Piggy Bank vs. Savings Account

As a result of the financial crisis caused by a global pandemic, people are saving more than ever before. According to the U.S. Bureau of Economic Analysis, in the span of one month between March and April 2020, Americans went from saving 12.7% to 33% of their income! That raises an important question: Where should you save that money?

The natural tendency is to stash your cash, like under a mattress or in the sofa, right? In that case, you better remember where you stashed it. When I was younger, I hid a $20 dollar bill in my desk and completely forgot where I hid it, only to discover it a decade later. If you can remember where you put your money, you might be tempted to spend it. Doesn’t that already happen with money in your wallet?

The better choice is to use a savings account. Here’s why. Your money is out of sight, out of mind. Unlike storing money within reach in your house, putting money elsewhere discourages spending it. The good news is that if you need cash, savings accounts offer liquidity, meaning they provide access to your money without costing a fortune in fees or taking forever.

The most important reason to store your money in a savings account: Interest. This is the key difference between keeping your money in a piggy bank or in a checking account, neither of which earns any interest. Banks typically offer interest on savings accounts as an annual percentage yield, or APY. For instance, 2% APY means you earn $2 dollars when you place $100 in that savings account all year long. If you don’t touch that savings for another year, you will earn a little more next year because the APY is calculated on $102 vs. $100 originally placed in the account.

Behind the scenes, the reason banks can pay interest is that they earn interest themselves through lending money. By placing your money in a savings account, you are providing additional funds that the bank can use for lending, with a promise to return your money when you need it back. Trusting someone else with your money is not easy, but choosing an FDIC-insured bank will protect your savings account from any loss up to a certain limit (currently $250,000), if the bank should ever fail.

Choosing the right savings account will depend on your own preferences and comfort. Interest rate may play a factor as well, since some accounts trade certain conveniences or features for a higher interest rate. Do your research beforehand. Inquire with banks you have relationships with, and check out some expert recommendations, like this one from MONEY Magazine.

You may be tempted to put all available cash into a savings account. Keep in mind that withdrawing money is easier from a checking account, which offers checks, a debit card, and the ATM. Plus, the point is to have limited access, keeping a savings account sacred for emergencies or earmarked for specific goals. Therefore, consider opening a savings account after you have set aside 1 to 3 months of cash in your checking account. That way, you can still use cash on a daily basis from your checking account, but have back-up funds waiting in savings.

We all know that saving money is important, but where you save makes a difference. Why let your money sit idle when it could be making money? That’s the power of a savings account!

Homework: What’s the APY on your savings account? If you were to add $500 a year, how much more interest would you earn? What about $1,000 a year?

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Credit Reports: Annual Check-Up Time!

Featured ~ Alice Tong ~ Leave a comment

What do you call an annual health check-up for your credit? A credit report! If you have ever used a credit card in your name or borrowed a loan from a financial institution, you have credit history. Your credit history shows whether you can be trusted with borrowing money and paying it back.

Your credit history gets filed at three bureaus: Equifax, Experian, and TransUnion. Whenever you apply for a new loan or credit card, the company that is offering the loan or credit card will check your credit with one, two, or all three bureaus. That is why you need to make sure your credit history is accurate. How do you check your credit history? Through a credit report!

Every twelve months, you are entitled to request your credit report at no charge from each bureau. Notice I said each bureau. You can request all three bureaus at the same time or you can view each report at different times in the year. If you are about to get a new loan, such as a mortgage, you may want to check all three before you apply. But if you are just doing a routine check-up, you could request one bureau first, the next one in four months, and the last one in another four months. It’s almost like getting three reports each year!

What are some of the things to check on your credit report?

Payment History. Does the report show that you made payments late, even though you were on-time? Paying on-time will tell future lenders if you are dependable when paying back borrowed money.
Available Credit. How high is your credit limit, and are the amounts of current balances listed properly? Contrary to popular belief, having too much credit, even if not being used, is a bad thing because it makes borrowing any more money a risk factor. From the lender’s perspective, there might come a day when you max out all your credit cards and then can’t pay them back.
Accounts. Are all the accounts listed correctly? Have you closed unnecessary accounts that you no longer use? Nowadays with identity theft and stolen credit cards, it’s of utmost importance to review your credit report carefully. If anything appears incorrect, contact the credit reporting bureaus.

