What Is the Purpose of a Savings Account?

In previous blog posts I described myself as a big saver, but I wasn’t much of one before I got my savings account. I opened my savings account back in 2016 after I graduated from college. I was working consistently and paying off my student loans, but my parents encouraged me to put money into my savings account because if I kept it in my checking account I was just going to spend it!

Savings accounts are basically your bank paying you to keep your money with it. I think of my savings account as a place to hold money before its intended use. The average savings account today has a 0.06% interest rate, meaning the money in your savings account will appreciate by that percentage over one year. It’s definitely not a place for my money to grow—I’m making $0.14 per month at most on my savings. Rather, it’s a place to accumulate money until it’s time for it to shine and fulfill one of my goals.

I learned from Bola Sokunbi in her book “Clever Girl Finance” that psychologically it’s better to separate savings for different goals into their own savings accounts to not only avoid confusion but to not feel that you’re being set back on your other goals when you need something for one specific goal. Right now I have money to be invested and my emergency savings in the same account, but they should really be in separate places so I can see my goals clearer. Thankfully they soon will be, but I also want to look into a high-yield savings account, which I learned about while dissecting Carrie Bradshaw’s financial situation.

First, it’s important to make sure that any bank you’re putting your money in is insured by the Federal Deposit Insurance Corp. (FDIC). This means that your money will be safe should the bank go under. You can check if a bank is FDIC insured here.

After some researching and reading reviews, I found a few candidates for my future high-yield savings account: Sallie Mae’s SmartyPig, Axos Bank, LendingClub and Discover. SmartyPig offers a 0.70% annual percentage yield (APY) or interest rate on my savings, but the caveat for this higher yield is that it only applies to amounts under $10,000. Once you have more than $10,000 in your SmartyPig account, the APY falls to 0.45%. Axos Bank can give you 0.61% per year up to $24,999, but after you hit $25,000 the APY is much lower at 0.25% and goes down to 0.15% on more than $100,000. LendingClub offers 0.60% APY for balances of $2,500 or more. Through AAII’s partnership with Discover, you can get 0.55% APY without any restrictions or minimums (this is higher than what you can get through Discover without being an AAII member). These are all high yields with good options—I would just have to decide which option fits each goal. Maybe I’ll end up having more than one high-yield savings account to maximize the interest rates for the amount of money I want to save.

On the topic of how much you should have in a savings account, I recall many years ago when someone told me that they couldn’t believe a person they knew had more than $100,000 in their savings account. I knew that having too much in a savings account was as bad as not having enough—the opportunity cost of not growing all of that money in investments outweighed having all of that money stowed away, and in a manner akin to stuffing cash under your mattress!

I will be revisiting this high-yield savings account research when I open one in the near future, so stick around for more of my investing discoveries!

How I Raised My Credit Score in 2021

When I first started my job at AAII back in 2017, I wanted to buy a new work wardrobe and my mom took us to Macy’s. She said, “If you get a Macy’s credit card, then you can get all of your clothes here and not have to pay for everything at once.” When I checked out with my new clothes, the cashier opened a Macy’s credit card for me. I had to talk on the phone to some guy who asked me for my Social Security number, my date of birth and my address, among other invasive questions. It felt a bit like an airport interrogation (one time when I had just turned 18, I left my government ID behind and had to tell someone the last names of my neighbors—I never forgot it again!), but after about 10 minutes I had my very first credit card.

I used my fancy new Macy’s credit card whenever I bought things from Macy’s, and then when I moved out on my own in 2018, I opened a credit card with Wayfair so that I could put all of my new furniture on the card and pay it off over time. Thankfully, I was able to pay off my store credit cards without incurring interest, and the Wayfair card allowed me to not pay interest for up to 24 months (the number of months varies depending on how much you spend). I paid everything in full within the year.

However, I’ve never had a proper credit card from a bank. I use my debit card for almost all of my purchases. Why? To be honest, credit cards—and credit in general—scare me!

First of all, what is credit? Credit gives you the ability to borrow money and pay it back later. But I like to see exactly where my money is going, and not be surprised by how much I’ve spent at the end of the month when it’s time to pay the bill. With my debit card, I see exactly what my purchases are and can budget accordingly. But with a credit card, my brain goes all theoretical and then I have to do math and that’s not a fun time! (I recently learned that I could pay off a credit card throughout the month if I want, instead of waiting until my statement arrives, which makes me feel infinitely better!)

