Learning What to Spend and Where to Save – Part 2

Last week, in Learn What to Spend and Where to Save – Part 1, I wrote about buckets to consider when setting up your budget. Although it’s different for everyone, it’s important to understand the types of saving you need for different goals in your life and how much you should constrain yourself on spending. This week I’ll offer some great places to put your money based on my research and own experience. If you have any suggestions you want to offer, feel free to help the readers by adding your recommendations to the comments below.

Where to Put Spending Money

I really like the use of an online checking account for my spending money. The advantages of online banks over conventional banks include the following.

  • Better online services for managing money
  • Easy transfers between checking and savings
  • Great interest rates
  • Convenient location (your home) to save time

The main downside is you can not make a deposit at an online bank, so for this you may want to still have a local bank just for deposits that you make once a month.

Make sure you keep enough money to last you one full month in your checking. There’s no need to waste time moving money from savings to checking every day as necessary.

Get started with these online banks now.

Short Term Savings

For the savings that may last you a few months, an online savings account will fit the bill well. You can even consider setting up multiple online savings accounts at one bank like ING Direct to separate money for different items. So you can have a furniture savings account and a vacation savings account side by side.

An online savings account works well for Short Term Savings because

  • A better interest rate than online checking
  • Instant transfer to checking when the money is needed
  • Limited withdrawals a month (to keep the interest rate high)

Mid Term Savings and Emergency Fund

For Mid Term savings, you can also use an online savings account, but an online CD will likely offer you a better rate.

Online CDs work well for Mid Term savings because

  • Potentially higher interest rates than online savings
  • Less access to the money since a penalty is issued

When settings up a CD remember to set it to a period of time that offers a good rate in the time frame you may need the money. If you don’t need access to the money for over five years then consider setting up a new five year CD every year and when one expires just put it back in a new five year CD (called CD laddering). This cycle will guarantee a good average return while the money is in savings.

Long Term Savings

For the money you will not need until retirement you should set up a retirement account (401k at work or IRA at home). I highly recommend Target Retirement Funds when available. These funds are index funds which tend to perform as well as the general market, but they follow recommended retirement strategies by getting less risky as you approach retirement. If you would rather not research what funds to be in every year for the rest of your life, Target Retirement Funds are the place to be.

For Long Term Savings, use the following steps.

  1. Put your retirement allocation into your company 401k up to any match they provide.
  2. If you still have retirement money, max out an IRA ($5K per adult in the household per year) at Vanguard or T. Rowe Price.
  3. If you still have long term money, max out your 401k (~$15K per employed adult).
  4. If you still have long term money, talk to a financial advisor about investing in stock market funds.

All together you only need a relationship at a few banks to satisfy all your spending and saving needs. If you have any questions, please Contact Me or write in the comments below.

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