The Basic Argument for Investing

Investing plays a huge role in my life.  An investment firm pays my rent and bills, I watch CNBC on my days off, and I am a huge advocate of financial literacy.  So it is no surprise that my friends come to me with investing and personal finance questions and I try to promote opening up brokerage accounts, IRAs, and saving in general for those that don’t.

As recently as yesterday, people were actually paying the government to loan the government money as yields (the interest rate) on short-term US Treasury bills dropped in to negative territory.  A CNBC poll yesterday showed that a staggering one-third of Americans do not believe their money is safe in the bank.

I will simply say your money IS safe in the banks and that no write-up is required.  Trust me.  Whether the US Dollar is worth anything may be another story, but the FDIC certainly has your accounts covered.  Fear can often be attributed to a lack of knowledge and/or irrational thinking.  I certainly think this is the case with what we have seen lately. But maybe there is another way in which your money isn’t completely safe at your bank.

The Time Value of Money
Any person in their right mind would not be buying investments yielding negative returns.  The truth is your traditional bank savings account should really be called a drainings account, and if your cash is just sitting in the bank you may essentially be getting the same result.  Any investor’s worst enemies are fees and inflation.  Inflation is the propensity for the general price level of goods and services to rise over time.

The reasons for inflation would take an entire other post, but historically inflation (as measured by the Bureau of Labor Statistics’ Consumer Price Index) sits at right around 3 or 4 percent.  At 3 percent, this means that about every 24 years the value of $1.00 gets cut in half.  Let’s say you’re 25 and have $10k just sitting in your checking account.  When you are 50 that $10k you have in the bank has effectively shrunken to $5k.  This is why it is so essential to be an investor and make your money work for you.

Practically Speaking
With this in mind, almost anyone can consider themselves an investor just by means of where they place their cash.  The easiest and most practical way of helping avoid the value erosion of your cash accounts is to open a high-yield savings account to supplement your regular checking account.

Many people have concerns that some of these online banks might just be fly-by-night institutions, but they are definitely safe as all the accounts I list are FDIC insured just like your major bank checking account.  If you’re more comfortable going with a major name, a couple of big players have started high-yield savings offerings in the last couple of years.  The larger institutions may pose a good deal of headline risk, but E*Trade Bank is offering 3.30%, Citibank’s Ultimate Savings Account currently yields 2.50% (with some catches), and HSBC Direct is yielding 3.00%.

Other offerings which may be considered the best high-yield savings accounts which have been known to have the highest interest rates and great user experiences include Emigrant Direct’s AmericanDream SavingsAccount at 3.00% and ING Direct’s Orange Savings at 2.75%.  I have personally been with ING for quite a few years and have had a very pleasurable experience, but am also a customer for other products with some of the aforementioned companies.

Things To Know
Currently with these high-yield savings accounts you are getting better or equivalent yields to CD’s without the liquidity penalty.  These rates are accurate as of publishing but are subject to change.  In comparison, the average Money Market Fund yield is at 0.7% nationally, a 1-Yr Certificate of Deposit is yielding 2.39%, and a 5-Yr CD is at 3.25% (bankrate.com).

The upside is that these great interest rates should definitely go up as interest rates are currently at historical lows.  The downside is that it may take 2 days or so for you to transfer your funds between some of the accounts and your regular checking account.  Many of these offerings also offer checking-like accounts with ATM cards that are directly linked at the institution, such as ING Direct’s Electric Orange.  If you need cash out of your savings in a bind just go online and transfer before you head off to the ATM.

Going Further
Over the next few weeks I will post some investing primers that should not only help you keep up with inflation, but beat it.  Feel free to ask questions as they arise and I will either answer you personally or if I think it will be a benefit to others, perhaps post a response.  Stay tuned…

Thursday, December 11, 2008, 00:01 | posted in explained | 2 comments »