Early Bird Gets the Worm

If you own a Discover Online Savings Account, you might have received the good news by now.  Discover Bank has sent out letters notifying certain select customers that they have been upgraded to a Premium Savings Account as of Jan. 31, 2010. 

The Premium Savings Account has the same features as the Online Savings Account, except it has a variable interest rate that will always be equal to or higher than the Online Savings Account.  As of Jan. 31, 2010, the current Premium Savings Account has an interest rate of 1.59% as compared to 1.35% for the Online Savings Account.  Most importantly, this offer is not available to the general public.

But there might still be hope.  If you do not have a Discover Online Savings Account, you can still open one today.  A 1.35% interest rate is comparable or slightly higher than some of the other online saving accounts out there, such as ING Direct, HSBC Direct, and Emigrant Direct (with the exception of American Express’s High Yield Savings which is currently offering a 1.50% APY).  And afterwards (or if you already have an account but have not received the current invitation), you can call customer service and request to be upgraded to a Premium Savings Account.  You may be pleasantly surprised, as Discover is known for its good customer service. 

Once again, the moral of the story is to start savings as soon as possible; but it’s better late than never.  Congrats to the lucky readers!

Better Save Now than Later

The recession might have ended, but we are still a long way from recovery.  Back in July, we wrote about some of the better online savings options that were available.  We hope that you took advantage of those “high” interest rates then, because since then all the institutions covered have reduced their savings interest rates.

Here are the current rates (APY) as of November 1, 2009:

There are, however, still a few institutions that offer interest rates over 2.00% APY, such as SFGI Direct’s Online Savings at 2.25%  with a $500 minimum deposit and ShoreBank’s Direct’s Online Savings at 2.15% with a $1 minimum deposit.  These places may be unfamiliar to you, but rest assured that they are FDIC-insured.  So if you haven’t started saving yet, start today before these interest rates fall as well.

If you have already opened a savings account and are discouraged by the falling interest rates, remember that your money still worked harder for you sitting in a savings account and collecting some interest rather than in a checkings around collecting no interest.  And nothing is standing in the way of closing your current account and opening a new one with a higher interest rate.  Happy Savings!

Tip of the Week: When is the Smartest Time to Pay Your Bills?

Everyone knows that it is important to pay your bills on time, but did you know that it pays to pay your bills as close to their due dates as possible?

Your money works best for you when it stays in your savings account collecting interest.  Therefore, it doesn’t make sense to pay your bills now if they are not due until the end of the month, for example.  Interest accrues daily, so you can maximize your interest income by keeping the largest amount of money in your savings account for the longest amount of time possible.  Below are a few things to keep in mind though:

  • If you still pay your bills via snail mail, you should send your payment five business days in advance of the due date so there is enough time for the check to arrive.  Otherwise, you can schedule your electronic payment to go through on the exact date the bill is due.
  • If you have various bills due throughout the month, decide when is the best time of the month to pay your bills and call your credit card companies and cell phone, internet, cable providers, etc. to change your billing cycles so all your bills are due at around the same time.  That will help you keep track of them, and most places are happy to accommodate.
  • Keep in mind that transferring the money from your savings account to your checking account can take a few business days.
  • Also remember that many savings accounts limit how many times you can withdraw in a month, so figure out how much money you need for your bills and withdraw the whole amount in a few transactions.

How to Own a Piece of the US Government’s Debt

With the instability of the market – predicted to last for at least another few months, but more likely longer – more and more people are turning to Treasury securities to protect their money.  While T-bills, notes, bonds, and the newer TIPS (Treasury Inflation-Protected Securities) carry low interest rates relative to the market, they are good options if you are looking to preserve rather than increase your wealth.

Treasury bills, notes, and bonds generally work the same way, and are classified according to their maturity (the time it takes for the principal to return to the owner without any penalties): T-bills are short-term securities, with a maturity of up to 52 weeks, Treasury notes have maturities between 2 and 10 years, and Bonds mature in 30 years.  Unless there are expectations of deflation, T-bills are sold below face value, and at maturity you can redeem them for the face value (the interest you earn being the difference between the two).  Treasury notes and bills are similar, but also pay interest – fixed at the time of purchase, based on the face value of the security – to holders every six months.

First issued in 1997, TIPS have maturities of 5, 10, and 20 years and pay interest every six months.  But the difference between it and Treasury notes and bills is important – designed to protect investors against inflation, the TIPS interest rate is pegged to the Consumer Price Index (CPI – a standard measure of inflation).  The principal value of the TIPS will fluctuate according to hikes and dips in inflation, and the interest rate will vary accordingly.  At maturity, however, the principal returned will be at least the value determined at time of purchase, even if it goes through deflation.  So while the interest rate on TIPS is frequently lower than that found in Treasury notes and bills, investors are able to take advantage of increases in inflation and still be assured that they will, at a minimum, get a fixed principal back.

If you are interested in buying any of these Treasury securities, you can go through a financial institution or a broker, invest in a conservative fund that includes notes or bonds, or buy directly from the US Treasury through TreasuryDirect.  As all of the securities are issued through auctions scheduled throughout the year, if you use a broker, you may be able to determine the rate and amount of securities you get.  But TreasuryDirect may be a good option for smaller investors, as it requires a minimum purchase of only $100, and while you do not get to participate in the auction directly, you can still set the value under which and the interest rate over which you are willing to purchase the auctioned securities.

