Where to Keep Your Savings When Interest Rates are Low

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Saving might be a virtue, but it’s not one that the market tends to reward.

Even as interest rates in the economy as a whole have risen over the past few years, savings account interest rates generally haven’t followed suit.  Banks are quick to raise rates on things that make them money (such as interest rates on loans), but haven’t been nearly as quick to raise savings account rates.

Simply put, savings accounts are terrible right now.

Ask your parents or grandparents where they keep some of their spare cash, and they might tell you that rather than keep money in savings, they put money into Certificates of Deposit (CDs) or into a Money Market Account.  The only problem?  Those rates aren’t very good right now, either.

So, is all hope of earning some decent return on your savings lost? What’s the best place to keep your savings?  And how much do you really need to keep in your savings accounts?

[This article is one of a fourteen part ongoing series about the way managing your money changes when you get married that will be released from November 2017 to February 2018.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

You Need to Keep Some Money in Cash

Please don’t misinterpret “Savings accounts are terrible” to mean “You shouldn’t keep any money in savings”.  You should.

You need to keep enough money in savings to cover three to six months of living expenses, just in case you lose your job, your car breaks down, or you have unexpected health expenses.  There’s no getting around it, you need to have cash that you could access at a moment’s notice.

If both you and your spouse have good paying jobs or your fixed monthly expenses (like your rent or student loan payments) are relatively low, three months of spending is usually sufficient.  If your household only has one source of income, or your fixed expenses are relatively high, you should shoot to have six months of spending in a savings account.

Don’t Let That Number Scare You

Three to six months of living expenses is a big number.  If you don’t have that much money in savings today, it can seem like an impossible target to reach.

Rather than focusing on the end target, start by working toward something smaller. Instead, calculate your average spending for one month, and focus on saving that much.  Once you have that amount in the bank, try to double it.  And so on, until you reach your target savings about.

Start small, and focus on saving a month’s worth of expenses at a time.

Once You Have Your Emergency Fund Established, Keep it There

Once you’ve saved three to six months of living expenses, which we call your “emergency fund”, don’t keep adding to it.  Leave your emergency fund alone until you need to actually withdraw funds in a pinch.  (Of course, once the emergency is over, you’ll want to focus on building up this savings back up to three to six months of living expenses.)

But, you still should check in on this account from time to time.  Once or twice a year, you should review your budget to make sure that your spending hasn’t drastically changed.  If you’re spending more than you used to, you may need to add some money to your emergency fund, and vice versa.

In fact, most people will need to add to their emergency fund periodically over time.  Why?

Because savings accounts are terrible.

Simply put, the stuff we buy tends to get more expensive faster than banks raise interest rates on savings accounts. Long term inflation (the rate that prices rise) is around 3% per year in the US.  If the money in your savings account only earns 0.2% interest per year, you’re essentially losing money by keeping money in a savings account.

Which is why it’s so important to review your spending and add to your emergency fund as needed so you could still cover three to six months worth of expenses if you had to.

Beyond Emergencies

We’ve talked about why I don’t like savings accounts, but also why you need to use them anyway for your emergency fund.  We’ll talk through ways to make the most of savings accounts in a bit.

But what about the rest of your money?  Once you have your emergency fund, where should you be putting your savings?

It Depends on When You’re Going to Spend Your Savings

When deciding what to do with your non-emergency savings, the first question you need to answer is, “What’s it for?”  Are you saving money for a down payment on a house in a year or two, or for something more long term?

Unfortunately, finding a place for your money that will earn a higher rate of return than savings accounts will involve taking risk.  And as a general rule, the sooner you actually need the money, the less risk you should take with it.

For example, I usually recommend that most people in their 20s and 30s invest almost all of their retirement savings in the stock market using low cost mutual funds. These are relatively high-risk investments, but they also produce much higher average expected returns every year. If your retirement account were to drop in value by 20%, you might certainly be upset… but since you aren’t going to retire for several more decades, it wouldn’t be catastrophic since you have plenty of time to earn the money back.

However, if you were planning on using your savings to buy a house a year from today, and your savings were to drop in value by 20%, this would be a much bigger deal for you since you’d have much less time to earn the money back.  While long term growth rates in the stock market tend to be good, they can and do fluctuate up and down in the short term.

All of this is a long way of saying:  when deciding what to do with money you’ve saved beyond your emergency fund, the primary thing to consider is when you’re going to spend the money.  The longer you want to keep the money saved, the more risk you can afford to take.

