Now that the Federal Reserve Board lowered the interest rate, it looks like we’re seeing the last of the 5.3% APY savings accounts, which appear to be a dying breed. I personally expect even these to disappear shortly; after all, why offer rates in the 5s when other banks are touting rates in the 4s quite happily?
This makes me sad and nostalgic for the better savings-rate days of yore, but also prods me into taking action.
I was mightily happy with the 6% interest rate I’d enjoyed on my FNBO Direct account up until September 28th of this year, when the company cheerfully announced their plummet to 5.05% APY.
Perhaps you might think me unreasonably happy with the 6% rate. To many readers, it’s not worth the hassle of switching accounts just for some chump change. But I’m one of the aforementioned chumps, you see, and to me, several hundred dollars I don’t have to work for on emergency fund money which was going to sit around anyway is a great thing.
Thinking about the after-tax rate does diminish my pleasure somewhat, but still, every last-day-of-the-month, my brain goes ca-ching when it runs down the roster of interest payments I’ve gotten. I threw the extra $460.34 I earned by keeping those funds in that high-yield savings account for 9 months right at my monstrous student loans, which helped to pay them off.
So today, while listening to my FNBO rep crow about their 5.05% APY on the phone, I took a nice big chunk of emergency fund money and stuck it in the highest-yielding CD I could find, 5.65% at Countrywide.
Countrywide offers the same 5.65% APY on both 6- and 12- month CDs, so before I hit “submit” on the application, I did spend some time playing Nostradamus. Would interest rates rebound by March? By September, leaving my funds off in their little electronic box not earning to their full risk-free potential?
I used the handy-dandy CD interest calculator at bankrate.com, and found that for $10,000 at 5.65% APY, a 6-month CD will pay $278 in interest and a 12-month CD, $565.
In the end, I settled on a 6-month CD for two reasons. [click to continue…]
Here is a question from a reader:
I’d be interested on a post about what to do after you’ve dipped into your emergency fund considerably. How quick should you replenish it? What are the best ways to replenish it? Is it worth backing off on funding things like Roth IRA’s to build back your emergency fund? It seems like everyone talks about getting an emergency fund, but I haven’t seen many thoughts about what to do after a real emergency.
First of all, it’s good to hear that everyone talks about the emergency fund. Having several months’ worth of expenses easily accessible is a good starting point for anyone trying to get their financial house in order. The funds can be in pure cash, a high yield savings account, a Roth IRA, or any combination of those three. If you have good credit, you may decide that a credit card that offers 0% APR on purchases can assist. Cash in your mattress (or a safer physical location) is the most liquid, but you do want your money to earn some income, so find a balance that works for you.
Just don’t touch the funds unless you experience a real emergency. Buying a new high definition television does not constitute an emergency, but unexpected hospital bills do. Taking a spontaneous vacation to Vienna should not signal a dip into emergency funds, but the loss of a job and therefore the ability to buy food or pay your heating bill might.
When you do have an emergency — a real emergency — you’ll thank yourself first for creating the emergency fund and then for not already depleting it for a non-emergency. When this emergency does occur and your fund is reduced to zero, once the situation has passed, it will be time to start replenishing the account.
If you pulled out your contributions from your Roth IRA for the emergency, which you can do tax and penalty-free, this is probably the first account you’ll want to replenish. This is simply because there is a deadline; after the tax due-date, usually April 15 of the next year, you won’t be able to replenish this year’s Roth IRA contributions.
The next priority would be any debt you might have incurred thanks to this emergency. Even while replenishing your Roth IRA, you should be paying at least the minimums towards your debt, but once you have taken care of any time-limited obligations, pay off that debt at full speed.
Assuming that you are receiving income at this point, automate your emergency savings to get your cash cushion back to its previous level.
How long should the process of restoring your emergency fund take? That’s going to depend on a number of different variables. Not all emergencies are created equal. If you require major surgery or an extended hospital stay and insurance doesn’t cover the expense, it might take a year to refill your accounts if you can return to work. If you can’t work after your hospital stay, it could take much longer.
