Uncommon Cents

We’ve talked about having an emergency fund before; to some extent we’ve talked about budgeting for expenses. There are also standard expenses, things we pay for every day. For me, in addition to having separate funds, I also have separate accounts for all of these.

My emergency fund, which I’m going to need to tap soon, is at iGoBanking.com. This is a true online bank; no checks, but online transfer options galore. The interest there was the highest I could find when I started, and now pays 3.28%; as usual (just like all my other bank accounts), it’s FDIC insured–not that I have anywhere close to $100,000, let alone $250,000, in there.

My budgeted expense account, where I send in a certain amount of money twice a month for regular expenses like mortgage, insurance, vehicle registration, and memberships, gets a lot of action; it’s in a Capital One Direct account. This has an ATM card (which I’ve never used) and checks (which I do use, although there is a limit on how many checks I can write a month) as well as online transfers. I can also send in deposits in prepaid envelopes, which I like. It pays 2.98% interest, which is less than the iGoBanking.com account, but the check writing makes it more flexible (as you may be able to tell, while I can get my money in a couple days with the iGoBanking.com account–the emergency one–a couple of days can be a real issue).

Finally, my standard, everyday account is at a local bank. I’ve had it since college at a bank my mom is a retiree of. It pays no interest, but I keep it there due to its accessibility and the fact it’s linked with my mother’s accounts in the event she needs money urgently. The local ATMs and branches are an advantage, and they recently opened one branch in a supermarket that’s seven days a week. It has limited online banking as well.

Having multiple funds is a given; having multiple accounts helps me to keep my banking situation straight on paper as well as in my head. This might be a concept worth trying if you, like me, need help keeping your money separated physically as well as mentally.

One of the things I tell any student of mine is that there are things which are simple, but not easy. It’s simple to tell someone, for instance, what they need to do to lose weight: address your eating (less sometimes but not always) and activity level (more sometimes but not always). Even the details are not that hard to fill in (get a cookbook for a diet you like; choose a form of exercise you can afford, find challenging, and can do conveniently; find a group of people who are helpful in your moving toward your goals). So why do so many folks fail at a goal like this when everything is so simple?

Because simple isn’t easy.

Easy means that no to very little effort needs to go into something. If people could lose weight without doing anything to lose it, they’d be fine. But weight loss is work, which requires discipline, consistency, and planning.

Similarly, improving your financial situation is simple, but not easy. “Spend less than you earn.” Simple? Sure. Easy? Apparently not.

What’s very interesting about this situation is that there are lots and lots of things you can do to make the tasks of personal finance easy, but people don’t take advantage of them. Invest automatically through a tax deferred plan? That’s a 401(k) or equivalent. Pay your bills automatically and on time? That’s called online bill pay. Keep track of your expenses? Try Quicken. Deposit your paycheck into your account automatically? That’s direct deposit. Diversify your stock market holdings? That’s an index fund. These are all easy ways to make your financial life better, but not enough people take advantage of them.

If you’re like me, you’ll want as many ways to make your financial life easy as possible. Take advantage of these ways to make things easy and get your financial life in order. They’re simple–and easy.

Holiday shopping is not new, unless you’re a teenager getting your friends gifts for the first time. Still, why does everyone seem financially strapped when the calendar turns to December (or, worse, in serious credit card chaos when the January calendar comes out)?

To me, this is one of the biggest examples of slow learning. If it happened last year, what makes us think it won’t happen this year? What can you do to try to get your holiday shopping budget under control?

Start Now: Yes, now. If you start for 2009 right this second, that’s great! Even if it’s 2008, the earlier you start, the better. You may not necessarily have to actually buy everything (I do appreciate the power of holding onto cash as long as possible) right now, but at least have a plan for people’s gifts and figure out how much they cost. In addition, save, save, save! Consider this next tip as well…

Separate Saving from Discounts: Many people cannot separate the concepts of saving money for the holiday shopping from buying the holiday gifts. They are not the same thing; no matter if the great bargains don’t come out until November and December, the dollars can be put away starting anytime. If you want to hold onto them until you find something ridiculously discounted the day after American Thanksgiving, that’s up to you, just make sure you start accumulating those dollars early on.

Keep Putting Dollars Away: Don’t stop your holiday saving, no matter what time of year it is. You will need those dollars and you’re better off having them than not. Simply figure out how much you spent last year on the holiday shopping, add 10%, and divide by twelve. Put that much away every month into a high yield or money market savings account: key words–every month.

