Save Thousands With Thoughtful Cash Management
by By Austin Pryor for Sound Mind Investing
January 5, 2006
(AgapePress) - - We recently looked at why you usually get your best savings deals from money market funds (MMFs). Now let me suggest how you might want to use one as your primary emergency fund. An emergency fund investment should be characterized by (1) safety and stability of principal, and (2) liquidity—the ability to easily and quickly convert it to cash. That makes MMFs a perfect fit. Thanks to Securities and Exchange Commission regulations MMFs are essentially as safe as the insured money market accounts offered by banks. And, you can have your money back whenever you want with no withdrawal penalties. MMFs will even give you checks to use. Opening a MMF is like opening a checking account—a few forms to sign and you're on your way.
Depending on how you use your money fund, the number of free services that a fund offers might be just as important as whether it's offering the highest yield. Let's look at how combining two such services can help you become a more efficient money manager.
Sign up for check-writing privileges. One of the most popular accounts offered by banks are their interest-bearing checking accounts. Many savers are not aware that a money market mutual fund set up with check-writing privileges is a better alternative. They have lower minimum balance requirements, and typically pay interest which is 1%+ higher than the typical interest-bearing checking account.
I have my contingency fund account invested in Vanguard Prime. Vanguard places no limit on the number of checks written, nor do they charge for the service; however, they do request that checks not be written for small amounts (not less than $250). Most money funds have similar policies (but verify to be sure this is the case before opening your account). Order a full supply of checks. Usually you'll get no more than a handful unless you make a specific request.
Sign up for automatic deposits. When it comes to saving, it's easy to rationalize putting it off until the next paycheck. So, it often helps to have some of your money put aside automatically before you have the opportunity to spend it. Here's one way.
Use your local bank checking account for all salary and investment income deposits. Then, instruct your money fund organization to have a certain dollar amount (you decide how much) automatically transferred from your local bank to your money market mutual fund once or twice a month.
I suggest transferring an amount that includes your desired monthly savings plus all your regularly scheduled monthly payments of at least $250 (or whatever the fund's check-writing minimum is). This might include your rent or mortgage payments, credit card and auto loan payments, insurance, and schooling. Then, when those monthly payments come due, pay them using your money fund checks.
With this arrangement, you earn a higher market rate of interest on your savings than you'll get at your local bank. Just as importantly, until the checks you write clear your money fund account, you'll also earn interest on the money which is earmarked for spending, accumulating for a major purchase, or long-term investing. When you think of the tens of thousands of dollars which briefly passes through your hands over years of managing your household finances and paying your bills, the interest earned on temporary account balances can be significant.
Most funds typically accept transfers of $50 to $100 and up on either a weekly, bi-weekly, or monthly basis. It's easy, convenient, and offers some useful discipline. Plus, your savings are available for withdrawal without penalty whenever you wish.
If possible, consider a strategy of saving 5%-10% of your gross income when you're in your twenties and moving up to 10%-15% in your thirties and forties. In your fifties, as home buying and child-rearing costs are tapering off, you might be able to boost your savings rate to the 15%-20% area in final preparation for your approaching retirement years.