In fact, if your emergency has changed your life so much, you’ll have more to worry about than just your emergency fund. At this time, you may find yourself forced to reconsider expenses you’ve always found affordable, if not just necessary. Cable television, internet access, eating out or purchasing enjoyable groceries for cooking, and basic entertainment may be eliminated. With fewer monthly expenses, you won’t have to replenish your emergency fund to the previous amount.
Even as you’re getting back on your feet, a 5% automatic deduction from your paycheck into savings can go a long way to improving your safety net. As you find yourself improving your position, increase that automatic deduction.
If you have any more suggestions for what to do after a real emergency, feel free to leave them here. I have not yet experienced a true emergency since creating an emergency fund, so I have no first-hand experience. I’d like to hear from anyone who has been through an emergency.
Note: There are some people who buck the trend and recommend not carrying an emergency fund of some sort. They are counting on never having an emergency or relying on credit (or generous friends or family) to get them through a rough time. They may never have an emergency, but it’s a dangerous proposition for which they could end up paying for years — much longer than if they simply took 3 to 6 months’ worth of expenses out of their high-cost investments and set it aside. This is not the type of risk that is good for long-term investing portfolios. With high interest rates for savings accounts, it’s really not such a bad idea to an emergency fund at least partially saved at HSBC Direct or a similar bank.
Photo credit: frumbert
Ryan Waggoner is an Associate Product Manager with CNET Networks, working primarily on GameSpot. He writes about entrepreneurship, real estate investment, and technology at ryanwaggoner.com. In this guest post, Ryan talks about his experience without a car in San Francisco.
My wife and I moved to San Francisco from Colorado about 10 months ago. We sold one of our cars just before we moved and took the other with us to SF. It was nice for a few months, as we were doing freelance work around the Bay Area, but after about 3 months of living here, we both got jobs within a couple miles of our house. At that point, the car began to look pretty expensive. Our parking alone was $235 per month. Throw in insurance, gas, maintenance, and depreciation and we were looking at close to $500 per month. So we sold it, giving us a nice little chunk of change to help pay off some lingering debt.
We’ve made some changes in our transportation life, including the following:
For commuting to work and running errands within a couple miles, we use the awesome public transportation options that SF offers. It does add a few minutes of waiting to our transit time, but it’s pretty convenient. We pay about $65 a month for two passes that let us use the buses, trains, and subways within the city.
For times when it’s raining, there’s not a convenient bus route, or it’s too late for the bus we need, we just take a cab. The city isn’t that big, so most cab rides fall between $5 and $10. We probably do this once or twice a week.
Since lugging our groceries onto the bus twice a month is a pain, we use Safeway.com and have our groceries delivered. For between $8 and $10, we go online and order all the groceries we would normally order and have them dropped off in a 4-hour or 2-hour window.
When we really need a car, perhaps to run an errand or to pick up something that isn’t practical to lug onto a bus, we use ZipCar, an awesome car-sharing service available here in SF. Basically, they maintain a fleet of cars at parking lots all over the city. When you join, you get an access card that unlocks the cars. If you need a car, you just go online or call to reserve the closest one. You pay about $9 per hour, which includes gas and insurance. It’s not practical for daily commuting, but if you need to run to Costco or IKEA once a month for a few hours, it works beautifully.
Overall, it’s been a wonderful change. There are still times when I wish we had a car, but in a city like San Francisco, it’s very practical to live without one. We cut our transportation expenses from about $500 per month to about $200 per month. I’m sure we’ll get another car at some point, once we value our time and convenience more than that $300 per month, but until then, we’re enjoying this chapter of car-free living.
For more on personal finance from Ryan Waggoner, visit his blog.
This is a guest post from Matthew Paulson. Matthew writes about money on his blog, Getting Green. While I save money on shaving by using water rather than shaving cream or gel, Matthew has another idea.
