Beginner Advice For Someone New To Personal Finance, Part 2
October 1, 2008 – 5:25 amEarlier this week I posted about helping one of my friend with some investing advice. Today I’d like to cover a couple of other “beginner” ideas. Please let me know if you have any other suggestions for my friend who is just now starting to save for retirement (baby step 4).
Here are my additional suggestions:
1. Checking accounts are a commodity. Choose one that pays interest! Here are the things I require from a checking account:
I. ATM reimbursement. You should be able to use any bank’s ATM and be reimbursed for the fee that ATM charges you for a withdrawal. Some banks that offer this feature may place a limit on the number of withdrawals they will reimburse, but it’s usually 5-10 or more per month which should be fine.
II. Earns interest. It won’t be a ton of interest, but some is better than none. You’re not looking for the absolute max interest offered at any given time because a lot of banks will offer teaser rates and then drop the interest rates later. Some banks are well known for offering higher than average interest rates consistently.
III. No minimum balance required.
IV. No annual fees.
V. Free online bill pay.
I personally use Charles Schwab. They make you open a brokerage account in addition to their Investor Checking Account, but you don’t need to ever use the brokerage account. ING is another probably the most popular choice. They offer free online bill pay, but I’m not sure they offer actual paper checkbooks. Etrade is another choice, and like Charles Schwab they make you open a trading account but you don’t have to use it. Some of the larger US banks may also have some good choices.
2. Think about where you put your emergency fund. You should make sure the funds’ location meets all of your needs. If your income and budget are pretty stable and you rarely need to use it (or much of it), you might consider putting your emergency fund in a short-term CD or high interest savings account that is still safe but will earn a little interest. CD’s do typically have a penalty for early withdrawal, but it’s usually only 3-months of interest. If you have a real emergency and need those funds, then losing 3-months of interest won’t be a big deal. At a 4% interest rate on big $10,000 emergency fund you’d only “lose” $100 for early withdrawal. And if you don’t end up needing it at least your emergency fund will keep up with inflation. Therefore picking a short-term CD (1-year or so) isn’t really that “risky”. You could also put ½ or ¾ of your emergency fund in a CD and keep the other part in a interest-bearing savings account. I keep my emergency fund in Vanguard’s Prime Money Market fund. Money market mutual funds are not FDIC insured, but they are still very safe and tend to yield more interest than the average bank savings account. Since money market mutual funds were invented in 1970 only two have lost value, and they only lost ~3%.
Do you have any other advice you would recommend to my friend?
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4 Responses to “Beginner Advice For Someone New To Personal Finance, Part 2”
ATM fee reimbursement? Dang, I didn’t even know anybody offered that! I’ll have to take a second look at ING’s checking then; if it’s anything at all like their savings accounts, I’ll absolutely love it.
And to think that I went through the hassle of setting up a checking account in my college town just to avoid ATM fees…
Have you ever considered keeping a portion of your emergency fund in something with an actual store of value- like gold or silver? I’m thinking of a worst-case scenario here, but during a national emergency or crisis our online accounts may be completely illiquid.
By
Blake (Who am I?) on Oct 2, 2008
I got ripped off on my checking account and bank accounts for a while too. Don’t feel too bad.
I haven’t ever considered keeping physical gold or silver as a portion of my emergency fund. This is mostly due to the fact that (I believe) if things get that bad I’d rather just stock up on shelf stable foods and bottled water. I think most people would be freaking out and robbing grocery stores if they couldn’t get cash to make purchases, so I’m not sure the store owners would be in a position to take gold coins in exchange for goods. That’s just me though. If you think having some gold on hand gives you peace of mind, go for it.
By
todd (Who am I?) on Oct 2, 2008
Hey Todd,
I see what you mean, but I’m talking about a full-scale financial collapse. While I absolutely hate to talk like I believe doomsday is approaching, you can never be too certain. I’ve read some personal accounts of people who lived through complete economic crashes, and it’s just plain scary. In one such case that I read about, the economy essentially reverted back hundreds and hundreds of years. There was no paper money, and the only way to acquire goods was through a bartering system or by using precious metals.
I realize how far-fetched this stuff may sound, but it does give me some piece of mind. Besides, I invest a portion of my total portfolio in metals, so I might as well actually have some it in my possession rather than all in electronic certificates.
By
Blake (Who am I?) on Oct 6, 2008
I know people who not only invest in gold or metals, but keep the actual gold at home. Yes in the worst case scenario where cash becomes worthless due to hyper-inflation or the money system freezing up, then having cold hard assets may come in handy.
This is a little too much for beginner investing though. For me the most important in growing my investment was paying myself first every month. I guessed you’ve covered that in earlier posts.
Best wishes to your friend who’s beginning to invest! It’s a world fraught with worry and laced with occasional glee!
By
Daphne (Who am I?) on Oct 7, 2008