 1st, in the same case). So if I charge something on that card on the 3rd of April, it’s billed to me on the 2nd of May, and due on the 1st of June. In other words, I have just two days short of two months to pay it off. That’s 58 days that money can sit in a “high” (see my post a few days ago) yield savings account and earn a few more cents of interest versus paying cash. It’s essentially an interest free loan for a term of almost two months! It also gives me the psychological benefit of holding onto my money longer.

The usual concerns of using credit cards apply; if you’re someone who believes they spend more with cards, then by all means, consider going to an all-cash lifestyle. Also, if you’re using this to buy something before you actually have the cash to pay it off, you’re playing with fire.

So here is an option that could help you financially; if used properly, it at least helps you hold onto your money a little longer when you make big purchases, which can, at the very least, mean a little more interest–a little more interest can certainly mean a few more snowflakes, and we all know what snowflakes can do!

It’s been a long two weeks since our last link payday. My mom is sick, my niece is on spring break, I’m on a nine day work stretch, I went to the dentist this evening, and this post is a few hours late. Still, it’s time to get this one on the road and out the door!

JD over at Get Rich Slowly makes a great post about the negative savings rate and the age of easy credit. Yes, right now, as a country, we have a negative savings rate–we spend more than we earn! The sad part is that it’s not a joke that debt is the American Way–it’s reality.

Lynnae over at BeingFrugal.net points out that there’s no shame in renting, which in these days of subprime mortgage disasters is a great piece of wisdom. If you can’t afford it, you can’t afford it, just like anything else–getting into debt you can’t handle, even “good” debt, is still a recipe for disaster.

Ron over at The Wisdom Journal points out even more issues with credit card companies and yet another way they might stab you in the back. Personally I’ve had much better experiences with Discover than he has, but my situation has also been much different.

Mrs. Micah points out how a surprisingly large number of things can be lived through–the current turmoil in the financial markets is nothing compared to the Great Depression, and many people who live in countries outside the U.S. are facing far greater challenges than we ever will. Perspective is always useful.

And finally, JLP over at All Financial Matters talks about an exercise in futility–estimating the future of the Dow Jones Industrial Average. We all would like to be able to time the market and figure out when it will rise and fall–and we all fail.

And that’s your Link Payday for March 20, 2008!