Now, whenever I buy something online and a website offers Afterpay, Klarna, PayPal Pay in 4 or Sezzle, I choose it. Not only does this make my bank account happy, since I don’t have to spend all my money at once, it has also raised and maintained my credit score for the last year and a half! Most of these companies that allow you to pay later also don’t charge you interest if you pay within a certain period of time, meaning that you will still be spending the same amount of money whether you pay for it all when you buy it or stretch it out over four or more payments. Most of these pay-later options take your money automatically, but make sure that you pay these installments on time, or else you’ll get pounded with late fees!

I’ve gotten my credit score to a good place (700+), which helped me to be approved for my apartment and will further help me to be approved for an actual bank credit card.

I primarily use Credit Karma to check my credit score, but it also includes offers for credit cards and shows how likely I am to be approved for different cards. After doing some research, it looks like the “Discover it” credit card is a great option for me. There are no annual fees, I can use it at Woodman’s (and buy infinite amounts of cheese!) and I can get 5% cash back on groceries, restaurant meals and more. (AAII worked with Discover to get you some other sweet deals here.)

Signing up for a credit card was super easy, but if my credit score had been lower and I hadn’t done anything to raise it over the last year, it would have been harder to find a credit card that I could get approved for. I’ll keep you all updated on how my credit card journey continues—I’m still freaked out by the possibility and the power!

I read this so you don’t have to! Clever Girl Finance by Bola Sokunbi

I found “Clever Girl Finance” by Bola Sokunbi when searching for beginning investor books, and I hesitated before buying it. Though the world of finance is dominated by men, particularly white men, I wondered if financial literacy needed to be gendered at all. Sokunbi answered this question within the first few pages of the book, saying that “despite [women] earning more than ever before, we are paid significantly less for doing the same work as our male counterparts in nearly every single occupation and industry. On average, women earn about 20% less than men … On top of that, we are living longer than men by an average of 5–10 years, which means we actually need more money for our financial well-being in retirement than men will.”

This reminded me of a comment on a video by YouTuber Elena Taber covering investing for beginners:

While reading, I did find it easier to learn from someone with similar life experiences as me. I had a feeling that nothing was being left out that might apply to me specifically.

Sokunbi covers your money mindset, how to get your money organized, budgeting, debt and loans, investing, credit, protecting yourself, making more money and key financial actions. Each section has helpful “Take Action” checklists with activities you can do to understand your relationship to money based on how you grew up, what you want to accomplish with your money, tracking your spending, creating a budget, getting your student loans under control, outlining a retirement savings plan and more.

I was most drawn to the chapter on budgeting and saving, especially how much is recommended to have in emergency savings. Sokunbi mentions budgeting apps as a simple way to start, but cautions “it can detach you from closely monitoring your finances if you don’t make a conscious effort to do so.” She says that you should have “three to six months of your essential living expenses in emergency savings. This includes living expenses related to your housing, transportation, and food needs” and the range is dependent on if you’re partnered (three months) or single (six months).

Regarding where to keep your emergency savings, Sokunbi suggests that they should be “easily accessible and liquid so you can get to it when you need it without having to wait and without having to worry about how financial markets are performing. Therefore, it shouldn’t be tied up in investments like the stock market or in real estate. An interest-bearing savings account or a certificate of deposit are good places to keep this money.”

But what I really appreciated about this breakdown is how Sokunbi highlights the behavioral aspect of saving, “You also want to make sure that you are keeping your emergency savings separate from your other financial goals. Blending your savings goals together can get confusing, and in the event you have to use your savings, taking the money out of a comingled account can make you feel like you are setting yourself back with your other goals as well.”

Though I could take or leave the gendered jokes about handbags and shoes (Carrie Bradshaw would love this book), overall I found Sokunbi’s writing style extremely informative and easily accessible. The “Take Action” sections are the most valuable part of the book, and I’ll be returning to them throughout my investing discoveries.

