Earn 7% Plus on your Emergency Fund…
…and now I have your attention.
Hi, my name is Roland and Nina has been kind enough to ask me to write some articles for Queercents and I look forward to it with much relish.
As to the title of this one its true in its way… many people only think of earning money when actual dollars get credited to them or stuck in their hand. That is not true.
One may “earn” a return on a given amount of money if it allows you to AVOID paying fees… the avoided fees are in essence your “interest”… and has the benefit of being Tax Free as well.
What I am talking about here is using your Emergency Fund… or a good portion of it…as the “Minimum Daily Balance” required to avoid the Monthly Maintenance Charge on your Checking Account. In my case I have a Basic Checking Account that requires a $1500 Minimum Daily Balance to avoid a $9 monthly fee… or $108 a year. To earn $108 on $1500 in a savings account or CD I would need to get a 7.2% interest rate. And if you factor in Taxes (28% bracket) it would need to jump to 9.21%.
Conversely if I didn’t keep the Mimimum Balance and paid the Monthly Maintenance you can say that I PAY 9.21% for the priviledge of putting the money in… Oh… lets say on Online Savings Account that pays 3% for a net LOSS of over 6%.
Now I can hear all the flamethrowers revving up about Free Checking, No Minimum Balances, Interest With Checking (my bank $5000 Minimum to escape maintenance and the return calculates to be 6.7% plus .25% interest paid so its less than Basic Checking avoidance), etc.
I’m of an age group (I’m 51) that often tends to be much more conservative and dislikes dealing with all the hassles you have with banks and we tend to have the same account(s) for decades. I’ve sat down with all my banks offerings and read through all the fine print (mice type as Clark Howard calls it) and every time… for my bank at least… the Basic Checking is the Best Deal for me.
All the other accounts have all sorts of add ons from Overdraft Protection (which you don’t need if you keep the Minimum Balance) to tying in your other accounts with LOTS more rules for you to run afoul of and incur Fees for the Bank… a losing proposition.
A Basic Checking Account is ideal for everyone especially Gen Y who is starting out and may not have a lot of money to start with… but you have to start somewhere.
And there is one more very Important thing that is Non-Tangible yet can be VERY valuable… I’ve had my same checking account for 34 years. That means I have an OLD ESTABLISHED RELATIONSHIP with the bank and the bankers in my branch that can mean making it easier to get a Loan (because they can SEE my track record of paying bills and how I handle money) and it enabled us to also borrow money at more favorable interest rates… usually 1/2 a percent lower than that offered to “walk ins” saving thousands of dollars over the life of a loan.
Photo credit: stock.xchng.
Oh come one, do you really think your bank cares how OLD AND ESTABLISHED your relationship is with it? As long as you have a FICO score within it’s formulaic tolerance for risk, you’ll get a loan, whether you’ve been banking there decades or minutes. The 7% you are earning is illusory. By your logic, I’m earning over 10% interest with my checking account, with a bank which doesn’t even have a physical presence in my state, no minimum balance, reimburses all ATM fees up to $15, AND pays 3% APY.
Roland: Sorry that your first post didn’t invite a warmer first comment. Welcome to blogging! I’m sure you’ll develop thick skin in no time! For me personally, I actually like when people disagree with my viewpoint… and have found that most people do when it comes to real estate, mortgages and the housing market (example: this beautiful virtual conversation!)
Anyway, I’m one of the “always keeps $5,000 in my account” in order to avoid the monthly maintenance fee. I’ve never actually done the math as you did, but then again, I’ve never really paid attention to the benefits of basic checking. Thanks again for joining the Queercents fold!
Welcome Roland! Thanks for an interesting analysis…but I must agree with the first poster; your relationship to your bank is important, but I’d suggest you leave the banking system and check out a credit union. My CU allows me to avoid fees by counting the number of services I have with them…a service might be a checking account, savings account, overdraft line of credit, electronic statements, CD, mortgage loan, home equity loan, etc….you get the point…they want to be my primary financial institution. Now, before you assume that I only drink Koolaid (TM)…I don’t…I’m not particularly happy with my CU’s yield on checking and savings (a paltry 0.25% and 0.5% respectively) and I’ve informed them of that…and have moved my savings to…an online bank money market checking account!
I have long been mystified as to how banks can get away with their outrageous fee structures and minimum balances…I guess its because people become accustomed to their institution…the old “how to boil a frog” problem…so jump out, the water is bubbling around you!
I do agree that there is some value in an established relationship…but again, I agree with the first poster, its only a relatively minor factor in comparison with their rigid formulae for evaluating applicant’s financial health…and desirability.
Thanks for an interesting analysis…I join you in detesting the fees and add-ons that seem to nickle and dime us everywhere…except those nickles and dimes add up to real dollars!
mark.
Hi Alfonso,
Banks do care about more than a good FICO score especially when borrowing large sums of money. Having an account with them for a very long time lets you develop relationships with the bankers themselves who make the decisions to loan money. And they DO have the authority to lower the Interest Rate, usually by up to a full point which can save you thousands, if they wish.
