Saturday, August 26, 2006

Mel on personal finance (you may laugh now)

Today I opened my own bank accounts. Yay! (Thanks, Mom and Dad, for finally letting me do my own financial thing.) I've read a lot on "personal finance" but have no idea how to implement it, but I'm writing here anyway in case it helps someone else out. Or at least for folks to laugh at. So if you have any banking or finance advice for young adults starting out, this is the place to give it, because I don't have a clue.

I have three accounts. The first is a Chase visa, which is a normal credit card. No special reason for picking Chase; my parents use it, so it was the easiest one for me to get credit on. I use it for most daily purchases since it earns points redeemable for cash, travel, and the other usual perks. It also builds credit, which will be important if I want to buy a (yellow) house in the future. I treat it as a debit card, considering money I spend this way already "withdrawn" from my checking account; it's an auxillary to my "money inbox" which I'll cover in a bit. I pay everything in full each statement cycle. Debt != happy.

The second is a Bank of America student checking, which has no minimum balance and is free for five years. This is my "money inbox"; direct deposits, otherwise known as the pittance that is a student worker's salary, goes here (I'll explain why later). It comes with a debit card that I can use to pull cash from the Bank of America ATMs that proliferate like small red rabbits on every Boston street corner. My checking account is my online wallet. If money is in here, I can spend it. For-amusement or otherwise consumable stuff like housing, food, phone bills, and textbooks-for-fun all go here.

Why do I put direct deposits into checking, which earns no interest? One reason. It's accessible - too accessible. I have a tendency to spend as much money as I let myself spend, so it's in my interest to pay attention and get extra money out of my checking account as soon as possible. Also, checking will let me take money out of it whenever and however I want. You're limited to 3 withdrawals from your savings account per month, but there is no limit to withdrawals from checking. That means I can transfer every bit I can afford from checking to savings, as soon as I can afford it... and more importantly, that it's hard for me to get it out again, which means that once in my savings account, money is really saved.

My checking account also has Online Bill Pay, which is great since I always forget to note down checks I've written. Online Bill Pay lets me go to my computer, type the check, and walk away. The bank will print your check and mail it for you. Free. Your recipients will get a little check in their mailbox as if you'd written it out yourself. All the transactions are already noted online, the data's on the computer, the funds are taken care of, and the lazy geek is happy. Because of this, I have no paper checks.

I've also opted for paperless statements and requested that my balances be emailed to me every morning, thus forcing me to keep tabs on my finances daily. I've also asked to be email-notified of direct deposit postings so I know when all my paychecks have come in. I also set an alert to email me if my balances dip below a certain panic-inducing amount, which with luck they never will.

My final account is a Bank of America student savings. Normally it has a $300 miniumum, I got that waived for the first year (ask!). Interest rate is low (0.5%), but this account only does two things. First, I've tied it to my checking in case I overdraw, as it's better to pay a $10 "whoops!" fee than a $35*n one, where n is the number of transactions I make before I realize I'm overdrawn. Second, this acts as my short-term piggybank. It's where I'll keep money until I accumulate enough (over the minimum of $300+cushion) to get a certain investment. Aside from the normal stocks/bonds/CDs/yada things, I also consider substantial utilitarian spending like tuition, bikes, computers, and donations to charity to be investments, albeit of a different sort.

The charity thing begs some explanation. I was raised to give part of what you get, no matter how little. Trouble is, the traditional 10% of my paycheck is currently pretty pathetic, and mailing it off to a charity twice monthly would result in my donations being mostly to the US Postal Service. So I'm going to keep a tally of how much I would have donated each paycheck instead; when that number's big enough to carry out a concrete action. Enough to get books to a library (and pay for gas to drive over and volunteer there for a day), pay for the materials for a house (and send me to the Philippines to help build it), or whatever crazy idea I come up with at the time that requires me to put my time and knowledge as well as my money. Then I'll take that amount and give it all in one go. Basically, it's like a mini-grant that lets me fund my volunteering in any capacity I want to.

As a side note, Bank of America has a really cool "My Portfolio" overview, which is like a Netvibes or Google Homepage for your financial data. You can even view your non-BoA accounts there (I'm watching my Chase credit card) and it'll tally your net worth so you can see exactly where you stand. I wish it'd take a hint from web 2.0 and let you choose and move around the modules you want to show. I have no investments, so I don't care about the "investment manager" module that currently takes up the best screen real estate; I want my "assets" module there! However, it's the best thing of its kind I've seen so far, and makes the daily "check in on your finances" web tour much less tedious.

That's pretty much it. I know this system is primitive and suboptimal, but right now, simplicity is king. Better to start with a less optimal system I'll stick with than try to perfect the beta and never actually use it. Eventually I hope to start with the whole "throw blah percent in an index fund and let it grow until you retire" thing, but I'm concentrating on paying bills and building that emergency cash fund first. I'm prone to random medical surprises and not likely to take a regular corporate job for long stretches of time, so the emergency fund is really important.

It's all uphill from here, though. Not upwards to wealth; I don't really want (nor do I need) lots of money, and chances are I'll do things with my life that mean I'll never be rich in the financial sense. But I am, I hope, on the upward road to... financial adulthood. Knowing what I have, being in control of what I do with it, and being able to use what I've got in the way that I think will bring the most good.


Simone said...

ING Direct Savings account =
4% interest.

That's better than some CDs, yet leaves your money accessible.

Cheryl said...


David Klempner said...

And HSBC has one at 5.05%, without any of that minimum balance BS. (albeit online only, but that isn't really a problem.)

0.5% is a total ripoff; it's not even anywhere close to inflation.

Mel said...

Thanks, everyone. Good point on inflation especially - it hovers around 3% for US dollars, so in that light keeping most of my money in the 0.5% savings seems kind of silly.

I've now got a 5.15% Emigrant Direct savings account. I've heard good things about them as well as ING Direct, so we'll see how that goes (if it doesn't work, I'll probably move to ING or HSBC).

Eric said...

This all sounds simple, but it's amazing how the vast majority of people get it sooooo wrong.

I started exactly the way you're doing (right down to the BoA accounts - it was fleet then) and the theory of spending on credit cards as if it's already withdrawn is the only way to do it.

I'm glad to hear that your savings is in a better account now - the .5 percent really is an insult.

My only piece of advice would be to make sure that you think of ATM withdrawl fees in terms of percentage cost rather than dollar amounts.

For example, If I pay $4.50 to take out $20 (2.50 atm fee + 2.00 BoA out-of-network fee) from a generic ATM, I'm paying a "cash-tax" of almost 25%.

If I take $100 out, the cash tax is reduced to 4.5%.

Of course, I can avoid this altogether by using only BoA ATMs, but lets face it, you're going to use other ATMs here and there simply because it's convenient or necessary.

Taking bigger sums out ensures that my next trip to the ATM will be further down the road, and it gives me more opportunity to hit up a BoA and get my cash for free.

Of course, money in your pocket is also easier to spend, but that's a different problem entirely :)

It was great to meet you at BarCampNYC

Mel said...

Good points, Eric. Actually, for all of last year I didn't have an ATM card (just a credit card), so my habits are very ATM-averse - but when I do go to them, I'll withdraw plenty so as to not get hit with the "ATM tax" you mentioned.

It was great to meet you at Barcamp as well. (I was going to email you back, but realized I didn't have your address, so in the chance you read this thread again, drop me a line - mallory dot lastname at students dot olin dot edu.)