Straightening out your finances: Part 3
This is the third and final part in a multi-part series about getting a handle on your finances.
Researching savings accounts will pay off in the long term
Banking and cash flow
So far in this series we’ve looked at how we get an idea of how our money is moving. We’ve looked at our income, our expenses, where we can cut back. We’ve looked at how to organize this to figure out fixed expenses and see how much we actually have to spend every month. Budgeting basics. For the last part of this “Straightening out your finances” series I want to take a look at where funds are being stored. What kind of bank, what kind of account, and why that matters to you in the long run. The short of it is that it can make a big difference over time.
Savings accounts
All savings accounts pay interest to the account holder, and that interest is going to grow over time. The key is to make sure that your bank offers a high percentage of interest as compared to your typical neighborhood or national bank. High yield savings accounts from online banks such as INGDirect, Emigrant Direct, and HBSC all offer higher than average interest rates. Disclosure: I use ING for my savings accounts. I should note though that over the past few months there’s been a decent dip in the interest offered by each. The rates certainly fluctuate and you should look into how steady each bank has kept their rates so that you can project your earnings for each account.
In case you haven’t yet noticed, I love internet banking. I have no need for brick and mortar stores so long as I have an ATM near by. Neither do you really. In fact, online banks have led the way on high yield savings accounts. Their overhead costs are so low that they’re able to blow competitors out of the water in most cases. They also frequently have few if any fees compared to traditional banks that charge you fees for just about everything.
This same logic holds for checking accounts. You should look for a good online bank that offers a high interest checking account, no fees, and offers free ATMs nationwide or reimburses you completely for the use of competitor ATMs. I personally use and love Schwab, which comes with a free investment account that I plan on using once I have my credit card debt paid off and my emergency fund fully funded.
The emergency fund
In today’s job market, having a 4-6 month emergency fund is essential to your survival. An emergency fund should have enough money in it to cover all of your living expenses for about 4 months or longer. 6 months is a good target, and I was unemployed for 7 months before I found a job again in the political realm. This is also where your fixed expense tracking comes in: you can quickly figure out what you need to save to fund this account. Based on my current rent, student loan payments, credit card minimum, utilities, and grocery bills, I need to fund an emergency fund of about $10,000 for a 6 month back up. That’s going to take awhile to fund while I try to pay off my credit card and continue paying my loans. Every little bit helps, and that’s why keeping your emergency fund in a high yield savings account is the best route to go. One reason I chose ING Direct was because I could easily get secondary accounts to use for specific things, such as an emergency fund, without having it mingled with my regular savings account.
Routing your money
An easy way to make sure that you save before you can spend is to have your income directly deposited to your savings account. From there you can have the amount you spend on fixed expenses transferred to your checking account along with a little spending money to get you through the week or two. I have all my fixed expenses set for automatic payment each month so I never have to push a button to make sure my bills get paid. Everything happens automatically. This also means I don’t have to worry about missing a payment or forgetting. The only exception to this is my rent and utilities, which get included in a check to my roommate and have to be individually calculated each month.
Next Steps
Take the time to do the research. Shop around and see which banks offer the features you’re looking for, and offer highly competitive rates. Look into customer service reviews for them too. Because most won’t be brick and mortar, you want to make sure you can get someone helpful on the phone if necessary. Once you’ve got your banking straightened out you will have laid a solid foundation for your financial future.
