Let me give examples.
Inflation can be when the increase of the cost of goods outpaces the increase of your savings and wages, this would be an example against you, and the most likely to happen. If you travel to some other countries however and their currency is inflated, your dollars have greater purchasing power and things such as rent, food, and the cost of living will seem ridiculously cheap.
With this in mind we need to maximize the return on our short tem savings to match or exceed the rate of inflation. This usually dificult because we also want to maintain a high degree of liquidity for our safety net as well.
Beat the Tax Man
Taxes are the number one drain on an employee's income, it is the price to pay for enjoying the benefits of this country. While taxes are inevitable there is one short term savings alternative that beats the Tax Man.
The tax free savings in your savings net is the HSA or Health Savings Account. I have written an earlier post on them so won't go into detail here except to say that one great distinction between this account and an IRA is that the money in the IRA can only be used after retirement, whereas the savings in the HSA can be used at any time for health care purchases.
Money Market Accounts
These accounts can be found at your bank and pay an interest as opposed to simple checking accounts. Rules frequently apply to them however, such as minimum balances or a limit to the number of checks that can be written. If you are use your credit card to pay bills and make purchases you will be writing fewer checks and this won't be a problem.
Many banks now have online access to Money Market Accounts with online bill paying making it easier to manage your money while earning interest on checking that wouldn't be available otherwise. Find a bank offering free ATM access to get fast cash when you need it without having to write checks.
CD's; Certificate Deposits
Keeping a large enough balance to maintain your Money Market makes sense but after that you can purchase CD's that offer greater interest yet are still easily available to build your three to six month safety net.
Here is how they work.
A CD is purchased for a set amount for a fixed time and in return the bank pays an agreed amount of interest. Here's an example; your bank may offer a $1,000 CD that pays 3.1% interest if you agree to a two year term. Your money is then unavailable to you for this amount of time and if you redeem the CD early you will be penalized with a fee.
So if you are penalized for redeeming the CD early how does it fit into a savings net?
Keep the amounts of the CD limited to an equal amount of your monthly expenses and build to purchasing one each month of the year. The CD's can be automatically renewed upon maturity and yet can be redeemed should you need it for that particular month.
"Are you crazy?" some might ask if they are unable to set aside a month's extra income per month. If that's the case, simply reduce the amount of the purchase. Suppose you can only put aside one week's worth of expenses.
Great! Start there and continue to cover the calender with monthly purchases until you have accomplished this goal. Once you have you will feel liberated!
You can get more information on CD's and compare rates at; www.bankrate.com
What about bonds?
There are numerous types of bonds and some which offer tax advantages. The easiest and simplest types are EE and I bonds which can be purchased from most bank tellers though for travelers I reccomend TreasuryDirect, so I will keep this post limited to them.
EE bonds purchased after May 2005 offer a fixed interest rate which is currently 1.40% till October of 2008 an I bond varies the interest to keep pace with infation. They can be purchased for various amounts from as little as $25 for the EE bond to as large as $5000. The minimum term of ownership for a both is one year and if redeemed before five years there is a an interest fee charged.
Here is are some pros on EE and I bonds.
- The interest rate appears low but also figure in the tax advantage and the interest acrues monthly.
- They can be purchased for smaller amounts than CD's making it easier to get started saving.
- They are easily redeemed for cash.
- They are considered among the safest investments in the world.
http://www.treasurydirect.gov/indiv/products/prod_eebonds_glance.htm
just copy this link and paste it in your adress bar.
Money Market Funds
Money market funds are offered by brokerages and mutual fund families
These funds invest in highly liquid, safe securities such as certificates of deposit, government securities, and commercial paper (i.e., short-term obligations issued by corporations).
These funds are very similar to the Money Market Accounts found at banks. Their advantages can be that they offer many if not all of the benefits of banks; ie, ATM cards, checks, online access, while also providing a higher interest rate.
The disadvantages is that they are not FDIC insured and while they make every effort to maintain a NAV (net asset value) of one share equals one dollar, they cannot guarantee this.
Weigh them as compared to your bank, making sure they allow direct deposit of your paycheck and strongly compare their interest rate to your bank's, otherwise why risk giving up the FDIC guaruntee?
Weaving Your Savings Net
By opening a money market account or fund with CD's and bonds as well as an HSA you can weave a strong savings net that will give quick access to your cash while maximizing earning potential. All of this can be done easily on your own with a minimum amount of time when done online.
What about all that other stuff?
I know I didn't talk about simple passbook savings and when there is talk of savings the conversation can easily turn to mutual funds, and IRA's. These are best left to professional financial managers and not someone like myself, however if you have suggestions regarding things you have learned over the road, please drop me a note and I would love to hear about it.
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