I noticed that my razor was getting dull the other day, so I did what everyone does and went to Wal-Mart and picked up whatever happened to look good at the time. I didn’t really think about the cost because it was something that I needed and would have to buy it anyway, but when I swiped it through the self-checkout line, those were some expensive razor blades. $11 for a set Fusion blades, ouch! I decided that there has to be a better way to shave without spending so much, so I did some research.
The first thing that you need to do is look for any free razor offers that you can. There’s no better price than free. You won’t find good free razors all the time, but quite often Gillette and Shick will offer free razors in hopes that you’ll stick with the brand and buy additional blades at a huge markup in the near future. If you have a few minutes of spare time, go over to Google and search for free razors, and see what you can find. Use a few different variations of your name to get a few free razors.
There’s the question of cheap razors versus the name brand razors to settle as well. I’ve personally noticed that a high quality Gillette razor blade will last about five times as long as the generic plastic razors with two blades. Usually I go for a name-brand because the disposable razors seem to have this nasty habit of cutting me and I don’t have to change razors nearly as often.
You can make your razors last longer if you take good care of them. If you shave in the shower, don’t leave your razor in the shower. Steam in the shower will cause your blade to become dull and less useful. If you can store your razor outside of your bathroom, you can nearly double the life of your razor blade. Be sure to keep them away from your wife or room-mate so they don’t borrow your razor.
If regular razors are the best option for you, don’t automatically go for the refills. Because the razor manufacturers want you to switch to their brand and razors, it’s sometimes cheaper to buy a new razor (with starter blades) than to buy refills.
In the same light, always take the free razor offers when available. When a new model razor debuts, it’s fairly easy to get these for free.
When you do have to buy new razor blades, changes are you can save a lot of money by shopping for razor blades on eBay. Even after shipping usually you’ll save quite a bit of money over heading down to the local big box store.
For more ideas for saving money, visit Matthew Paulson’s blog, Getting Green.
Sharon Harvey Rosenberg is a columnist for the Miami Herald. She writes about about saving money and the art of being frugal in her column as well as on her blog, The Frugal Duchess. In this guest post, Sharon writes about making the best choices in clothing through the concept of cost-per-wear.
It’s a cute black skirt from Ann Taylor Loft and it costs me about 53 cents every time I wear it. What’s more, as each week passes, the cost-per-wear declines.
I’m not delusional and my calculations are not a frugal fantasy. Here’s the bottom line: Quality garments are cheaper in the long run. Crafted from fine fabrics in classic cuts, most of my wardrobe pays me hidden dividends.
Here’s my closet matrix: The black skirt was originally priced at $60, then reduced to $34 (still too expensive for my budget). But I made my move to the cash register when the price dropped to $16. That was last fall and I have worn that skirt about 30 times (probably much more) since September. The current price-per-wear cost is 53 cents and by next September, I estimate that the price will drop down to 25 cents per wear. The skirt does not need dry-cleaning, an expensive process that dramatically inflates the total price and the price-per-wear figures.
I’m not the only one who makes this kind of calculations. In the book How to Say It For Women, author Phyllis Mindell also writes about price-per-wear calculations on page 175. 
Here’s her example: One business woman buys a Liberty of London shawl in 1986 at Harrods for $100. She wears the shawl about 10 times annually, which translates into a “price per wear” value of under $1.
“Fine accessories represent a wise investment: They last, they say in style longer than clothing does, they offer the chance to exercise your individuality,” Mindell recommends in her book.
She advocates shopping for quality when it comes to briefcases, handbags, wallets and jewelry.That’s my model for shopping. And it’s a strategy that Flexo mentioned in an earlier post about being Pound-wise and Penny-foolish.
Of course, I’ve had my share of missteps. A few years ago, I was hired to fill in for a business reporter at the Herald, who was on maternity leave. She covered the retail (shopping beat), so I wanted to look especially spiffy while filling in for her.
That’s fine, but I made two shopping errors. I purchased two trendy shirts at a discount chain for teens. Who was I kidding? Big mistake. The shirts were low-quality garments made from a poorly made cotton/spandex fabric. Additionally, the trendy cut was a flavor-of-the-month variety that quickly melted out of style. Due to the inferior fabric, the shirts did not wash well. It was not my finest shopping moment.