Not All Savings Accounts are Created Equal

As interest rates on savings accounts creep down towards Japanese lows, keeping your money in cash or letting it sit in a checking account may be tempting.  But as we argued in our first post, there are some savings options that can still give you at least a spark for your buck.  Along with savings accounts at credit unions, online savings accounts have one of the highest yields among your low risk options.

ING Direct’s Orange Savings and HSBC Direct’s Online Savings are probably two of the best known online savings accounts.  Offering a 1.40% and 1.55% interest rate (APY), however, they are easily beat by other options.

You can do better with Discover’s new Online Savings and American Express’ High-Yield Savings, both with a 2.00% interest rate (APY).  It seems that as people try to cut down their credit card spending, credit card companies are also turning to savings.  Discover requires a $500 minimum deposit to open the savings account, but imposes no minimum balance thereafter.  Amex has no minimum deposit or balance requirement, and both accounts allow up to six transactions per month (they are savings accounts after all).

Now there’s also SmartyPig, which got a special mention in Ron Lieber’s financial health day article on the NYTimes a couple of weeks ago.  It offers a daring 2.75% interest rate (APY) and requires only a $25 minimum deposit.  But before you rush to open it, consider whether some of its other features may become an inconvenience to you: SmartyPig is set up as a program to help people save for specific goals, and, as such, requires that you define a savings goal between $250 and $250,000 and set up monthly deposits to come in from an existing account according to your timeline and goal (SmartyPig calculates the value of the deposits for you).  If you need more flexibility in allocating your money towards savings, this may not be a good option for you, though you could set a very small goal and add more money at your pace.  A nice feature of this program, however, is that you can make your account “public” to friends and/or family through email, where you can choose to show them your goal and the percentage and amount saved towards it, and they can contribute to it, too.

Chances are, though, your friends and family are also trying to build savings of their own (and if not, you should definitely encourage them to do so).  Particularly in this economy, a rainy day fund or saving for a goal is always better than no fund or savings at all, but one that grows, albeit slowly, is even better.

Rain, Rain, Go Away

Even if you live in the sunniest, most pleasant place on earth, you still need a rainy day fund.  Unlike the weather, there is no way to predict when you might get into a car accident or fall ill or become unemployed.

Many people, however, find it hard to start saving.  It is might be because they have to live paycheck to paycheck or because for the first time they are enjoying having disposable income and would like to spend more of it on things they couldn’t before.  But the notion that saving is a burden that makes a tight budget even tighter or that cuts into the fun parts of our lives is false.  In fact, saving can be painless and effortless.  Take for example this tip I learned from Mellody Hobson, Good Morning America contributor and President of Ariel Investments.  On the ABC special Un-Broke: What You Need to Know About Money, she challenged everyone in the audience to start saving  $1 a day for 4 months, then $2 a day for another 4 months, and finally $5 a day for another 4 months.  In a year’s time, each person will have $1,000 in his/her savings account.  (This would be a great New Year’s resolution, by the way.)

If you think you will still succumb to temptation and spend the $30, $60, or $150 you should be putting aside each month, then try to have the amount automatically deducted from your paycheck and directly deposited into your savings account.  It is much easier to have less to spend to begin with than to have to hold back and put aside the money later.

Finally, the rainy day fund is not a marriage, so it doesn’t have to be forever.  I recommend having at least enough money to cover 6 to 9 months of living expenses saved up (because it takes about 6-9 months to find a new job during times of recession).  Should you ever have to dip into your rainy day fund, just replenish it afterwards.  Otherwise, it is a much better use of your money to save it towards retirement or a down payment for a home.  Ultimately though, even in the most robust economies, no one is immune to financial hardship, which is why everyone should have a rainy day fund.

Under the Mattress is not Your Only Option

Way back when, people used to stow away their funds under the mattress and with banks lining up to file for bankruptcy, I don’t blame you for going to back to the tried and true method. There are, however, two other options before you start putting your savings under the mattress or in your checking account, where they are earning you zero money.

The first option is opening up a savings account at a credit union. Credit unions function like regular banks, but they are smaller and usually offer better interest rates. This might come in handy should you need to borrow money for a car, a home, or other expenses in the future, since some credit unions require that you be a customer anyway. The downside to credit unions is that they usually have one branch and there are few ATM locations (but this is a savings account and you are not supposed to be accessing these funds for a night out on the town). You can go to the Credit Union National Association’s website to find credit unions near you.

The second option is opening up a savings account online. For example, EmigrantDirect and Ing Direct are offering a variable annual savings rate of 1.65% and 1.50%, respectively, and require no minimum balances. This is a pretty good deal when you compare them to savings accounts offered by some of the major banks, which usually earn less than 0.25% a year and require minimum balances anywhere from $300-2,500 to avoid fees. The downside is that the savings account is online, so if you want to access the funds, you will have to transfer them to your checking account (but again the point is that you are not supposed to have easy access).

You can easily set up a direct deposit from your paycheck straight to your savings account. While leaving them under your mattress or in your checking account may be convenient, any extra money (especially what little) you may have should be put to work. For example, your $500 in an Ing Direct Orange Savings Account will have grown into $507.50 a year later. $7.50 is nothing to boast about, but it is $7.50 more than if you didn’t put it in a savings account and that puts you slightly above the inflation curve.