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The Carrie Finances: Introduction

In my recent rewatch of Sex and the City, an episode where main character Carrie Bradshaw is forced to buy her apartment or be evicted by her ex-fiancé Aidan revealed that Carrie only has $700 in her checking account and $957 in her savings account! Indexed to inflation from 2001 to 2021, that would be approximately $1,100 in checking and $1,500 in savings. Given that Carrie’s apartment was previously rent controlled for $750 per month (a steal in New York City then and now, at around $1,200 with inflation), the bulk of her income was spent on her Achilles heel: expensive shoes—according to her, $40,000 worth!

The down payment required to buy her apartment is $30,000. After consulting a loan officer at the bank, her ex-boyfriend Big and her three closest friends, her friend Charlotte gives Carrie the engagement ring from her first marriage to float the bill and save the apartment. Carrie promises to pay Charlotte back in full.

https://www.youtube.com/watch?v=1maxJJBcgQ4

At age 35, Carrie has little to her name in assets but “many life experiences,” she notes. As much as we like to enforce the idea of saving from a young age, Carrie makes a good point about enjoying your life while you’re young—but shoes are not the same thing as life experiences! What if Carrie had spent only half of the $40,000 that she estimated she spent on shoes, and put $20,000 in savings …

Carrie says that at this point she has lived in Manhattan for a decade, so let’s see how much money Carrie would have if she put $20,000 in her savings account for 10 years. The average savings account today has a 0.06% interest rate, meaning the money you have in your savings account will appreciate by that percentage over one year. The more you put into your savings account, the more money you’ll make in the long run. Over a 10-year period, Carrie would make about $270 on her savings, which isn’t much and wouldn’t cover her down payment.

But what if she used a high-yield savings account? High-yield savings accounts have interest rates much higher than the average bank, some as high as 0.70% today. If Carrie had her money in a high-yield savings account, she would have almost $21,000 in total savings.

This would be the best Carrie could do at this level if she still wanted to maintain half of her Manolo Blahnik shoe collection. Even with a high-yield savings account, she still wouldn’t be able to pay for her apartment on her own at today’s low interest rates.

When I first watched this episode, I was horrified by Carrie’s financial state! I couldn’t help but wonder: Would she would be able to support herself? Unfortunately, she would have to start investing or save more of her income to do anything more with her money. She might also have to sell some of those shoes, but that would be even more painful for her! Through my Carrie Finances series, I intend to teach myself about budgeting and life-planning so that my finances are in better shape by the time I turn 35 than Carrie’s are!

Hereditary Financial Habits: Introduction

https://investingdiscoveries.blog/wp-content/uploads/2021/11/Hereditary-Financial-Habits-Intro.mp3
You can listen to the audio of this post!

Before I got my first paid internship as a college student, money was something that was just out of my reach. Like many kids, I was given an allowance by my parents to do chores around the house. I would empty the dishwasher, set the table for dinner, take the garbage out, etc. I appreciated that there were also things I was expected to do that I didn’t get paid for, like doing my own laundry and cleaning my room. I would get paid for the things I could do for other people, but the things I didn’t get paid for had to be self-motivated; it was a great way to build discipline.

I learned from a young age that being independent and doing things for myself was an asset to me. To this day, I will try my hardest to solve any problem that arises before asking for help (yes, sometimes to a fault, but I’m working on it!).

As I’ve gotten older, I’ve noticed more similarities between me and my parents in the way we think, the way we conduct ourselves socially and how we interact with the world. Some of those things my dad will address as “the family curse,” others as his “insanity,” but one of the ripest that I want to break down further is what financial habits, if any, I inherited from my family.

Unfortunately, my grandma on my mom’s side died when I was very young, so all I have is stories about her. As I grew up, I learned that she was an accountant and started her own tax business in the 1950s. It wasn’t an easy time to be a woman, let alone a businesswoman. She was the only woman in her accounting class, and people questioned why she wasn’t getting a teaching degree instead. But she proved all of them wrong, and she went on to meet my grandpa on my mom’s side, who was active in his parents’ phone and answering service business. My mom’s parents ran the phone business together, and my grandma kept her tax business on the side up until the 1980s when my mom recalls a little old lady about four feet tall coming to the office asking for my grandma to do her taxes because she couldn’t possibly go anywhere else!

