Sushi Money

     How are money market and savings yields in your local region?  It’s not hard to see that most smaller and regional banks offer very poor (low) rates to consumers on their money market and savings accounts as compared to what you can find nationally.  And many of those same local banks require much higher minium deposits than their national counterparts.  Sure, they are trying to make money too… but why do consumers settle for 1.00% or 2.0% yields on local money market or savings accounts when they can get closer to, or better than 5.0 % nationally through companies such as UFB Direct, GMAC Bank, HSBC Direct, CitiBank Direct, ING Direct, etc?   Sometimes I wonder if convenience prevents us from achieving financial success in many areas of our lives.  Sure, many people have a local branch where they feel more comfortable ”keeping” their money… which obviously means where they “keep” their paperwork and relationships.  But we can do so much better!  Let’s use an example of Mr. Johnny and Mrs. Debbie:

     Mr. Johnny has $10,000 in  “Low-Rate Bank’s” money market account, earning 1.5%, compounded monthly.  He likes the bank… it’s local, and they have nice people.  He always knows who to talk to, and feels secure “keeping” his money there.  After one year, Johnny should have earned $151 for a total of $10,151 and change. Hypothetically, Johnny leaves his money in that account for many years- let’s say 10 years.  Money market account interest rates fluctuate greatly over time, but let’s assume Johnny earns an average of that 1.5% at “Low-Rate Bank” over the course of 10 years.   His total earnings over that time would be $1,617  for a grand total of $11,167. 

     Now Mrs. Debbie also has $10,000, but she keeps her money in “High-Rate Bank’s” money market account, earning 5.0%, compounded monthly.  Debbie’s bank is an internet bank based somewhere she doesn’t even know, but it is a reputable, large institution that provides the same security for her money as the local banks.  Debbie also has a local branch bank account, but at 1.5% she thinks their money market or savings rates are too low, so she keeps most of her funds at High-Rate Bank.  After one year, Debbie checks her earnings at High-Rate Bank  and sees that she earned $511 for a total of $10,511!  She’s happy with that, and knows she earned $360 more than her local bank would have paid her at 1.5%.  Debbie decides to leave her money in that account over time.  She knows interest rates on her account may not always be at 5.0%, and in fact Debbie achieves an average of 3.7% on her money over 10 years.  If she kept her original $10,000 there, her total earnings over that time would be $4,469,  for a grand total of $14,469 in her money market account.  That’s $3300 more than she could have had at 1.5% with her local bank!  Wow… all because she kept her money somewhere that earned more interest!

     Just an illustration… realistically, if Johnny or Debbie had $10,000 to set aside for 10 years or more, and didn’t need the money, they should have been in the market invested in a low-cost, diversified stock or index mutual fund.  The S&P 500 Index alone has achieved better than a 7% average total return over the last 10 years. So that same $10,000 invested in a good low-cost fund such as the Vanguard 500 Index Fund (VFINX), with a 7% average total return would have doubled your money!  Unless you wanted to withdraw it at about the 5 year point… in which case it’s value would have been pretty close to the original $10,000.  Which brings up a key point:  If you need the money in the next 3-5 years, then you need a more conservative investment vehicle, maybe even a savings or money market account.  You’re taking on a lot of risk if you put money you need for something (down payment on a home, emergency funds, etc) in the market for a short period of time.  But for long-term investment returns, few things can compete with the returns found in the stock market.

     One other point… interest you earn from taxable savings and money market accounts may be taxed at the highest rates for your tax bracket as ordinary income… but since 2001 dividends and capital gains (from stocks and mutual funds) are taxed much more favorably, at least for now. Keeping your money in a low-cost mutual fund for long periods of time can save you money on taxes as well!

     A little here, a little there… earning higher rates, compounding over time.  Whatever we can do to save more of our money, earn more interest and dividends on our money, and keep more of our money is a good thing. The saving and keeping part is the challenge… but interest and compounding works its magic by itself, we just have to find a higher magic number!

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