You and Your Money: Building Your Assets
14. Building Your Assets
You know about how much to put aside each month, but where do you put it? The financial advisors and others in your financial support network will give you specialized guidance to answer this question. To get your conversations going and keep them productive, there are some basics to keep in mind.
Ideally, the bare bones of your financial portfolio should be
- An emergency fund—a "comfort" fund equivalent to three or more months of expenses kept in a short-term, accessible savings account.
- Retirement assets.
- Your investment portfolio.
- Your home.
The mix depends on your individual goals. Once you define your goals, you have an idea of not only what they are, but how much they will cost. Are you saving for retirement, your children's education, or your own second career? Or is your goal to be financially independent by a certain age—60, or even 45? The structure and timetable of your particular goals will determine the best mix of your financial portfolio. If you are living in retirement, you will usually want your investments to be more heavily weighted in fairly conservative securities. If you are in your prime and planning on early financial idependence, you could be working with a portfolio that is heavy in high earning (and perhaps very high risk) investment products. In other words, there is no generic blueprint about what your financial portfolio should look like. Your plan is you; it will have your fingerprints all over it—your goals, your hopes, and your aspirations. But it will also be backed by sound, proven financial tools: cash accounts, stocks and bonds, and perhaps investment real estate too.
Money in the Bank—Climbing the Savings and Investment Ladder
If you have been a bank customer for a number of years, you may want to skip this section and go straight to Stocks, Bonds, and Mutual Funds, but if you are one of the millions of Americans who has only a checking account, (or no bank account at all) this section is for you.
No one knows how many people in the United States have no bank accounts. The Federal Deposit Insurance Corporation (FDIC) estimates that people who are "unbanked" represent 10 to 13 percent of all U.S. households. The Federal Reserve estimates that up to 10 million beneficiaries of Social Security have no bank account. In addition, there are uncounted millions of immigrant families who have no checking or savings account. By far the simplest and safest place to save money is in a bank or a credit union, not under the mattress or in a shoebox, even though a few frugal souls have been known to accumulate small fortunes doing just that. The FDIC is an independent agency of the U.S. government that protects you against the loss of your deposits, if an FDIC-insured bank or savings association fails.
Credit Unions function much like commercial banks, but they are nonprofit. Some are available to the public, but generally they are available through an employer or a specific industry, certain location, or university. Credit unions often offer depositors competitive services and more favorable rates and fees. The National Credit Union Administration (NCUA) is the federal agency that charters and supervises federal credit unions and insures savings in federal and most state-chartered credit unions across the country through the National Credit Union Share Insurance Fund (NCUSIF).
Commercial banks and credit unions insure your deposits up to $100,000 and both types of institutions offer a variety of accounts, depending upon how much you plan to set aside and how long you intend to keep your money on hand in an accessible form. One drawback to banking with a credit union is that you will not find branches in several locations as you might find with a commercial bank, but you may not need this particular convenience either.
Basic savings accounts work well if you plan to accumulate money for a short time only. For savings accounts, most banks do not have an initial minimum deposit, but they may charge a monthly fee if your account drops below a certain balance. You would not want to keep much money on hand in a basic savings account, since they generally pay very low interest rates (1–2%, if that much) so they should be considered only as a temporary measure. Basic savings accounts, on the other hand, can be ideal for you when you are just getting started on your savings plan or if you come into a small windfall, such as a gift or insurance payment, and you need time to decide just how and where you will invest your funds.
When choosing a bank or a credit union, choose wisely. First, compare rates and fees. While most banks are fairly competitive, there are some fluctuations. Then look at locations—is there a branch or office convenient to your neighborhood or workplace? Keep in mind that some people consider this convenience a bad thing. If you are concerned that you may be tempted to withdraw money, you may consider a bank in an out-of-the-way location and forgo an ATM convenience card. If you have a high T (Tangible) or M (Money) score and cannot resist a sale, or if you have a high S (Social) score and find it hard or impossible to say "no" to a family member or someone else in need, a less convenient bank might be right for you. That way, the trip to the bank will at least give you time to reconsider your motives for making a withdrawal. Finally, look to your values. There are large, regional and nationwide banks, smaller, community-oriented institutions, and even banks and credit unions that align themselves with social justice or environmental concerns. Your own values might make that institution a good match for you. The bottom line is that not all banks are created equally, so shop around to find the bank best suited to your needs.
A second type of saving vehicle is a money market account. These accounts require a higher initial deposit—usually at least $1,000—and you are required to keep a minimum amount in the account to avoid paying monthly maintenance fees. Although these accounts have the look of checking accounts, you are allowed a limited number—usually three—monthly withdrawals. A money market account, therefore, cannot replace your regular checking account. Money market accounts pay a higher interest rate than basic savings accounts, depending of course, upon market conditions. They are ideal for your emergency fund because, like basic savings accounts, they are liquid, so your funds can be easily withdrawn if circumstances warrant.
Certificates of deposit (CDs) are products that pay a fixed interest rate if you keep your money invested for a specific period of time. CDs are a one-time investment that pay interest until the CD matures. Most banks require at least $500 to open a CD, and you can get a CD for a term as short as three months or as long as 10 years. Generally, the longer the term, the higher the interest rate, but check carefully because there can be some variation, especially in markets where short and long-term interest rates do not rise and fall in their usual patterns. Generally speaking, however, a three-month CD rate is comparable to a money market account, and a six-year CD can bear interest at a rate that is three times that amount. Before the stated term expires, you will receive notification from the bank asking if you want to cash out the CD or roll it over into a new CD offered at the current rate. The good thing about these rates is that they are stable. Once you purchase the CD, you are guaranteed to receive the stated rate, no matter what happens in the rate marketplace. These products, however, come at a price in terms of flexibility. You will be charged a penalty, based on several months of interest, if you cash out the CD before the date the certificate will mature.