I had a case where I was buying a new piece of equipment costing $200,000. The sellers came in with a financing offer at the current market interest rate which was pretty good considering in the industry (towing) a lot of businesses have to pay a premium rate.
I called my banker and told him I needed to borrow $200,000 and what was the rate. He quoted the same as the sellers then said he would drop it 1/2 a point and told me to give him an hour to have the check and loan papers ready. Because I had a “long standing relationship” with them the entire length of time to request and get the money was less than 2 minutes on the phone.
Walk in off the street and say to the branch manager “Hi, my name is xxx and I have a Fico score of 799 and I need a loan of $200,000 and I need the check in 15 minutes.” and see how fast you get laughed out of the building. Especially in todays credit environment.
Long time and personal relationships are the way things USED to be done for everyone and still is for those who don’t “jump ship” from bank to bank and keep their accounts in good standing and take the time to get to know the bank managers.
As for my “Illusory” earnings…the attitude of “if its not a postive number added to my account then I’m earning nothing” is part of the misconceptions a lot of people have with money.
The point I’m trying to make is AVOIDING fees or expenses that 99% of everyone else pays is the SAME AS earning interest on the given sum of money. You just have to go through the mice type and see if the “Interest” you will earn compensates you at a greater rate than putting the money in some account that actually credits you with a number you can see on a statement.
As I also stated what I calculated out was for MY bank and the, I guess you could say, “lower end” minimum bells and whistles style checking account which for someone of my more conservative and OLDER ways suits me fine. Though avoiding fees is still a priority.
Many of us in the older generation are still somewhat uncomfortable with banks that have no physical signs of their existence that we can actually go to.
~ Roland
Nina: LOL…if someone disagrees with you it makes for a good discussion that everyone can learn from. As for “thick skin” one of the businesses was a towing service..EVERY customer is Unhappy..NO Exceptions..NO ONE likes to have their vehicle towed and it is always an unexpected hit to the wallet (or emergency fund) for the tow and the repairs.
Thanks Mark,
As for using a Credit Union they are wonderful things but up until 20 or so years ago they were not available to everyone. I hate to say it but I’m old enough to remember when to belong to a Credit Union you had to actually WORK for a specific employer or, a little later, live in a very circumscribed area. Today anyone can join one.
And I’ve seen the banking industry go from one extreme to another and is heading back again.
In the 70’s and earlier you had to really have a relationship with your financial institution in order to get a loan…along with good down payments and a good credit score. Banks also paid a Federally mandated 5 1/2%, (Savings and Loans 6%), on savings accounts.
Then we started to get into “cheap money” and the attitude of “if they’re breathing give them money and if they’re not give it to them anyway” that has lead to the current credit crunch and housing bust.
Standards to loan money are getting back to what they were in the 70’s and earlier and regardless of what many people think the bank managers still have authority to alter terms or grant credit to whom they wish..BUT they still have to be able to justify it in some way if questioned by higher up…pointing to a 20 or 30 year old checking account with no bounced checks and a decent average daily balance has been usually enough to satisfy higher up.
~ Roland
Thanks for the great discussion, and welcome to Queercents Roland! My partner and I are currently researching banking options for our joint accounts in order to get the best interest rates. I hadn’t ever really considered the whole minimum balance option, seeing as I’m used to free checking accounts that are geared towards the college crowd. Thanks for giving me something else to think about.
Actually Roland, thanks for an eye opener for some reason! You just made me think of a way to use your checking account as a “savings” account! Why should I pay taxes on my earned interest or tax bracket and give it to the government? Why not just take your monthly saved “fee” and keep it as an interest bearing checking account to keep for yourself? I would rather put aside a said amount each month and not spend it as a way of saving money. Maybe I’ll just redo a part of my budget spreadsheet to keep a certain amount of checking account money as an emergency fund or savings for me – not the government. Who cares if you have too much money in your checking account? It’s your money! Thanks Roland!
Hi Roland – and welcome to Queercents as a contributor (I have often read your comments and enjoy your insight.)
Although I usually agree with you, I have to state my disappointment in this article. Saying your saving over 7% due to not paying fees is equal (in my mind) to someone saying they saved $50 by buying shoes on sale. I think you are actually losing money on minimal balances since it isn’t earning anything and eroding in value due to inflation (if it’s not earning and growing, your money will buy you less over time.)
I look forward to reading your future posts. Thank you for contributing.
Hi Scott…Thanks for the Welcome.
I figured this article might be considered unusual. I have a slightly (extreme sometimes??}:~D) different way of looking at money.
Your point on inflation eroding the purchasing power is valid..but its also valid for balances in accounts that pay interest so I see it as a wash.
Is it better to park $2500 in a Savings account that earns 2% netting you $50 a year Before Taxes and at the same time pay the same bank $108 a year ($9 a month) in Maintenance Fees with After Tax Dollars??
You “save” money by foregoing the interest earned from the savings account but because we’re talking about money you can say that you’ve “earned” the money you’ve not spent on fees. (geez trying to word stuff so it sounds sensible can be hard..especially when talking about money..}:~D)
~ Roland