Sounds like a nice problem to have, right? :)
What I really mean is that as of my latest monthly recap, 8.6% of my net worth is in cash, bank accounts, and CDs. I'm not getting very high rates of return on most of this. At this writing, here's what I'm earning:
Checking $214.34 @ negligible interest rate. I try to keep this account at a zero balance between payments anyway.
Savings $4,268.65 @ .75%
Money Market $17,320.99 @ 2.5%
6-month CD (to March '08) $3,003.12 @ 3.92%
2-yr CD (to Oct. '08) $5,826.67 @ 5%
I hadn't really been paying enough attention to these interest rates, and now that I am, I realize how pathetic they are! That money market account used to earn over 4%, I'm pretty sure. And my savings account used to be around 2%, I thought. Anyway, this is just ridiculous and I want to take action right away.
One option would be to open a new savings account with one of the higher interest internet banks. I had an account with Presidential for a while at 5%, which I closed out when I had to pay for my condo. At My Money Blog, Jonathan has a good comparison of some online savings accounts. Looks like I could get 5.05% at FNBO, or 5% at WaMu, which might be worth considering just because they have local branches. (That almost makes me want to give up my Chase accounts entirely but I can't bring myself to ditch my savings account there because the account number is THE BEST BANK ACCOUNT NUMBER EVER, as my accountant reminds me every year! And I have to agree that it has a beautiful symmetry to it.)
So I'll be looking into getting a new savings account where I can do online transfers and use that as a better place to park some of this money. But that is only one step. I think I should be putting some more of this money into investments with a better potential return. First I have to decide how much money I want to keep in cash. I've never really maintained an "emergency fund" of any particular amount. My view on this is that since my income is steady and my job seems relatively secure, I can basically consider ALL my money to be a kind of emergency fund. I have cash and CDs and mutual funds, etc. and in a true emergency, I could draw on any of those, or even take money out of my 401k if I had to. If I had less money and more debt, or a fluctuating income, I'd have a totally different attitude about this, of course.
But all that said, I do think it's wise to have some cash on hand to cover a couple months' worth of expenses. Given how high my expenses are lately, I'm suddenly feeling like maybe I don't have as much extra cash as I thought! Not including income taxes and other paycheck deductions, I tend to be spending around $4,000 a month lately. If I lost my job suddenly, I would certainly change my habits and lower those expenses quite a bit, but housing and utilities come to about half of that, so there's only so low it can go. So should I be keeping more like $10,000 in cash? For the reasons I cited above, I don't think so. I think a cushion of $6,000 or $7,000 in a savings account should be ok for now, especially since I should have a bonus coming within the next 6 months. So I think I could open an online savings account with $6,000 or so, and then take $15,000 or so out of that money market account and use it for other investments.
So then I have to decide what kind of investing I want to do. Stocks? Mutual funds? ETFs? Bonds? I already have some money tied up in all of these things except ETFs. Frankly, I don't know all that much about ETFs and don't think I want to take the time to learn right now, so I'm ruling those out. As for individual stocks, I've dabbled in them in the past, and I kind of like the idea of investing in a specific company whose performance I can monitor, but again, I think that takes a willingness to invest time and effort as well as money. I don't have the expertise or the energy to do the research I think I should.
That leaves mutual funds. In the past, I've attempted to pick out individual mutual funds from different companies that seemed to be doing well, but now I think it's probably best to just find funds with low expense ratios and pick a couple different index funds. I've always used E*Trade for all my stock and mutual fund purchases outside of my 401k, but I'm wondering if I should look into opening a direct account with Vanguard. I'm also wondering if I should make it a traditional IRA, or a 529 college savings account for my niece and nephew... Now I'm getting into more complicated decision-making, but I really want to take action on this quickly. I'll be thinking it over, and hopefully by the next time I post a monthly recap, some of those account balances will be very different!
Friday, October 12, 2007
Sounds like a nice problem to have, right? :)