Multiple savings accounts are useful for budgeting

Why you need 3 savings accounts

Excerpt:

Multiple savings accounts can get expensive at traditional banks that have minimum balance requirements and account fees. Many online banks, however, allow customers to set up dozens of accounts for free with no minimum balances. Most people need at least three, with regular (preferably automatic) transfers from their checking accounts into each:

• An emergency fund for job loss and other major financial setbacks
• A "needs" account to cover necessary expenses that aren't monthly (such as property taxes or annual insurance premiums) or that are inevitable but often unpredictable (such as car repairs or medical deductibles)
• A "wants" account to pay for the fun stuff, such as vacations, holiday spending or a down payment on a new car

Multiple savings accounts are useful for budgeting in much the same way as the envelope system, where people divide cash into envelopes to cover expenses such as rent, food and entertainment. The savings accounts, like the envelopes, tell you if you have enough to cover that specific goal, but also allow you to shift money around when required, said Rachel Schneider, a senior vice president for the nonprofit Center for Financial Services Innovation and co-author of the book "The Financial Diaries: How American Families Cope in a World of Uncertainty."

Comment: What we do - using Capital One 360 and Wells Fargo (our primary bank).

• We have a CO360 checking account that we use for all handwritten checks
• We have six CO360 savings accounts label as below. (We no longer have Allstate for our insurance - did not change the name. The Allstate and Taxes is an escrow account for property taxes, homeowners & auto insurance)
• We have a Wells Fargo savings account with several thousand 

Top image source

Updated: How much cash should I keep in the bank?

14 years of savings

Comment: Although interest rates are historically low, CapitalOne360 is one of the best places to save!

Non-Savers "don't see a correlation between where they are now and where they will be"

Guess what? America's best savers aren't wealthy

Excerpt:

A quarter of middle-class households (those earning between $50,000 and $75,000 annually) set aside more than 15 percent of their income, according to a survey that accompanied Bankrate's March Financial Security Index. That money is rerouted from their daily expenses to fund long-term goals such as a retirement investment plan or an emergency savings account. Comparatively, 8 percent of lower wage earners contributed this much. And only 17 percent of the highest earners in the survey (households making $75,000 and above) elected to put the same amount of their salaries away for a rainy day. "Middle-class Americans (have) to do the saving, because nobody is going to do it for them," says Greg McBride, CFA, Bankrate's chief financial analyst. "They don't have the six-figure income to fall back on" for expenses, including household emergencies, long-term health care, children's education or their own retirement. In contrast, people between 18 and 29 years old -- the youngest group in the survey -- were the most likely to save relatively little: 37 percent said they save 5 percent or less. Another 18 percent said they save nothing at all. "They don't see a correlation between where they are now and where they will be," independent budgeting expert Tiffany Aliche says.

Comment: Image source: The origin of the Piggy Bank. Jim's simple savings tips:

• Eat out less
• Travel less (we've had great times just going to a neighboring state!)
• Less clothes
• Older cars
• Simpler gifting. 
• Enjoying the simple things of life 

“Better a borrower than a lender be?”

Falling Rates Aid Debtors, but Hamper Savers

Excerpts:

“It’s the whole point of low rates, to entice borrowing and discourage saving, but it means a massive wealth transfer from savers to borrowers,” said Greg McBride, a senior financial analyst at Bankrate.com. “It is a trend on steroids now because interest rates have been cut to the bone.”

For example, anyone keeping $500,000 in a 12-month certificate of deposit earning a rate of 1.5 percent annually — one of the best savings rates available nationally these days — would earn $7,500 a year, hardly enough to live on. Just three years ago, that same investment would have generated $26,250.

...

As long as rates stay this low, the plight of the saver will be especially disquieting for those who rely on their savings for a large slice, if not all, of their income. That is a particularly unnerving prospect for pensioners or for people approaching retirement age — who now want to draw on the interest from their savings to support them when they are no longer working.

