Saving Cents with Common Sense Issue 2: Interest rate hikes stink if you need a loan or carrying a credit card balance but they are great for high-yield savings accounts and CDs. High yield savings accounts make money for you without expended energy.
The past few months, I have been pleased to see more practices with actual savings accounts, in case of emergencies, but their money was not in a financial institution that it would earn more than pennies.
Big box banks tend to offer the lowest interest rates but out of convenience, businesses flock to them. Credit Unions used to be the best for savings accounts, but that spot has been taken over by online banks. Find out what your bank rate is then check out the best savings rates available at Bankrate.com.
Bankrate.com lists all the interest rates for financial institutions, including loan rates, mortgage rates, credit card rates, savings account rates, etc.
So, if you are searching for a loan, mortgage, credit card or any of those, be sure to check out bankrate.com first. It is a great resource that is most often overlooked. Do not take someone else’s word for a “great rate.” Do the research yourself.
At this writing, there is a high yield savings accounts with banks we are familiar with on this list: Lending Club is at 4.5%. Many banks are now over 5% but may have minimum balance requirements, as well as withdrawal restrictions.
Just to put this in perspective, I researched the big box banks savings account interest rates.
Bank of America listed .01%. Chase listed .01%. Wow. Seem low? Yes. Yes, it is yet millions have their savings accounts with these big box banks.
This past spring when the Savings Account interest rates were crawling up, these were still low. And here we are months later, and they are still low this fall.
Let’s be clear. I am not endorsing anyone for their savings account interest rates. You must still do the research and make a wise decision. All I am saying is to stay on top of it so your savings can earn your practice and you more money. Have it work for you!
Point in case. My elderly parents for years had a Chase Savings account. It was where a majority of their money resided, yet they made pennies on this account. When I started overseeing their finances in the early 2000s, I moved them to a Discover Online Savings account, one of the first online banks to offer great rates. They made much more than pennies until the interest rates slowly declined.
Bankrate.com also has a Simple Savings Calculator. If you had $10k in savings and made a $100 monthly contribution, you would earn $34.75 the first month or $2905.33 the first year, at the 4.5% interest rate. That would pay for Christmas presents or 193 of Mariano’s margaritas.
Let’s take that same scenario for the .01% interest rates. It earns .08 cents per month or $1.05 annually.
Seeing the difference is what compelled me to move my elderly parents’ money over to a higher yielding savings account so that it would work for them. I can still hear my 90-year-old Dad say, “I didn’t budget to live this long.” With a little bit of tweaking and a bit of help, they made it.
By the way, it was hard for him to ever ask for help. If you have elderly parents, you may need to navigate these waters WITH them.
Money Market accounts typically have slightly higher interest rates even at the big banks, but all the big banks are still low on money market rates. Most of the money market rates are at this time close to or over 5%.
Make your money work for you. Do not overlook this opportunity.
This issue does not just apply to the practice but to you personally as well. When 2020 happened, it was a struggle for most everyone to figure out how to make ends meet.
Now, the doom and gloomier financial forecasters ying and yang daily, stating that we are headed towards a financial decline with the rising costs of even breathing. At this point, it is a guessing game. A little like weather forecasting.
With the cost of everything more expensive, how the heck do you save?
One penny at a time.
And, yes, it does require discipline. Most employers pay via direct deposit these days. Whoever is processing your payroll, even if you are using Intuit, all payroll service direct deposit providers, allow the opportunity to split the paycheck to two different accounts.
One amount can be a % of the total net paycheck or a dollar amount. If it is tough times, even having $10 put in a savings account is $10 more set aside than before the paycheck. And that adds up to $120 at the end of the year, or $240 at the end of two years, or $360 at the end of three years. PLUS, interest. And, once the comfort of having a savings account is understood and appreciated, that monthly $10 sacrifice could grow to a $20 sacrifice. The more that is in the account, the more it is seen being rewarded with interest, the more an investor is born.
Sometimes it is a matter of being out of sight, out of mind.
And, one of the things I like about online banks is that it typically takes two days to transfer money into your checking account. It is not as easy to access, which really encourages savings, to keep it in the account and not spend it.
I have long been a fan of Suzy Orman and am now a fan of Jill Schlesinger. Their financial wisdom is aligned with mine. I think I have mentioned on a podcast before how I love to watch Suzy’s Can I Afford It segments, where viewers call in to the show, asking if they can purchase something and they have to provide their financials.
It is amazing how few of them are approved because of their financials and typically it will be because of the amount of debt they already have and the lack of a healthy, active savings account with more than just a token amount. Some of them are so completely clueless as to the impact of what they most likely “want” versus truly “need.”
What is a healthy amount to save?
For your business, this will surprise you and I am doubtful many practices or small businesses have this set aside. Six times the monthly expense amount – supplies, utilities, payroll, everything.
Realistically, I looked at a client’s QuickBooks file that I have been cleaning up as part of my Extreme Makeover service. They are a very large practice with over $2m in revenue and over $1.8m in expenses.
That is $150k per month times six equals $900k in savings.
Most practices do not have even half of that. Most have maybe less than $100k.
Earlier this year, I was working with a client in designing his QuickBooks for a clearer business understanding. He had $183,000 in a Chase Savings account, that had made $3.17 in interest. I asked him if he was happy with that rate of return. At the time, the interest rates were somewhere around 2.85%. If he had that in a high yield savings account, he would have made $5215.66 annually in interest versus $38.04 with Chase. Now with even higher interest rates, let’s say 4.8%, his annual yield would be $8784.26. Let’s hope they have switched by now.
The point of having money in savings is to have a reserve for when catastrophic happens, weather events (hurricanes, tornadoes, blizzards, etc), pandemics or health crises. Any of these are life disrupters and greatly affect the flow of our businesses as well as our personal lives.
For personal savings, Suzy recommends an 8-month emergency savings. That is your monthly paycheck times 8. This also depends on your debt load.
Let’s break that down.
If your biweekly take home paycheck amount is $1300, which is $750 weekly. The total 8-month savings goal amount is roughly $25,800, depending on what month it is.
How much do you have in savings?
Not just for businesses to be mindful, but in our families as well. Make sure your elderly family members have any hard-earned money in a high yield savings account so that it makes money for them.
When my father passed away at 94 years old, my mom was instantly nervous about what she had to live on for the remainder of her days. They had managed well but none of that mattered at the time. I had been providing Dad monthly Quicken reports after I downloaded all their expenses and was able to quickly assuage her fear with a net worth report. There was not much but she was covered, and we were able to talk it through. Mom passed a few years later at 97.
They were able to financially swing it because Dad had invested financially years into high yield savings accounts and certificates of deposits (CDs). The savings the CDs made were rolled into their checking accounts and the initial investment was rolled back into a CD. This was back when the rates were 17% and higher. But it was the lifestyle and understanding of needing to save finances that I was taught.
Are you encouraging your kids to learn the importance of saving money?
Are you showing them the benefit of a true “don’t touch this” savings account?
Remember,
High yield savings accounts make money for you without expended energy.
Money can grow on “trees”!
Come back because we are not finished with this series! Next blog – how to design an understandable accounts payable software.
**Remember, I am not a CPA nor a financial advisor. Please contact either for specific questions regarding your specific situation, or do the research yourself.