Some Rules of Thumb

Now that we’ve discussed how to think about risk with the money you have saved, consider the following options for your short and longer-term savings.  There are pros and cons to each of these strategies that you should consider before making a decision- if you have any questions about these strategies, shoot me an email.

Short Term Savings (You Expect to Spend the Money in 0 – 2 Years)

For short term savings, you should take as little risk as possible to minimize your risk of loss in the account.  If you’re still up to take some risk, you might consider investing 20% of your short-term savings into stock mutual funds, and the other 80% into bond mutual funds.  This portfolio mix will still fluctuate with the market, but it should offer you a decent expected long run return.

Better yet, you might consider only investing in bond mutual funds and skipping the stock component altogether.  Bond funds still go up and down in value like stocks, but tend to be less volatile in most environments.  A money market mutual fund could also work well, but will offer a lower expected return (in exchange for less volatility).

If you’re looking for places to put your money that don’t pose a substantial threat to drop in value, you could consider a short term individual savings bond or a CD that matures by the time you need to withdraw the money. While rates on these vehicles tend to be relatively low, they are still a safe place to put your savings.  And particularly for 2 year CDs, rates tend to be much better than you’ll get on a savings account.  But, beware:  using either of these investment option, you’re tying your money up for the full term of the bond or CD.  If you buy a 2 year CD, you shouldn’t plan on taking the money out of the CD until the full two years are up.

Finally, particularly if you are looking to use your money in the next few months, you may be stuck keeping your savings in cash.  We’ll talk about ways to improve your returns on these types of funds shortly.

Medium and Long-Term Savings Goals

While any of the short-term strategies I described above could be used for longer term savings goals, I recommend investing your longer-term money into stock and bond mutual funds.  A longer-term CD or individual bond could work for you, but you’ll likely be better off putting your money into the market.

Since stock mutual funds offer more risk and more reward than bond funds, the longer you are looking to invest for, the higher the percentage of your investments should be in stock funds.

For example, if you are looking to buy a house in five years, you might consider investing 50% of your money for this goal into stock mutual funds, and 50% of your money into bond funds.  If you’re looking to invest for your newborn child’s college education, you might invest 80% of your savings into stock mutual funds, and 20% into bond funds.  And if you’re saving for your retirement that’s 35 years away, you might invest 100% of your retirement savings into stocks.

One final note about this, though.  As you get closer and closer to realizing these longer-term goals, you want to make sure that you gradually shift your investments into more conservative positions, all else being equal.  If you want to buy a house five years from now and you decide to invest your savings 50/50 in stocks and bonds, as you get closer to the point in time when you want to buy a house, you should shift your account away from the stock funds and into more bond funds or CDs.

This is All Well and Good, but Where Do I Keep My Cash?

You know the options for where to put your savings beyond your emergency fund, but that still leaves us with the same fundamental problem we had at the beginning.

If savings accounts are terrible, is there another option for where we can keep our emergency fund and maybe even our savings for our short-term savings goals?

The answer is, “sort of”.

Ditch the Traditional Savings Account and Open a High Yield Savings Account

Like just about everything else in our lives, the internet has drastically altered the landscape of personal finance options.  A few decades ago, you would have needed to work with a stockbroker to invest in a stock or mutual fund.  Now, you can open up an account at TD Ameritrade and place a trade on your own with just a few clicks of a button.

The same thing has happened with savings accounts.  A few years ago, you had no other option than to keep your savings with the local branch of a national bank, or maybe a more regional bank or credit union.

No longer.

Over the past decade, several banks have opened high yield savings accounts.  These aren’t banks that you could go to visit in person; instead, they operate 100% online as a way to keep their costs low.  This, in turn, allows them to pay significantly higher interest rates than the traditional savings banks.

Three of my favorite high yield savings accounts are

As of this writing, all three of these banks paid the same interest rate and they have been regularly raising their rates over the past few years.  They also have no monthly fees associated with them, and are FDIC insured.

Best yet, the interest rate on these accounts is literally over 4,000% higher than the interest rate paid on a Bank of America savings account at the time of this writing.

Most savings accounts just aren’t good in today’s interest rate environment.  And even with high yield savings accounts, I still don’t recommend keeping your medium- and long-term savings in one of these accounts.

But, if you’re looking to get a higher return on your emergency fund and even your short-term goal savings, a high yield savings account is the first place I’d start.

Should You and Your Spouse Have the Same Health Insurance Plan?

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It’s the most wonderful time of the year…  health care open enrollment is upon us!

Ok, ok, so picking a health insurance plan isn’t super exciting stuff.  Fair enough.  But, we all know that health insurance is important, and picking a plan is a critical step to protect our finances (and, of course, our health) in the coming year.