“You have spent your life being prudent, building a nest egg for your retirement, and now the returns are terrible,” said Todd E. Petzel, chief investment adviser at Offit Capital Advisors, a wealth advisory company in New York. “I am 58 years old. I know lots of my peers who are thinking of retiring, and they are scared to death.”

Among the winners from low interest rates are people taking out new mortgages. The benchmark 30-year fixed-rate mortgage has fallen to 4.53 percent, the lowest in more than half a century, according to Bankrate.com.

Comment: I'm a far cry from the illustration above of $ 500K in a CD! One of the better savings rates is with INGDirect. Bankrate.com has more options.

Charles Schwab: No incentive for saving

Low Interest Rates Are Squeezing Seniors

Excerpt:

In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.

Today's average rate for an identical one-year CD is roughly 1.3%. On the same nest egg, that retiree will now get annual payout of just $1,300—a 76% decline in four years.

Some would argue that today's low inflation rate offsets the decline. But even at an inflation rate of zero, a 76% decline in spending power is painful. And we're already seeing signs of inflation this year. The first two months of 2010 showed an annualized inflation rate of 2%, further exacerbating the spending power problem for retirees by eroding the value of their principal.

To be sure, the country's recent financial crisis required unprecedented action by the Fed, including lowering rates to levels not seen in more than 50 years. In particular, the infusion of capital into the banking system through historically low fed-funds target rates pulled many banks from the precipice of collapse. By that measure it has been a resounding success.

Yet these unprecedented low rates have now been in place for almost 18 months. As a result, banks have enjoyed virtually free access to money while retirees have been deprived of any meaningful yield on their fixed-income portfolios. For a large segment of our population—people who worked long and hard, who followed the rules by spending less than they earned and putting the remainder away to keep themselves independent in retirement—the ultra-low interest rate is more than a hardship. It's a potential disaster striking at core American principles of self–reliance, individual responsibility and fairness.

To put the scale of this problem in context, consider the fact that more than $7.5 trillion in American household wealth is held today in short-term, interest-bearing products such as checking and savings accounts, retail money funds and CDs. At today's low interest rates, the return on those savings is hundreds of billions less than it would have been at 2006 interest rates. Retirees feel the consequences disproportionately, but because much of that income would have made its way into the economy, spending and job creation also suffer.

...

It's not just retirees on fixed income we should be concerned about. Let's not forget that savers of all ages—even the young person opening his first savings account—need some incentive of future reward for saving. Today, there is none.

Comment: The problem is that if interest rates rise (and they will and they should!), the cost of money for the debt laden Federal government will also rise! But back to personal finances: there is little incentive to save. But save you must!

I's time we talked about adult toys

I Won't Buy Toys. Unless I Really Want Them.

Excerpts:

Don't turn necessities into toys. A car is a tool, I've told them; buy anything nicer than a midrange Honda and you're buying a toy.

...

The truth is that my parents have taught me, through example, not to buy anything just because it is appealing. I've learned that it's important to deliberate, to rationally weigh whether something is really worth the money. To think before I buy.

But they also taught me, through example, that buying some toys, even if they aren't necessary at all, is OK if they have a high payback in education or entertainment.

Comment: An interesting read about a family discussion about needs vs wants

Savings: Little steps help

Making Frugality a Habit

Excerpt:

Weaving a financial safety net is not just about covering yourself in a crisis. “It’s also about being able to get ahead,” said Jennifer Wheary, a senior fellow at Demos, a nonpartisan public policy research group in New York. Ms. Wheary is the co-author of a report released in November: “From Middle to Shaky Ground: The Economic Decline of America’s Middle Class.”

Most people’s economic stability depends on a variety of factors. Right now, with so many people facing multiple sources of financial strain, “it’s even more important to have that cushion,” Ms. Wheary said.