Don’t Get Caught Up in Black Friday Madness: Black Friday–the day after American Thanksgiving–is traditionally the start of the holiday shopping season, and at least in American is known for having some of the best bargains of the year. In fact, some Web sites such as Black Friday Info are notorious for putting out advertisements for large retailers early. Yes, these can help you spend less, but be careful and don’t get caught up in the madness. Make a plan, have a plan, stick to it!

Keep Writing Stuff Down: Remember our often discussed friend the spending log? Keep using it. Review all of your purchases–even before you buy–as well as figuring out if you’re spending what would be a reasonable amount for the items. It’ll also help you with planning for next year.

The holidays are supposed to be a happy time of year, but for so many they’re a stressful time of year, not just due to the flurry of activity but also due to the financial stressors. Plan ahead, use your plan, stick to it, and reduce your stress and increase your happiness toward the end of the year!

Here’s a deal that showed up in my email from ING Direct:

If you use your Electric Orange Debit card to make five purchases of at least $10 that show up on your November statement, you’ll get $20$10 deposited by ING into your account by December 15, 2008. This deal was better in the original email, where it offered $20; the current Web listing says $10.

I’m going to do this using five purchases of $10 gift cards for holiday presents. Wish it was $20 still, but I can live with it!

Some people discover their risk tolerance is rather low, or lower than they thought, in stock market times such as these. If that is indeed the case, what options do these people have?

The principle of risk/return does not disappear just because someone can’t deal with somewhat higher risk; rather, it becomes very clearly in effect. If someone wants to take absolutely no chances with their money (or just shy of no chance), they can certainly do that, but the returns their money will gain will be quite low–but they will exist. This is unless it’s someone who would rather bury money in coffee cans in their back yard or stuff it in their mattress, of course–but that’s not investing.

Realistically, everyone needs a safe place to put at least some of the dollars they have. An emergency fund needs to be kept away from stock market risk, because emergencies don’t come on a schedule (some would say the market currently is in a state of emergency!). So “chicken money” is something everyone has at least some of–money we’re too chicken to put at any risk at all.

Savings or Share Accounts: These are your typical accounts at a bank or credit union. Right now the rates of interest on them are anemic–in the case of my mother’s bank account, one fourth of one percent of interest! That’s definitely not keeping up with inflation. However, since the account is FDIC insured and she’s well within the limits of the insurance, it’s as safe as the federal government’s word. If you’re going to use one of these, make sure you have insurance by the FDIC or the NCUA (in the case of a credit union). You won’t make much, but your money will be safe, and it’s really high in liquidity, meaning you can get at your money pretty much anytime (provided the bank’s business hours work for you).

High Yield or Money Market Accounts: These tend to be a lot like savings or share accounts but with a somewhat higher rate of interest and possibly more limits on accessing your money. For instance, I have a Capital One Direct high yield savings account that pays me 3.55% interest and allows check writing and ATM access–but limits how many checks I can write per month. Fortunately, it also allows electronic access, which is a bit more liberal. This is a nice place to stash an emergency fund, since it’s almost as liquid as a savings or share account.

Certificates of Deposit: CDs tend to have rates about the same if not a little higher than high yield or money market accounts. In return for offering a little more interest, you lose liquidity. Still, CDs you may be appropriate for an emergency fund with a little planning (having a CD mature every month with 5/6 of an emergency fund means at most you’d be one month away from access, and having that remaining 1/6 in something like a high yield account could do it) but for simplicity’s sake, you may not want to use these for that purpose. Make sure you are wary of the FDIC limits (which apparently will be increasing, at least for awhile) on how much they’ll insure if you really are concerned about safety!

Treasury Bonds or Notes: In many ways considered the safest of investments, there are lots of different bonds and notes you can get; some may offer tax advantages. I have a bit of my portfolio in I series bonds, for instance. There are also government issued bonds or notes from local or state governments that may be worth looking into as well. Again, the rates are not fantastic, but combined with possible tax advantages as well as safety, this could be a viable option.

Money Market Funds: Not quite the same as the money market accounts, these are mutual funds that invest in short term instruments. They are not backed by FDIC or NCUA insurance as they are mutual funds, although they recently had some temporary insurance offered to them with unusual circumstances that led to a “run” on them as a consequence of the Lehman Brothers bankruptcy. Money Market funds nearly always have a stable net asset value of $1 per share and pay a return based on how their investments do. Of course, since it’s a mutual fund, your initial investment will likely need to be more than you can put into a savings account, money market account, or CD, and you may have commissions to deal with.