For couples, though, making decisions about health insurance is much more complicated.  Should your family have one health insurance policy for both of you, or separate policies?  Before you drop your health insurance plan and add yourself to your spouse’s, let’s discuss a list of things to consider to determine the right steps for your family.

[This article is one of a fourteen part ongoing series about the way managing your money changes when you get married that will be released from November 2017 to February 2018.  But, there’s no need to wait!  Click here to download your free Newlywed Money Checklist, that will walk you through each of the steps to take with your finances when you get married.  Click the link to get it today!]

Your Goal: Get the Best Benefits for the Lowest Cost

At a high level, this doesn’t seem all that complicated.  You want the best health insurance policy you can get at the lowest overall cost.

If your spouse’s company offers much better health insurance than yours, you may want to drop your coverage and get added to your spouse’s plan.  On the other hand, if the coverage of each of your policies is similar, but yours is less expensive, this might be a reason for your spouse to join your policy.

Sometimes, the quality and cost between your plans will be negligible.  It probably isn’t worth the time or effort in these cases to make a change.

But Unfortunately, It’s Not That Simple

When evaluating the cost of a policy, there are a lot of other factors to consider rather than just the premium amount.  You need to sit down with your spouse and really dig into each policy to figure out which one is going to give your family the best benefits at the lowest cost.

There are many factors to review:

Your Expected Medical Expenses

Consider your overall level of health.  Are you the type of person who hasn’t needed to see the doctor in years?  Or, are you regularly working with specialists on a particular health issue?

Take stock of how often you usually have sick visits to the doctor, whether you are working with any specialists, and any prescriptions that you take.

You want to compare coverage of the services that you know you’ll be using under all of your available health insurance plans.  If you have no underlying medical conditions, a High Deductible Health Plan (HDHP) with minimal coverage and low premiums might be a great fit for you.  But, if you make frequent doctor’s visits, you may find that a more comprehensive policy is a much cheaper option for you than a HDHP, even if the monthly premiums are more expensive.  This analysis should be one of the primary factors to consider when choosing between your health insurance plans.

Make Sure You’re Protected in an Emergency

Beyond your expected medical expenses, make sure that you know how much you’ll need to pay in the event of an emergency.  Comprehensive plans often cover most of the cost of emergency care.  Under a HDHP, you’ll likely pay for 100% of the medical cost up to a specified dollar amount.

Review both of your insurance policies to understand how they handle emergency treatment prior to deciding.  While it probably won’t be the basis for your decision, it’s critical to know what’s covered and what’s not.

Understand How Much You’re Expected to Pay When You Visit the Doctor

Different health insurance plans will expect you contribute different amounts toward your health care.  While reviewing your options, you should identify the deductible, copayments, coinsurance, and maximum out of pocket expense for each policy.

  • The deductible of your policy refers to how much you’ll need to pay for your health care before the insurance company starts to “kick in” money. For example, if you have a $1,300 deductible on your policy, you are responsible for paying for the first $1,300 in healthcare expenses this year.  When reviewing healthcare plans, a higher deductible means that you’ll have to pay more for health care before insurance starts to cover your medical expenses.
  • Copayments, or “copays”, are flat-fee dollar amounts that you’ll need to pay when you see a doctor or get a prescription (after you hit the deductible). For example, a sick visit to your doctor might cost you a $20 copay per visit.
  • Coinsurance is another way of calculating your required payment for medical care after you hit your deductible. Rather than paying a flat fee (like the $20 copay example), instead you pay a fixed percentage of your care.  So, a visit to the doctor’s office might cost you 10% of the total visit under a coinsurance model.  Note that under most insurance plans, you’ll have to pay a copay or coinsurance- not both.
  • Finally, health insurance policies have a maximum out of pocket expense. This is the total maximum amount you’ll have to pay for your health care this year.  Once you pay this amount, your insurance company will cover 100% of the remaining cost of care for the rest of the year.

When you review the health insurance options available to you and your spouse, you should review each of these terms in detail when estimating the total cost of the insurance, and choose the option that’s best for you.