When you are stretched thin, it can feel impossible to save — and yet that is when you need to make sure, somehow, that you do, she said. Among the families surveyed for the study, 75 percent “couldn’t survive for three months, if they had to do it on savings alone.”

My husband and I could easily be one of those families. Every time our emergency fund hits the one-month mark some crisis strolls along and gobbles up our funds. Then we start over. Now, I am determined to save the $15,000 that would cover our family’s most basic needs for at least three months.

A few tricks that might help. Start by finding a specific chunk you can save — perhaps cutting back cable, quitting smoking, renting out the garage or limiting spending on restaurant meals.

THEN do an end-run around your own inertia and use automatic transfers to deposit a set amount — $100, $200 or $300 — every month into an account not linked to your checking and definitely not accessible by PIN or with any piece of plastic. The first time I tried this, I saved $3,000 so fast it made my wallet spin.

Comment: Little steps: Automatic savings transfers, freeze a credit card (put it in a locked box), bagging lunch, dinning in a Friday night, driving less. All these help.

Potential borrowers are not credit worthy

Bailout Monitor Sees Lack of a Coherent Plan

Excerpts:

“You can’t just say, ‘Credit isn’t moving through the system,’ ” she said in her first public comments since being named to the panel. “You have to ask why.”

If the answer is that banks do not have money to lend, it would make sense to push capital into their hands, as the Treasury has been doing over the last two months, she continued. But if the answer is that their potential borrowers are getting less creditworthy with each passing day, “pouring money into banks isn’t going to fix that problem,” she said.

...

In her view, the government should be trying to create more reliable customers for those banks by shoring up the fragile finances of the millions of American families that could not save, borrow or spend even if their banks were flush with capital.

“Any effective policy has to start with the households,” she said. “Years of flat wages, low savings and high debt have left America’s households extremely vulnerable.”

Comment: Heard: GMAC will not make a car loan to anyone with less than a 700 FICO score. GMAC limits loans to buyers with 700+ FICO rating. We need a long term national program to encourage savings and investing. See: In 2005, the U.S. savings rate hit negative levels for the first time since the Great Depression. (article has graph)

The importance of savings

Save, Save. Don’t Splurge on a Piggy Bank, a Tin Can Will Do

Save, Save. Don’t Splurge on a Piggy Bank, a Tin Can Will Do.
By SHIRA BOSS
Published: September 1, 2007
Saving money may not be the sexiest financial move, but it’s probably the most important.

Excerpt:

Saving money is not the sexiest financial move, but it’s probably the most important. So start squirreling. Even if it’s the change from your pocket. Start incubating a nest egg, which is not just for retirement. A cash account may be for a flatter television set, a vacation, new clothes, a period of unemployment, a down payment on a house, car repairs or whatever treat you can dream up.

I know, times are tight and 7 out of 10 Americans report living paycheck to paycheck, meaning there never seems to be enough left over for savings. In 1985, Americans were saving $11 for every $100 they brought home; now the savings rate is around zero, and debt is at a record high.

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It is a widespread and harmful myth that one needs to make more money to save some of it. “We’ve met people who can save on a salary of $30,000, and people who have not a penny in savings and a salary of over $300,000,” said Manisha Thakor, co-author of “On My Own Two Feet,” a personal finance primer for women. “Saving is about a mind-set and a commitment, not a level of salary.”

When I was most stressed financially, I forced myself to put 5 percent of every check into an emergency account. It built up surprisingly quickly and ended up paying for surprise expenses that otherwise would have gone on a credit card. Now I’ve worked up to putting some cash from every paycheck into envelopes marked Goody Bag, which I dip into for luxuries like a nice teapot. That definitely makes earning money — and spending it — more fun.

“The powerful thing is that saving is not about deprivation, saving is actually all about spending,” Ms. Thakor said.


Comments: I thank my wife for having us on a conservative fiscal policy for the 33 years (will be 33 years in December) of our marriage. Interent banks have automatic savings plans (eg. ING Direct).