Bond Funds: In bond funds, you have a ton of choice just as you do with stock funds. If you’re looking for safety, consider the quality of the bonds in the fund; “junk bonds” may offer higher yields, but more risk. Funds that are based on Government National Mortgage Association bonds–Ginnie Mae funds–tend to be both very safe and pay very nice returns. A fund like the Vanguard Total Bond Market Index has offered similar performance and safety to the Ginnie Mae funds over time. Again, these are funds, but unlike the money market funds which almost never move off the $1 per share net asset value mark, these do fluctuate a bit, but historically, nothing like stock funds.

There are some alternatives–from about as safe as you can get to pretty safe with some amount of risk–to consider for your chicken money, whether that’s just your emergency fund or your whole portfolio. Good luck in selecting one that might meet your needs!

If you are interested in borrowing money right now, you’re likely going to have some difficulty. The credit crunch has made lenders fearful. While interest rates for individuals are pretty low (both for savers and borrowers), rates that the banks charge each other to borrow have remained higher than expected. In addition, banks are just a lot less willing to lend money right now. It basically seems like the only way you can get a loan now is to prove to the bank you don’t need the money.

This is a 180 degree turn from a few years back, when the housing market was booming and subprime loans were everywhere. At that point, you practically had to shoo lenders away; today, you can’t get them to come over if you invite them for dinner.

Where does the answer to all of this lie? Clearly, somewhere in the middle. The economic crisis that’s going on right now was caused by lending practices that were far too lenient; now, it’s being extended because almost no one can borrow money. There’s a need for responsible, reasonable lending practices that don’t end up in foreclosures and defaults but are more accommodating to economic growth.

It’s one of the biggest questions on the minds of folks with an account at a bank or credit union–which is just about everyone in the United States. How safe is my bank?

It’s a question that isn’t all that easy to answer. Many people consider the size of the bank when thinking about safety; after all, it’s easy to believe that a bank with huge buildings and tons of branches (as well as billions of dollars in deposits) is really safe. To that, there’s two words that serve as a counter argument: Bear Stearns (of course, Bear Stearns is an investment bank, which is not your typical everyday bank).

So how do you know your bank is safe? While there’s no absolute way to be sure, here’s some ideas:

1) Make sure your bank is FDIC (or credit union is NCUA) insured

While the Federal Deposit Insurance Corporation has a list of “problem banks”, that list is not made public. However, we know a bit about that list, including the number of banks on the list, which is 117 and appears to be growing.

However, none of that matters if your bank is not FDIC insured! You can find out if it is by using the FDIC.gov Web site. You can do the same for credit unions with the roughly equivalent National Credit Union Administration Web site, NCUA.gov.

2) Understand what FDIC and NCUA insurance actually covers

Just because your institution is insured, it doesn’t mean your accounts are, or the things in them. There are many types of uninsured products that can be had at insured institutions, such as stocks, bonds, mutual funds, money market funds, U.S. government backed investments, insurance products, and safe deposit box contents. Some of these have other forms of insurance (such as the U.S. government backed investments); some are just not insured. Also be aware of the $100,000 limit on your insurance coverage at an institution. While there are ways around this, I am of the opinion it’s best to simply have accounts at different institutions.

3) If your bank is publicly traded, check its stock price and performance

This can give you a pretty decent idea of how your bank is faring. For instance, over the past year Wells Fargo (WFC) and J.P. Morgan Chase (JPM) have had their stock price underperform the major indices, but not by a lot; on the other hand, many other banks including some large ones (which I won’t mention so as to start a rumor they may be in trouble) are performing considerably worse than the indicies, one down about five times what the Dow Jones Industrial Average is in one year performance. This doesn’t tell everything, but at least you know how it’s held up versus other banks.

4) Get a ranking

Bankrate.com and AMBest.com have various ways they rate banks through their Web sites. This may well be worth taking a look at.

Those are some ideas to see if your bank is safe; they’re not infallible (Indymac, for example, wasn’t on the list of banks that the FDIC considered to be at risk), but they can tell you something. Take reasonable steps to make sure your money is safe even if your bank isn’t necessarily so (like keeping your deposits well within the insurance limits). When Netbank was taken over by the FDIC and eventually had its accounts sent to ING Direct, I didn’t lose a cent, which is exactly what the insurance can do for a consumer. Be smart and be safe!

