Deposit Accounts – Cash Parking

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Deposit Accounts and Savings.  In this article I am not talking about investing your money.  To me investing has more to do with the risks you take with your money, so the rewards can be much bigger.  You first need to start saving your money and understanding the principals associated with basic saving in order to then make your money really work for you.  All of the deposit accounts I discuss in this article would take years to grow your money.  When you look at topping out with 3% interest rate on even a $50,000 Certificate of Deposit(CD), that is safety and insured, when you talk about investing $50,000 in a company IPO that is risk and no guarantee of return, if the company succeeds you could double your money in a week or month, even 5 years. It would take about of about 12 years to double your money with a CD.

Interest is a Payment for Use of Money. Learn how to save money first, so you can be BYOB(Be Your Own Bank). All of the deposit accounts mentioned below pay interest but in today’s market the amount of interest paid to you for your money is terrible. Saving money is very important and it is very important that you understand all of these types of deposit accounts and make educated decisions with your hard earned money. Discipline and consistency.

Investing comes after you understand the difference.

Growing Your Money – Rules for Becoming a Millionaire

  1. Save Early and Often.
  2. Save as Much as Possible
  3. Earn Compound Interest
  4. Try to Earn a High Interest Rate
  5. Leave Deposits and Interest in the account as long as possible.

Okay without further ado -

Your Options for Cash Parking

Everyday Checking accounts

A checking account is for cash replacement basically. Banks don’t pay anything on basic checking accounts because the money doesn’t stay in it very long so they can’t consider it as an asset really.  Banks make money on checking accounts when someone overdraws or in other words writes a hot check. You have to pay them and believe it, there are still a lot  hot checks are still written. Once you have a checking account which is usually your first account, that is after your piggy bank stash. Things are changing a little here though.  If you keep money in your account and meet certain requirements, some banks are rewarding you with nice interest rates. For instance Kasasa checking account,  I have a Kasasa checking account. They pay above 3% most of the time if you meet the requirements or qualifications.  However, some banks do combine the conveniences of checking with the return of a money market account. But once again these money market accounts have requirement that must be met. One more possibly with checking, this is known as “asset management” accounts at brokerages become more feature-rich — offering unlimited check writing, ATM access, and money market rates — more folks are shunning the banks in favor of brokers.

 Down and Dirty on Checking Accounts.
Very liquid and you can get it quickly. Usually people open a checking account close to home so they know where their money is. And lastly your checking account is FDIC insured up to $250,000. Must shop and understand banks don’t normally pay much on checking accounts because you won’t be leaving it in very long. Many banks charge a maintenance fee for giving you a temporary place for your cash.

Savings Accounts

This is still one of the mainstays for putting your extra cash, maybe not so good for growing your money but very safe. It is one of the best places to actually start saving and learning how to pay yourself first. You can use for Christmas Saving, Vacation Saving, Anniversary, basically any goal you have. But once you start saving more and more, you should look for better place to park your savings. Consider it as a short term saving vehicle and don’t forget the emergency cash fund should be in a safe place and the saving account is a good place for that.

Down and Dirty on Savings Accounts

You can use it for anything, once again it is very liquid and you can get it quickly if needed. Remember if you use online savings account located across the country it might take a day or two unless they can transfer directly to your checking account. This type of deposit account is also FDIC insured. You can open a saving account usually with $5-25 bucks. No real interest to speak of.

High-yield Bank Accounts

If you are savvy with the internet you can find high-yield savings and checking accounts. They’re an ideal place to park money for your daily and monthly bills. They offer flexibility (you can add or withdraw funds at any time) and liquidity (your dough isn’t locked in for a specific time period). Some even boast interest rates on par with more restrictive investments like CDs. The best interest rates by far are offered by online-only banks that keep costs low by cutting back on standard you get with traditional banks.

High-yield Bank Accounts Down and Dirty

Better interest rates than many traditional banks, but like the Kasasa account I mentioned earlier, might have to meet qualifications to get the better interest rate. FDIC insured. What you may not like about a high yield bank account is you may not be able to get to your money as quickly. Writing a check for cash might prove a little more difficult. You may not have ATM/debit card access. You might have to flip-flop your money back and forth from your local bank, that could take a few days. So I am a little weary on these high-yield bank accounts. If you plan to leave money alone and don’t have qualifications to earn a good interest rate then go for it.

Money Market Deposit Accounts

Money market deposit accounts are offered by banks, usually require a minimum balance, and permit a limited number of transactions per month (six transfers, three of which can be checks written on the account).

Money Market Deposit Accounts Down and Dirty

Money Market Deposit accounts are very liquid, easy to get your money. They have checks and transfers, and some have Debit Card. They are offered by banks so the money is FDIC insured. They do over interest if only slightly better than regular savings account. Example just looked at Everbank offering 1.07% for account deposit up to 50K, that is paltry.  They may or may not have a minimum balance. They may have penalties.

