Where to keep liquid assets?
There is no doubt, when it comes to saving for retirement including some mix of stock and bonds is essential. Nothing else will generate the type of returns needed to build a nest egg. But what about “emergency funds” and “home savings accounts”? While it’s fine to keep some of these funds invested, you should keep a significant portion in savings. Why? Well, imagine that the your roof needed replacing in March of 2009. If you had your “home expense savings” invested in the stock market from 2008 – 2009 it would have lost nearly 50% of its value. If you didn’t need the money for a few more years, you would have been fine – even made money. But its 2009 and you are sitting under a leaky roof – you need money and you need it now! So where should you keep this money? Boring, old fashioned, government insured savings accounts – and thats the problem.
How to get higher returns on you savings account?
Most larger banks pay abysmally small interest rates on savings accounts. Take my bank, Wells Fargo. Saving accounts currently pay 0.01% interest. this is important because in 2018 the inflation rate was 2.44%. This means that if you put $1,000.00 in a Wells Fargo savings account in January of 2018 you would get back $1,000.10 in December; however, because of inflation, that $1,000.10 would have only $975.88 of buying power. We actually lost buying power! What can we do? Well actually there are several opportunities for safe, insured returns. The first and perhaps most important is look beyond your local bank. While Wells Fargo was paying 0.01%, several on-line banks were paying as much as 2.45%. How do I know? I looked at Best Cash Cow which lists rates at major banks across the nation. Why the discrepancy between Wells Fargo and on-line banks? Well for one, on-line banks don’t have expensive brick and mortar locations and employees to pay. The other is competition. Wells Fargo doesn’t really need to offer higher rates of return to attract customers, they literally walk in off the street. On-line banks need to get your attention. But are these on-line banks safe? Well for starters, they are insured by the federal government. (Note: If you don’t see FDIC insured, don’t ever give a bank your money). Also, there are some very recognizable names on that list. For one, Live Oak Bank which is familiar to many veterinarians is near the top of the list for offering high rates of returns.
Want to get even better returns on your “surplus” savings? Think long term!
A second attractive option if you don’t think you will need all your emergency money tomorrow are certificate of deposits or “CDs”. With a CD, you give your money to a bank for a specific period of time, typically 6, 12, 18, 24 months or longer, and they give you a higher rate of return. Typically, the longer the time period, the higher the interest. CDs are insured by the federal government so your investment is safe. The down side is that your money is tied up for a period of time so you don’t want to put anything you might need immediately in a CD. Let’s say you have a $300,000 home and your goal was to put $5,000 a year in your home savings account for annual upkeep. At the end of a few years, you find there is actually $8,000 in your savings account. One option would be to take the extra $3k and put it in a CD for higher returns. Currently, Live Oak Bank is paying 2.85% on its 1 year CDs.
Want to maximize interest income? There’s an App for that!
If keeping up on the latest in interest rates and moving your money from bank to bank sounds like a pain, there’s a website -and and app- for that! Max My Interest will link into your savings account and then automatically sweep your money to a bank that is offering the highest possible interest. Max my interest works by keeping an eye out for the best rates and automatically reallocating your cash among bank accounts – your federally insured accounts in different banks – as rates change. You can view your balances at any time, and track the status of each optimization online. Is it legitimate ? Seems to be. Is it safe? Well they never acutally touch you money, they just move it from insured back to insured bank. Is there a catch? Of course. Maxmyinterest charges 0.08% per year on the cash being optimized, which seems reasonable for what it is doing.
When it comes to “emergency funds” and “home savings accounts” we need to keep it liquid but that doesn’t mean losing value every month! Just a few small adjustments in the way we save can make the difference between keeping up with inflation and losing buying power.