Compare Premium Costs

Finally, you should compare the cost of your premiums for the insurance options you have available.  In particular, you should answer the following questions:

  • Do either of your employers pay a portion of your health insurance premium? If so, you’ll lose this benefit if you decide to not use this insurance policy.
  • If either of your policies make you eligible to have an Health Savings Account (HSA), does your employer make contributions to your HSA? If they do, giving up that policy is giving away free money.  It still might make sense to do this if the other policy has better benefits, but it is certainly a factor you’ll want to consider.  We’ll talk more about HSAs in a minute.
  • How do your premiums change when you add a spouse to your policy? In other words, is there a cost difference between a) having both of you on your insurance, b) having both of you on your spouse’s insurance, or c) having separate insurance plans?
Review Coverage Provisions

Picking a health insurance policy for your family needs to be about more than just picking the lowest cost policy.  You’ll also want to review the coverage levels that each insurance offers.  Specifically, consider:

In-Network vs Out-of-Network Providers

Many health insurance plans have a list of doctors and specialists within their network.  If you go a doctor within your health insurance’s network, it will cost you less (via copay or coinsurance) than it would if the doctor is outside of your network.

The implication here:  if you drop your insurance coverage and get added to your spouse’s, you may need to switch doctors if your current doctor isn’t in your new health insurance’s network.  Or at the very least, it might be more expensive to continue seeing your doctor.

For every doctor or specialist you see, you want to make sure that switching health plans won’t put yourself out of network.

Coverage Exclusions

All health insurance policies cover the basics-  preventive care, immunizations, and emergencies.  However, if you have specific health care needs, you want to make sure that your policy actually covers them.

Many health insurance policies have certain conditions that they exclude from coverage.  “Preexisting conditions” were a particular type of exclusion that has been in the news a lot over the past few years; Obamacare eliminated the exclusion for preexisting conditions, but there are other exclusions that are still allowed.  So, you should review your policy options carefully to make sure you can get the coverage you need.

Beyond Costs and Benefits

Costs and benefits are the two primary drivers behind picking a health insurance policy for your family.  However, there are a LOT of other things you might want to take into account before picking your family’s health insurance plan(s).

Review ALL of Your Options

I’ve touched on this in passing a few times, but when you’re deciding whether or not to combine health insurance plans for your family, you really shouldn’t just look at the plans that you and your spouse are currently on.

Take this as an opportunity to review ALL of the insurance plans that your company offers.  While HDHP plans have become increasingly popular over the past several years, some companies still offer more comprehensive (but more expensive) policies that may appeal to you if you go to the doctor a lot.  Review the options at each of your employers, and pick the best plan for you.  Don’t just limit yourself to what you’ve done before.

Do You Want to Use a Health Savings Account?

Health Savings Accounts (HSAs) are savings and investment accounts specifically designed to be used to pay for health care expenses.  You (or your employer) contributes to these accounts, you decide how you’d like to invest the money in the account, and can withdraw the money at any point to cover medical expenses.

There are a few reasons why I highly recommend HSAs for many new families.  First and foremost, they have a lot of tax benefits.  Any money you contribute to the account (up to $6,750 per year for a family, or $3,400 per person in 2017) isn’t counted in your taxable income for this year.  What’s more, the growth of your money in the HSA isn’t taxed, and as long as you spend the money on medical expenses, it isn’t taxed when you spend it, either.

Particularly for families with low medical expenses, HSA’s can be a great way to invest for the future.  By investing the money in your HSA now, you have a source of tax free money in the future when you need to pay for your medical expenses.

But, there’s a catch.  You can only contribute to an HSA if you have a High Deductible Health Plan (HDHP).  So, if you currently have an HDHP and switch to your spouse’s (non-HDHP) plan, you would no longer be eligible to contribute to an HSA.  You’ll still be able to spend the money you’ve already put in your HSA on medical expenses for either you or your spouse… you just won’t be able to add any more.    If you like the flexibility that an HSA provides and like the idea of investing money specifically for future healthcare expenses, you may want to think twice about giving up a HDHP policy.

Other Considerations

Finally, there are a handful of other things to consider when picking a health plan for your family:

  • Job Security- if one of you has a much more secure job than the other, it might not make sense for you to both use the health insurance policy of the spouse with the insecure job.
  • Complexity- Having two health insurance policies means twice as much paperwork to deal with, and two different sets of bills to pay. If you value simplicity in managing your household finances, it might make sense for you to combine.
  • Coverage Gaps- Most health insurance plans start on January 1. But, if either of your plans have a different start date, you want to make sure that you don’t have a gap in coverage if you choose to combine.  For example, let’s say that Bob’s insurance plan starts on January 1, and Amy’s starts on July 1.  If the couple decides they both want to be on Amy’s insurance plan, they will need to make sure that Bob is covered by his insurance plan from January to July.

This is a decision with a lot of factors to consider before making the right decision for your family.  To learn more about other big financial decisions to make once you get married, download our free Newlywed Money Checklist.   Ultimately, evaluate all of the points in this article to weight the pros and cons before making a decision.