Credit reports sometimes get confused with credit scores. A credit score is generated from your credit history, but acts more like a quick rating. A credit report goes into greater detail about your credit activity. Compare it to a friend asking what score you got on a test versus going over the actual test questions and mark-ups. Although the credit score is not typically noted on your credit report, some credit card companies are now offering free access to credit score monitoring as an added benefit for cardholders.

Why the need for three credit bureaus instead of one? There are times when your information doesn’t get captured by one of the credit bureaus. Each bureau also weighs certain types of credit differently, so your credit score could alter slightly from one bureau to the next. Regardless, it’s a good way to check one against the other, instead of getting all of your information from one source.

Just as you visit the doctor for an annual check-up, do your finances a favor by getting a copy of your credit report. It’s free!

Homework: Request and review your credit report by visiting www.annualcreditreport.com. How would you rate your own creditworthiness?

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The Road To Recovery

Featured ~ Alice Tong ~ Leave a comment

Everyone tells you to “Save, Save, Save,” but no one talks about what happens if you can’t save or you found yourself in a pinch and spent all your savings. Are you doomed for a life of poverty? Not necessarily.

When I worked in finance, there was a common theme in every situation I met. All of my financial clients wanted something they didn’t have, and all of them had to work towards it. Whether they had savings or didn’t have savings or even worse, had debt and no savings, there was always a solution. Is it possible to fix financial mistakes? Yes! And one more glimmer of hope: It gets easier along the way.

When it comes to people and their money, the most difficult hurdle to overcome is erasing a deeply ingrained mindset. Like the lavish lifestyle they lead. Or the age they think they can retire. Or their way of buying things and then figuring how to pay for them afterwards. But if they take the right steps to alter course, something interesting happens. As they get closer to their goals by doing things differently, they don’t remember how they did things before. That’s exactly what happened with my clients. That lavish lifestyle of the past? Who cares when you have food and shelter? Retiring at 58 vs. 55? Beats having to think about going back to work at 70. Can’t afford to buy an extra handbag when you have 3 others? Big deal! Those were the responses when I reminded them of where they had come from.

If others can do it, you can too. When faced with one of these hurdles, here is how you can get on the right track.

Living Large. Do you find it hard to save on a monthly basis? Then your answer is to downsize! Cut expenses you don’t need, and lead a more modest lifestyle. For instance, go with a smaller home. Take public transit or opt for a used car. Give yourself a budget for dining out. No matter if you earn $30,000 or $100,000 a year, everyone can afford to save. Don’t just take it from me. Look at how Suze Orman reacts to a millennial who spends $720 a month on a car when she makes $80,000 a year. At least she makes her own coffee.

Retirement Loan Vs. Withdrawal. Normally taking out retirement savings before retirement is a big no-no, but when faced with financial hardship, there might not be a lot of choices. If a retirement loan is allowed, that is the better option compared to a withdrawal, assuming you can pay back the loan later. You will lose out on the opportunity for market gains that you could have seen with that retirement money, but you don’t have to wash away your hard-earned savings. With either a loan or withdrawal, not staying invested will likely carry some impact to retirement. This may mean delaying retirement age or adjusting what life looks like in retirement. Since the rules have changed with the CARES Act of 2020, consult a financial or tax professional before taking a loan or withdrawal from your retirement.

Credit Card Debt. One of the hardest money challenges to get out of is credit card debt. It’s a vicious cycle. Just when you’re done paying one thing, something else strikes and you’re stuck with a new debt. It’s tempting, too, since you’ve done it once, what’s borrowing again? To get out of the cycle, you need to understand the root cause for debt. Where are you spending your money that it’s landing you in debt? If you’re spending more than you make, then you need to draft a budget and stick to it. Freeze or cut your credit card in half and instead use a cash allowance for everything on your budget. If you’re living within your means but still encounter debt, was it the result of an unanticipated expense? Chances are that your emergency fund is too low or that you don’t have one. Rather than putting all available income towards paying off debt, set aside a portion to bulking up your emergency fund. That way, if another unexpected event occurs, you have cash to pay for it, not your credit card.

With a change in perspective and a lot of work and discipline, you can turn around any money situation. Financial challenges can happen, but remember, there is hope!

Homework: What did you take away from watching Suze Orman’s video commentary? Name some of the good and bad financial choices reflected in the video. How can you apply these lessons to your life?