One of the things that we all need is a safe place that earns some interest in which we can park some money; this is typically “chicken money”, money we need in case of emergencies and cannot put at any stock market risk. For these, a high yield savings or money market account are likely the best choices. Sometimes these accounts allow check writing and have automatic teller machine (ATM) cards for easy access; they also often require minimums but pay comparatively high yields.

Where to find these accounts? Here are some ideas:

Your local bank: the obvious place to look would be your local bank, assuming you have one. Unfortunately, this may also be the worst place to look. While not its money market account, my local bank pays–get this–0.25% on its regular savings account. Yes, that’s right, one fourth of one percent. I can’t imagine its money market rates will be thrilling. The one big advantage a local bank has is that they are, well, local–meaning you can walk in and get your money when you need it.

Your local credit union: Credit unions for decades have been alternatives to traditional banks that tend to pay higher interest rates. They also are local to you, and many have liberalized their rules as far as membership goes–for instance, the Hawaiian Tel FCU here lets anyone on island join. The question is whether or not they’re higher enough versus some of the other alternatives.

Your memberships: Perhaps you’re a Costco member or belong to an auto club or professional organization; it’s worth checking to see if you can get any kind of special rates. Costco, for instance, has an arrangement with Capital One Direct. Even your employer may qualify you for something.

Online: Bankrate.com provides easy comparison of interest rates. You may also want to consider an online bank; Virtual Bank, ING Direct, iGoBanking, Capital One Direct, and many others are offering higher rates of interest than you would typically find in a local bank or credit union, often with no or low minimum initial deposits.

Consider all of these options when looking for a home for your chicken money. We all need a safe place to put some of our money; we may as well try to get the best interest rate we can in the process. For what it’s worth, if you’re interested in opening an account at either ING Direct or Virtual Bank, I still have some referrals which will get the two of us a bonus when you open a new account! Contact me if you’re interested.

A CNNMoney article a few days ago brought a sadly stunning thought into my head:

What if people started being thrifty?

What if people became more frugal? What if they started paying attention to their finances and spent less than they earned? What if they avoided fees and interest and late charges and paid their bills in full and on time?

What if instead of a negative savings rate the people of America actually put away 10% (or more) of what they made?

What if people actually figured out how to fend for themselves and only relied on the government in the most dire of circumstances?

What if the message people get from rising gas prices is not, “I have to find $50 more for gas this month somehow,” to, “Why am I $50 from the edge of the financial cliff every month?”–and they do something about it?

Perhaps the silver lining that is happening with the tough economy, struggling stock market, and dismal housing market is that people may be getting the message that living beyond your means and spending money you don’t have, getting mortgages you can’t afford and praying for huge increases in equity are, in the end, fool’s games and they’re not fools.

Perhaps.

I’m doubtful but hopeful.

How about you?

Success! Well, mostly. My trip to Kansas City for KansasFest 19 (basically a summer camp for computing Geeks centered around but not exclusive to the Apple II) had no delayed flights and no lost luggage and I successfully announced (but have not yet released) a new software product and won a programming contest as well as had my usual way too exhaustive fun time. My long time roommate Kirk and I did again do the opposite of winning the door sign contest; I think I’ve won every single contest and gotten every possible recognition there except for the door sign. In the meantime, I was also able to maintain our daily posting schedule, thanks in large part to a timely contribution from Kyle over at Rather-Be-Shopping.

I did, however, apparently manage to misplace my earbuds on the way home and not get in much of any exercise while I was gone. I’ll work harder.

I’m off from my day job for another week so I’ll work on catching up in many ways, including cleaning up around here (which is likely going to take way more time than this), doing some thank yous and get wells, checking my P.O. box, and doing work on the blog.

Some blog specific notes:

A review of the (I’m sure) horrible portfolio performance of June is coming, even though it’s almost August. In fact, I’m sure a July one will also be done.

The 5% Plan updates have stopped because I had to replace my truck’s battery which reset my mileage counters, following being out of town for a week. The updates will resume, probably in about two weeks.

I have to do a few more blog changes, including adding a badge for referral from a top referral source. Behind the scenes, I need to automate billing for advertisers too.

Finally, I have a bunch more ING Direct and Virtual Bank referrals; if you’re interested in opening a new account and getting more bucks, just let me know!