On my dad’s side, his father died very young, so we never got to meet him. But his mom was around for a little while after I was born. She was big into investing, and when she passed, she left her estate to my parents. My dad told me that when he was 15, his mom bought him stock in IBM Corp. (IBM) to get him into investing. To keep him engaged, she also had him oversee her dividends! My dad would have to verify which amounts were going into her account and match the dividend depending on the company and the month. They had a manual bookkeeping spreadsheet (on paper!) of when the dividends were expected that he helped to maintain.

So I grew up with a lot of business-minded people in my family. But how did that affect how I view money?

As a kid I used to think that my parents would always have enough money to take care of me, that money was something infinite, but I quickly learned that wasn’t the case. My parents had just made good decisions with their money and gotten lucky. I think the biggest lesson I learned from growing up in this environment was to save. When I started making a steady income, I was big into saving because I wanted to be someone who had reserves if something went wrong. If I had a sudden health issue and couldn’t work, I wanted to make sure I could live for at least a year on my savings. It also strikes me as an extension of my need to be fiercely independent; I didn’t think of asking anyone else for help if I fell on hard times, I expected to be able to handle everything myself.

How did you view money growing up, and how did that influence your relationship with money and investing?

Frosty, our littlest investor, doesn’t have a job so he invests all his time into waiting for food.

The Great Index Fund Diversion

Index funds have been on my mind for a while. A few years ago, I was talking to my family about investing and index funds came up as an easy way to start.

Index funds are groups of securities like stocks or bonds that you can invest in to get a bigger chunk of the market in your portfolio.

I had index funds in mind when I opened my brokerage account; I made sure that my broker had a good amount of no-transaction-fee mutual funds available. Index funds seemed like a great place for me to start investing, since I’m not yet comfortable investing at the individual stock level. I could get what I needed to diversify a portfolio with just a few funds, instead of trying to identify 20 stocks that would serve a similar purpose.

However, once I actually started to look at index mutual funds, I quickly descended into panic when there were so many barriers to entry: Minimum purchase amounts, especially for the socially responsible funds I was interested in, were sky high; there were institutional funds that I wasn’t sure I could even invest in as an individual (I found out that it depends on the fund); and there were funds that weren’t even open to new investors.

I used AAII’s Fund Screener to try and find something that would work for me but soon I was overwhelmed by all of the metrics I needed to apply to find what I was looking for. Which index should the fund be following? How can I find a fund that is actively socially responsible and not just investing in big corporations that happen to not, at this point in time, be treating the earth like a hotel? And how do I sift through the mammoth amount of 24,000+ mutual funds available to begin with?!

After about a week of screening and researching, I decided to take a step back.

This is essentially online clothes shopping but for index funds, so I tried to narrow my search to find the ones I like in my size. But I don’t want to force myself to fit into anything, and I definitely don’t want to invest in something that I don’t understand. I want to follow a strategy that doesn’t require any emotional breakdowns in the process!

One day when I’m more entrenched in investing, I’ll revisit index mutual funds. But for now, I’m going to focus my attention on index exchange-traded funds (ETFs). There are no minimum purchase amounts attached to these, and there are only about 2,700 ETFs to choose from, which should help narrow my search immensely. I’ll report back on how it goes!

Start Investing With $5!

If you think you need thousands of dollars to start investing right now, you’re not alone! Before I started working at AAII, I didn’t think I would ever do any investing by myself. And even then, I thought I would need at least $10,000 to start investing. But the good news is, you only need $5 to start investing right now. You can start yourself a tiny little portfolio! Like with anything, there are risks attached to investing with small amounts but here are some ways you can do it:

Micro-investing apps are those like Acorns, Stash and Cash App. These apps provide services like rounding up the charge when you buy something and investing that extra change. Acorns provides more of a hands-off approach, doing the work of saving and investing for you. But this also means there can be hidden transaction costs since Acorns is making the decisions.

I looked into Acorns as an option for starting something small, but the behind-the-scenes aspect of it concerns me. Since I chose my broker based on the lack of fees for exchange-traded funds (ETFs), I’m going to stick to my main Schwab brokerage account for now.