Money market funds

Money market funds are offered by brokerages and mutual fund families. These funds invest in highly liquid, safe securities such as certificates of deposit, government securities, and commercial paper (i.e., short-term obligations issued by corporations).

Money Market Funds Down and Dirty

This is a pretty safe place to park your cash, but it is not FDIC insured. In the last ten years or so, pretty low growth. The fund managers try to keep Net Asset Value (NAV) at a $1, safe but not much growth. I used to have an Oppenheimer Money Market fund until it cost me $12 a quarter with no activity. Closed my account.

Certificates of Deposit (CDs)

CDs are debt instruments with a specific maturity, which can be anywhere from three months to 60 months (i.e., five years). Most CDs are issued by banks, but they can be bought through brokerages. You are basically promising the bank they can use your money for a cost. Let’s say your put $10,000 in a 1 year CD earning 4%, the bank can loan your money for 12%. You made $400 and the bank made $800. That is how they make money.

Certificates of Deposit (CDs) Down and Dirty

If you have $5000 you don’t need in the near future, you can lock it up for a fixed amount of time and earn a fixed amount of interest. They are FDIC insured and offered by most banks. Depending on maturity (how long you gave it to the bank to use) they pay more than money market deposit accounts. Drawback if you have to take the money out early, you will usually have to pay a penalty.

U.S. Government Bills or T-Notes

“Treasuries” are backed by the full faith and credit of the U.S. government. Treasury bills mature in less than a year; Treasury notes mature between two and 10 years. With treasury bills you are loaning the United State Government Money for a return interest on your money.

I don’t know the down and dirty on this type of deposit account, except they are considered one of the safest in the world. So I will direct you to the authority where you can learn about the different types of treasuries to put your money for safe keeping You can still find deposit accounts that pay a better return, but you have to shop around CD’s, Money Markets.

Municipal bonds

Municipal bonds are issued by city or local governments in order to build schools, highways, and other projects for the public good. This are a trade-able asset.Municipal bonds are most attractive to high-income investors looking for tax-friendly income.

Municipal Bonds Down and Dirty

They are relatively safe. Depending on the agency of course you must do your due diligence. Income earned is exempt from federal taxes, and could be exempt from state and local taxes if you live in the municipality that issued the bond. The interest rate is relatively low, unless you are in a high tax bracket, you might be better off with another investment vehicle. If you cash out early you might lose money.

Corporate Bonds

Corporate bonds are issued by a corporation to expand their business. They will have a maturity date. The more credit worthy the company, the less it will pay in interest. Because they can borrow it elsewhere. Once again you definitely need to understand a company.  Moody’s and Standard & Poor’s rate companies as to their ability to meet their debt obligations.

Corporate Bonds Down and Dirty

You better know what you are doing. You can make more money than with treasuries, CD’s or money market accounts. They are not FDIC insured. The company could go under and you could lose your money. Remember risk / reward. They usually use a brokerage company to issue the bonds so you have to pay a commission. They will have a maturity date and if you redeem early expect a penalty.

Bond Funds

Bond funds are collective investment vehicle that pools the money of investors to buy bonds and other debt securities. This type of deposit account is for a more seasoned investor.

Bond Funds Down and Dirty

If you want to purchase bonds as a investment this is a better route to go than on your own. It is diversified so you risk is minimized to some extent.  The price of bond funds fluctuates, from buy and selling of other investors and new purchases, Since the Net Asset Value (NAV) changes you can’t know what your investment will be worth until you decide to cash in. You do have expenses for bond funds and you might have to pay a commission each time you invest.

Dividend Reinvestment Plans (DRIPS)

DRIPs are an investment is companies stock. If the company has a DRIP you can buy directly from the company or a transfer agent. This is a low cost way to start investing in company stocks.  Your dividend will be reinvested in the company stock and you can purchase additional shares of stock.  They have minimum initial purchase and also minimum monthly purchase plans.

Dividend Reinvestment Plans (DRIPs) Down and Dirty

I personally use ComputerShare which is a transfer agent for many companies. I own stocks in a few companies and don’t even think twice about this.  This is not trading stocks. This is part of my Pay Yourself First Plan.  Low entry cost to own stocks. Small monthly to purchase more shares, dividend automatically reinvested.  Not as liquid as other deposit accounts, but a few days to a week and you can have your money deposited into your checking account or mailed to you.  Not FDIC insured and you could lose money, pick good companies and go long term.

In closing I would like to leave you with this again…

Growing Your Money – Rules for Becoming a Millionaire

  1. Save Early and Often.
  2. Save as Much as Possible
  3. Earn Compound Interest
  4. Try to Earn a High Interest Rate
  5. Leave Deposits and Interest in the account as long as possible.