Tag: Cash Flow

How To Choose An Online Savings Account

If you have a sizable emergency reserve (or a chunk of cash you’re setting aside for a near-term goal) sitting in your savings account, you’ve probably had the thought that you wish it was actually doing something for you besides earning next to nothing.

I get it. Most brick-and-mortar banks offer a 0.01% interest rate on their savings accounts. That translates to earning $5 per year on a $50,000 account balance.

While it may be tempting to invest the money, that’s the last thing you want to do. There is a risk of having a considerable decline when your money is in the market, which could be when you need the money the most.

Fortunately, many online banks are offering high(er)-yield savings accounts that earn more interest than brick-and-mortar banks and still ensures that your money is there when you need it. 

Below are a few tips to finding the online savings account that is right for you.

shop the rates

I would start by comparing the current online savings account yields at http://www.bankrate.com/banking/savings/rates/.

As of writing this, the most well-known institutions (Synchrony, Ally, American Express, and Capital One) are paying about 0.60% interest which equates to roughly $300 in interest paid for a year. A whole lot better than $5 on a $50,000 account, that is for sure!

Speaking of rates, you’ll want to make sure you are using the Annual Percentage Yield (APY) when comparing them.

The APY indicates the total amount of interest you earn on a deposit account over one year, assuming you do not add or withdraw funds for the entire year. APY includes your interest rate and the frequency of compounding interest, which is the interest you earn on your principal plus the interest on your earnings.

APY gives you the most accurate idea of what your money could earn in a year.

insure the risk

The next thing you’ll want to do is look for banks whose deposits are backed by the Federal Deposit Insurance Corp. or credit unions whose deposits are secured by the National Credit Union Administration. Both federal agencies insure balances of up to $250,000 if the bank or credit union fails.

Read the fine print

After you’ve narrowed down the list to a few possible contenders, you’ll want to make sure you read the fine print for each. 

The most common ruse I see institutions use is advertising a higher rate than their peers, but it’s only an introductory rate for the first year. Afterward, it drops below what the other institutions were offering in the first place.

Another thing I always look for are the fees. I generally avoid a bank that imposes a maintenance fee simply because the majority of the banks offering these accounts don’t have them.

You’ll also want to see if there is a minimum balance required to obtain and maintain the rate. If the minimum balance isn’t kept, the rate could dramatically decrease. If you don’t think you’ll be able to stay above the minimum balance, it’s probably worth looking at a bank that doesn‘t have one.

Ease and accessibility

Once you’ve made your choice, you’ll follow the institution’s instructions to open the account. Depending on the bank, this could take less than 10 minutes. 

After your online savings account is opened, I would suggest linking it to your regular bank’s checking or savings account.

This link will allow you to sweep money between the accounts as needed. Just be aware that the transfer can take a few days so keep some money in your regular savings for immediate emergencies. 

Should I Lend Money to Friends or Family?

Hard financial times can hit anyone and, with 58% of Americans having less than $1,000 in their emergency reserve, a person may find themselves struggling to pay their bills when such an event occurs.

Do they max out their credit cards? Beg the utility companies to pay late? Borrow money from a friend or family member?

If someone you care about comes to you for financial assistance when they’ve hit hard times, of course, you want to do everything you can to help them.

But before you start writing checks, ask yourself a few questions to help determine if its the right fit for you and your loved one.

Do you have money to lend?

When it comes to your financial ability to make the loan, ask yourself:

  • Do I have enough money set aside for emergencies after making the loan?
  • Am I on track with my other financial goals?
  • Do I have my own debts to worry about?
  • Would I still be in a healthy financial position if I never get repaid?

If you’re not able to lend the money, you can show the friend or family member that you empathize with their situation and perhaps suggest alternatives that may work instead.

Will THis Negatively impact your relationship?

Your relationship with this person is probably important to you and you’ll need to carefully consider how lending them money will affect that.

How would you deal with them spending money on other stuff — like a vacation — before paying you back in full? What if they miss payments or never pay you back? Would you be able to retain the relationship?

If lending money is going to impact the relationship negatively, then you may want to consider helping them in other ways.

Why do they need the money?

Perhaps this person is truly in a unique situation and a small loan is just what they need to get back on their feet.

On the other hand, if this person needs help on a regular basis, a cash infusion addresses the symptom rather than the underlying issue. It could be careless spending or another issue that needs to be fixed, not enabled.

Instead of offering money, offer to help them fix the problem. For example, you could help them set up a budget or offer to pay for a class like Dave Ramsey’s Financial Peace University.

lending smart

If you decide you are comfortable loaning your friend or family member money, make sure you have a conversation up front about the terms of the loan. Talk with them about how the repayment will work and make sure it works for both parties.

Once the details have been discussed, create a written loan agreement to detail the amount of the loan and how much interest will be charged and paid (annually, quarterly, monthly). Include how and when the loan will be repaid. Set expectations and steps for how late payments are handled, and any fees for late-payments and how those fees will be calculated and charged. Also, state what happens if the loan is not repaid.

Creating a collaborative agreement and setting clear expectations together will help foster a pleasant lending experience for both parties.

Staying On Budget This Holiday Season

Last night (as I sat in a turkey-induced coma) I watched in amusement as family members were gearing up for their annual Black Friday outing. Newspaper ads were strewn across the dinner table while they chatted about the most strategic routes to the best deals and how much they budgeted to spend at each location.  

Their whole process reminded me of an article I read a few years ago that recommended a family spend 1.5% of their gross annual income during the holiday season for gifts.

That number kept running through my mind as they said their goodbyes and headed out to spend their hard earned money. 

What Should You Be Spending?