With Stash, you can control your investments and buy fractional shares of stocks, but there are a lot of other distracting bells and whistles like the Stock-Back card that invests in the stocks of the brands you purchase from. This strikes me as a bit of a leap, a whole new way of saying “Put your money where your mouth is.” Simply investing in the companies that you buy from already is not an investing strategy, and it’s just giving more money to corporations that could be doing more harm than good.

Cash App also allows you to choose what you want to invest in, including fractional shares. It’s not just for investing, so if you already use it to send money to friends it could be a multi-purpose app for you. I like that Cash App seems to be more transparent than the other two micro-investing apps.

Acorns invests mainly in ETFs, while Stash and Cash App have a focus on stock investing with some ETF offerings as well.

Keep in mind that Acorns and Stash have a minimum fee of $1 per month to maintain your account, while Cash App is free. Fees were a huge part of choosing my broker, so if you haven’t opened a brokerage account yet, check out my post and accompanying video on how I did it!

With these apps, you can start investing with very little, but with Acorns, for instance, you can also boost your savings to invest for your future as it squirrels away your spare change.

Purchasing fractional shares of stocks or ETFs can be one way to start investing if you only have a little to spare each month. If you want to invest in a stock that’s pricey but you don’t want to shell out the entire share price amount, you can buy a fraction of the share. You can also do this with ETFs, which can be an easy way to get better diversification for your portfolio right off the bat. Not all stocks and ETFs are available for fractional share purchases, leaving you with limited choices, and they can be risky in the sell process since your fractional shares have to be matched up with other fractional shares in order to be sold. However, it’s a great way to start out with your first stock purchase if you’ve been putting it off. It’s getting your foot in the door (and maybe just your foot for now). I made the decision to go with Schwab for my broker because it offers fractional share purchasing, so I might be playing around with that in the future!

I read this so you don’t have to! Investing 101 by Michele Cagan

I started reading at such a young age that it feels like I’ve been reading since I came into consciousness. Before I started reading by myself, my dad would read the Wizard of Oz series to me. But it was when he started the Harry Potter series that I took the first book from him one night and said, “I want to read this one.”

There were nights I would go to bed at 4:00 a.m. just to finish a book, on a school night no less! Nothing and no one could stop me, not my mom, my young eyes or the butt crack of dawn on the horizon. Reading is my preferred way to learn new things, so if you’re not a big reader, or don’t have the time for a whole book, you’ve come to the right place because I’ll be reading investing books so that you don’t have to!

“Investing 101” by Michele Cagan, CPA, is a book that my uncle gave me when I started working at AAII. Instead of reading it, I put it in my closet and never looked at it again—until now!

“Investing 101” offers a ton of entry point options for beginners. Cagan covers basic economics, stocks, bonds, mutual funds, exchange-traded funds (ETFs), styles of investing, investing in real estate, currency and commodity trading, education and retirement planning, socially responsible investing, how to create your investment portfolio and advice from professionals. If any of those aspects of investing interest you, Cagan does a good job of explaining things plainly but factually. If you click on any of the links in this paragraph, they will take you to a place on AAII.com where you can begin learning more about these investing ideas.

I was on alert for any descriptions of investing concepts that might help me build a portfolio, and Cagan introduces the concept of diversification. Diversification is an investing technique that acts as a safety net against how the economy might perform: “Different types of industries perform better during specific stages in the economic cycle. For example, some industries take off when the economy is expanding, while others actually profit more when the economy is in a slump. That means that investors can always find a way to profit in the markets, as long as they know where to look.”

Instead of trying to take a wild guess when certain investments will do well, diversifying what you hold in a portfolio means you won’t have to stay up at night thinking about how the economy will affect your investments. Instead, you can stay awake plagued by thoughts about the end of the world!

Some great advice Cagan included that I’m going to follow is to “avoid duplication. It is a waste of your investment monies to own multiple funds with identical objectives. It’s best to own just one fund in any particular fund category.” She also notes, “However, keep in mind that it’s usually not advisable to have more than six or seven mutual funds at a given time, or you can start to counterbalance your efforts to construct a strong portfolio.”

I gravitated toward the chapter on mutual funds and ETFs since investing in individual stocks right now is still intimidating for me. I think I could easily follow these guidelines that Cagan provides and start investing in mutual funds and ETFs. I’ll report back on how that goes!

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