Saturday, May 26, 2007

What to Do With The Rest of the Money That Is Not in Stocks

Throughout history stocks have certainly proved to be the best investment vehicle, performaning significantly higher than other assets. While I strongly suggest that readers implement the 120 Solution when allocating their investments (subtract your age from 120 and you get what percent of your avaiable capital should be in stocks), I understand that some money should be saved for emergency and liquidity needs. Now it is time to ask yourself, are you really making that money work?

Online savings accounts are a great way to make this money work. I current have an ING Direct savings account that yields around 4.5%. I was actually given a $25 promotion so the account has actually yielded me around 6.5% last year. The account is great because it allows for automated transfers between my accounts. I know that every month I have to pay rent. I have simply set ING transfer the rent amount to my checking account (yields 1% a year) a few days before rent is due and then write the check. For small account values like mine, this process only really earns me $40 more a year, but 40 bones is 40 bones! This account also encourages me not to spend money! I usually only have about $150 in my checking account, the rest is in my ING savings account. The automatic transfers force me to be frugal by reducing impulse purchases. The very act of manually going to ING's site and withdrawing the money before I spend it usually takes too much effort, so I end up not buying the product. ING also offers a paper checking account with a lower yield, but if your interested in the savings account, feel free to post a comment and i'll share the $25 promotion link.

There are an array of other products offering higher yields than the typical savings accounts. I know that HSBC offers a higher rate than ING, but I calculated that the $25 promotion was a better deal for me. Another interesting account is Schwab's new checking account. This account offers traditional paper checking as well as 4.25% annual yield. I would personally be very interested in this account but I am concerned about the impact on my credit score from opening too many accounts soon after I opened up my ING account.

In short, individuals should really consider these higher rates of return. Given that inflation is sitting around 3% a year, you are actually losing a significant amount of money on those accounts that are giving you 1% or less.

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