Simple Debt-Free Finance

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Put Your Money to Work for YOU!

Posted on | January 18, 2008 |


A lot has been written and a lot is often said about putting your money to work for you, but what does that mean in practical terms?

Investing is one thing that comes to mind for a lot of people when they hear the phrase “stop working for money, and make your money work for you”, but that doesn’t only pertain to investing. In the simplest case, it’s really no more than stashing your cash where it can earn more cash over time. Often times this makes use of the miracle of compounding interest.

So, clearly the mattress is not the place to be, but where should your money be?

In the simplest case, a bank account (either checking or savings) that pays you interest for the money you let them hold would be one place to put your money to work for you. Online savings accounts garner the most in today’s environment, but it can often take days to get money out again.

You Don’t Get Something for Nothing.

Yield (return) is a function of risk vs. reward. Savings accounts yield less than stocks over the long term because stocks are more volatile and prone to large fluctuations in value. In other words, you risk losing money in the stock market. But you also pay a price in savings accounts vs. checking accounts. The biggest risk is that inflation will be greater than the yield on your bank account, and you’ll actually end up losing money after considering the effect of inflation.

With savings accounts, you often get a higher yield but have less flexibility over how soon you can access that money when you want it. Conversely, checking accounts provide fast access to your money, but don’t often pay much, if any interest.

As of the writing of this post:

ING Direct online savings: 4.10%

HSBC Direct online savings: 4.25%

Those are my online banks. Follow this link if you’re looking for a free $25 for opening an ING Direct Savings Account.

Here’s a handy reference for the latest run down of online savings account rates.

Personally, I’m wary of banks that yield significantly more than the Federal Funds Rate.

The Fed Funds Rate is essentially the rate at which a bank can borrow money. So if they pay you more money in interest than it costs them to borrow the money from the government you have to ask yourself how they can afford that. It may be that they invest in junk bonds or mortgages or subprime mortgages. Who knows? The point is that any amount under the Fed Funds Rate should be considered ’safe’ because the bank is still making money paying you the interest. Also, make sure the account is FDIC insured, which means the government will bail them out enough for you to get your money back if they go under. You can find out the current Federal Funds Rate here.

Money Markets are similar to savings accounts, but don’t carry the FDIC insurance. Money Market accounts are relatively safe (I think there have only been 2 that have ever failed), but they’re not as safe as FDIC insured accounts.

The next safest place to stash your cash is a CD, or Certificate of deposit. You can think of this as a contract with your bank that says you’ll lend them your money for a set period of time (you agree not to touch it) and they pay you a set interest rate for the term of the agreement. This is nice if you lock in a high rate as the Fed is cutting its rate, i.e.: savings account rates are declining. The catch of course is that you can’t touch it for the duration. Terms run anywhere from 3 months to 5 years, the longer the term yielding more interest.

After that, you’re pretty much looking at bonds and stocks but that’s a topic for another post. :)

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Category: Saving

Comments

One Response to “Put Your Money to Work for YOU!”

  1. Marco Rigby
    October 14th, 2009 @ 6:28 pm

    I just looked at your RSS feed and it gave me an error. Can you post your RSS feed url when you have a chance? I don’t check email very often.

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