It is easy to get “wrapped up” in all the hype about what you should be buying, or how much you should be spending.

Our society is obsessed with putting a number to happiness. If you don’t achieve that number, you feel like a complete failure; no wonder why so many of us have the winter time blues.

It is unrealistic to generalize everyone’s situation, and, to suggest that spending 1.5% of your annual income is the “norm”.

For instance, a family might have an annual household income of $250,000, but have horrible cash management skills and are drowning in debt.

Is it fair to say they should spend $3,750 this holiday season because that is what is expected? I don’t think it is. 

I believe there are ways for families to still have fulfilling holidays while keeping on a budget, but not falling to social pressures.

Keep On A Budget

The keyword in knowing what the right amount for you to spend is budget. If you don’t know how you are spending your money, you won’t be able to identify problem areas that are holding you back from achieving your goals.

Simple cash management today can go a long way in future financial success.

It usually takes six months to a year of continually tracking cash flow in order to get a good idea of where your money is going. Once you have established a budget that allows you to fulfill your most basic needs and goals, you can start to branch off and save for the things you enjoy; vacation, hobbies, holiday spending, etc.

Many financial institutions offer savings accounts that are aimed at specific goals. These are great ways to keep yourself on track for holiday budgeting. As a bonus, they usually have certain periods that you can withdrawal money, which will keep you from being tempted to dip into it.

Other Holiday Spending Ideas

If you don’t have a budget set up yet, or you are struggling to stay on budget, here are some recommendations that can help you keep your holiday costs low, but still enjoyable:

  • Invite friends and family over for dinner. You can usually provide a meal for 6 people for under $75. You are still providing your loved ones with something special, but keeping your costs to a minimum.
  • Take the family on a light tour around your town. Looking at the holiday lights that people hang each year is free! You get to spend quality time with your family and create lasting memories. Make the trip even more special by making some tins of hot chocolate.
  • Host a white elephant gift party. Everyone bring a gift under $10 and exchanges it with someone else. There are fun rules you can find online to make the exchange even more fun. You may even suggest a pitch-in so everyone gets fed, but the cost is split between multiple people.
  • Consider making charitable gifts in honor of someone. The money is going to a good cause.

These are just a few budget-friendly ways you can take part in the holiday spirit. 

What it really boils down to is that creating memories and sharing time with loved ones is more important than any material gift.

Don’t get sucked up into what other people are doing and focus on what makes you happy.

Where Did All My Money Go?

It’s Thursday after work and your friend sends a text about going to Margarita Night at the local Mexican restaurant. You decide you want to unwind with some tasty arroz con pollo and a refreshing margarita or two, so you reply, “sure”. You pull up your bank’s app to check your account balance — $106.26. “Where did all my money go?!” you think to yourself.

According to a Gallup poll from 2013, only about one in three Americans actually has a household budget. I would say this statistic is still accurate because less than half of the people that come to me for help actually keep track of their cash flow. When I ask those who don’t, why they don’t, the standard response is, “I look at my online banking every day so I know how much I have to spend”.

This is partially true. Your online banking application does tell you how much you have available to spend right now (according to their records) but it doesn’t tell how you are spending your money. If you want to get a better grasp of where your money is actually going, you’re going to need to actively keep track of it.

Reasons To Track Your Expenditures.

Banks make mistakes. I worked at a bank and I saw this first hand. While it isn’t a common occurrence, it still happens. It may not even be the bank’s fault. It could be a merchant that double charged you by mistake.

Some merchants charge more or less than the actual transaction. A prime example of this is gas stations and hotels. When you select debit/credit at the pump, the gas stations will put a temporary $1 pre-authorization charge on your account. This way the vendor can verify the card is active before authorizing the total amount. So you really put $20 in your tank, but your pending transaction on your online banking will say $1. After the transaction is authorized the $1 will fall off, but that could be minutes to hours after you actually filled up. A lot can happen in a few hours.

Fraud. A thief gets a hold of your card number and proceeds with a spending spree. A lot of times a thief will charge a few small items first. If they get away with it, they go for the big time items hoping that you don’t catch it until they are scot-free.

Paper checks. Paper checks may not be used very often anymore, but we still use them occasionally. Like that $20 check you wrote to your niece six months ago for her birthday that she still hasn’t cashed.  Those checks can add up and one day you may find your checking account overdrawn because your niece finally got around to cashing that check.

It will help you budget. The dreaded “B” word. I find knowing where your money is going is integral to formulating a budget. If you know that you spend $200 a month at Starbucks, you have a benchmark for how much you want to cut and spend somewhere else.

How To Keep Track Expenses.

There are multiple ways to keep track of cash flow; all the way from the basic check register to apps on your phone.

Doing it the old fashioned way of balancing your checkbook takes a little more time and effort. You will need to keep the receipts from any transactions you use your card for and write them down in a check register. If there are any outstanding checks or pending transactions, they won’t be checked off until they actually post to your account, but they still should be subtracted from the running total.

Apps like Mint, GoodBudget, or You Need A Budget are great for people who want to base their budget on their cash flow. The apps link to your checking account and help keep track of your spending by category. You will get reports on where your money was spent and how much you have left for the month based on the budget you created. They even give you reminders of when reoccurring bills are due.

Stay On Budget.

Keeping track of your cash flow is an important step in helping you create, and stay on, a budget. When you know where your money is going, it is easier to ensure you have enough money for the things you need. It’ll also help you pay off any debts you have and keep you out of debt going forward.

Living on a budget doesn’t mean giving up things you want or like. You can enjoy the occasional iced latte and still find places to cut back in order to balance your income and expenses.