The good news: I only spent $12 for each shirt The bad news: I only wore each shirt a few times and my cost per wear was about $4. Fortunately, I’m getting a lot of low-cost mileage from the rest of my closet.
But when is it best to splurge for an item and when is it best to pick-up the no-name brands? This guide from Real Simple magazine offers insights.
Tee shirts: Go for the super-saver, Real Simple says. Why? Tee-shirts are frequently worn and washed, which decreases the shelf life.
My experience: I prefer good quality tee shirts at low, low (end of season prices). The cheaper shirts don’t hold up well in the wash.
Hose: Save. Expensive or cheap, stockings run quickly, at least on my legs. Real Simple agrees.
Jeans: Shop for quality. Expensive jeans tend to fit better than cheaper counterparts.
To read more from Sharon Harvey Rosenberg, visit her blog, The Frugal Duchess.
According to BlogAhorro, ING Direct is offering existing customers 10% APY for one month. Here is a rough translation:
ING Direct has sent a letter to its customers offering a 10% APY for its Orange Savings Account for one month.
In order to qualify, make a deposit from any other bank before April 5, 2007. From the moment of deposit, all funds up to 10,000 euros deposited in the account will receive 10% interest APY for one month, after which it will return to the previous 3% APY.
I don’t see anything about the 10% APY on the information page for Spain’s Orange Savings. That leads me to believe this offer is only for existing customers. Otherwise, one could determine the probabiliy of the euro declining against the dollar over the next month and decide that it may be worth it to place funds in Spain’s version of ING Direct. They do seem to accept account opening applications from those living outside of Spain, but you may need to provide your passport number.
A 10% annual return on a maximum of 10,000 euros can net only about 83 euros over the course of one month. Right now, that’s worth US $109. Who knows how much will it be worth at the end of the 10% promotional period?
One commenter on BlogAhorro plans on taking advantage of the offer as soon as the letter arrives.
Here’s a question I received from a reader regarding the Premium Certificate of Deposit accounts at Millennium Bank:
Have you ever heard of a bank called Millennium Bank? They are Swiss, not FDIC insured, and will give me 7.25% on a 1-year CD, which is not redeemable until maturity. I really want to do it, but I’m hesitant because they’re not American and not insured. If you’ve heard anything about them, I’m more than willing to listen.
I answered the question to the best of my limited knowledge. A deposit at Millennium Bank will likely be safe, despite not being insured by the FDIC. However, there may be hefty undisclosed fees for maintaining an account with the foreign bank as an American citizen. These fees would likely eat into the interest income.
If there are any Americans with experience with a Geneva-based savings account similar to the one offered by Millennium Bank, please feel free to write in with a comment below to describe your satisfaction, problems, and anything else you’d like to add. I don’t expect many readers to have this experience, but it never hurts to ask.
Here are some interesting survey results from the Pew Research Center.
- 77% of Americans describe themselves as “always looking for more ways to save money,” while 18% don’t even try to save.
- 63% believe they should save more, while 32% believe they are saving enough.
How about spending more than one can afford? Today, a government report showed a negative savings rate of 1.2%, worse than the previous rate of 1.0%, meaning on average Americans are spending $101.20 for every $100 of income. Here is what the Pew survey reported about spending.
More than one-in-three (36%) Americans say they often or sometimes spend more than they can afford. Among the groups most inclined to say this are lower-income adults, younger adults, blacks, people who carry credit card debt, and self-described savers.
Why is this trend getting worse? US News & World Report believes this is due to little splurges, based on the survey results.
Consumers have drastically expanded the list of things they deem to be necessities of life. For instance, 68% of adults now believe that a microwave oven is an absolute necessity, up from just 32% a decade ago. Fifty-nine percent say they absolutely must have an air conditioner in their cars, up from 41% who thought so in 1996. Roughly half of all respondents say that a home computer and a cell phone are needed to function in day-to-day life.
This might be a difficult question. What do you consider a necessity now than you may not have ten years ago?
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