Right now with all that is going on in the world it may not be a good time to talk about money, or is it the best time? People are losing their jobs left and right, our entire economic system is in a disastrous downturn, Disneyland’s closed, and life as you know it will never be the same again! But some things will always remain the same, such as our mindset towards money. For some reason it’s always seen as inappropriate to talk about money, or if people do it’s always about the stock market and “diversified portfolios” because it sounds sexy. Talking about paying off debts, creating automatic savings plans however is not.
Managing money isn’t fun, usually reviewing our spending and trying to manage our finances we end up crying with our head in our palms. It’s not the fact that money is an issue, it’s where the money is going and being spent on that is. There’s tons and tons of information out there that tell you how to manage your finances, some good, some bad. But if you have too much information you’re likely to do nothing, such is the case of most Americans.
I’ve always believed that there is a first step towards everything and money is no different. You can either continue to cry with your face in your palms or learn the bare basics of money.
Listed below are 3 basic accounts that I believe every young working person should have regardless of whether they make $30K or $130K (yes people who make over $100K need help managing money too believe it or not)
First is a checking account. A checking account is where you can deposit, and withdraw your money, comes with a debit card you can use at most any ATM. Most people reading this probably already having a checking account and are pretty familiar with how it works. Most use it pay their bills and make everyday purchase using their debit card.
A checking account can have some hidden fees though. Like a monthly maintenance fee, you shouldn’t have to pay a freakin’ bank to keep your money. Banks will try and tell you they’ll waive this fee if you keep a monthly minimum in your account. For example you have to keep a minimum of 100 bucks in your checking account to have the $5 monthly maintenance fee waived. No! That 100 bucks just sitting in your checking account can be earning you interest in high yield savings account or a retirement account, which we’ll get into later.
Check with your bank to see if you’re paying a monthly maintenance fee simply by logging into your checking account and reviewing your statement for the last month. Another much better way to have this fee waived is to set up a direct deposit. Direct Deposit is when your job sends your paycheck directly to your bank, I’m sure most of you already have this set up. If not please step into 2020, you’re paying ridiculous check cashing fees.
Another way checking accounts get you with fees is through debit cards, most ATM charge you a $3 fee to take our your money, then your bank charges you an additional $3 fee for using your money. This means a $40 withdrawal can cost $46 after fees, you can avoid this by using an ATM associated with your bank.
Another account you should have by now is a savings account. Savings account is similar to your checking, it lets you deposit/withdraw money. But it doesn’t come with a debit card and usually has monthly withdrawal limits to discourage you from taking money out. You don’t pay your bills or make daily purchases through your savings account. This account is usually for short term goals (1 month to 3 years) or to hold emergency funds.
Most of you that have a checking account probably have a savings account with the same bank. In my opinion that’s not a good idea and here’s why.
Most big banks attach your checking and savings together making transfers extremely easy. You want to save the money not consistently be taking it out. Having a savings account at another financial institution takes about 3-5 business days to transfer, which is good!
Also savings account at your neighborhood bank might be charging you monthly maintenance fees, in which case you’re losing money. Banks charge you to save your money that they lend out, does that sound fair to you? No! They should be paying you to keep YOUR money at their bank. Which brings us to our next reason.
You probably heard of a little thing called interest rates in savings accounts. This is the money that banks pay you to keep your money, now that makes sense right? It’s not a whole lot but it’s better than paying them anything. Big banks saving accounts interest rates are horrible, usually 0% or you have to have some sort of minimum before you can start earning interest.
There are a number of online savings account that offer much better interest rates from 1 to 1.5%. Let’s say you deposit 150 in a savings account that earns 1% in January and you contribute $50 dollars a month after that, by December you will have about $755. (Figures taken from https://www.nerdwallet.com/blog/banking/savings-calculator/) Run your own numbers.
Let’s take that same example but this time but it in a big bank savings account that charges you $3 monthly maintenance fee and no interest, you’ll have $664 after 1 year. You LOST money that you were trying to save. Look into opening a high interest online savings account, one of my favorite is Ally. They are trustworthy, offer 24/7 customer support, and have an extremely easy website to navigate and offer 1% interest on their savings account. https://www.ally.com/bank/online-savings-account/
The final account I believe every young person should have is a retirement account. A retirement account is just what it says it is, an account for your retirement, which is about age 59 and a half years old.
Unlike your savings account which earns you less in returns and is used for short term goals, your retirement account is for a much longer term (typically 30 years) and can earn you significantly more than your savings. In the past it may have been possible to get away using your savings account as retirement but in today’s world forget about it. If you don’t want to be greeting customers wearing a blue vest every morning at age 64 then I suggest opening a retirement account.
The most common type of retirement account is the 401K which is offered through your employer. You contribute money which is automatically taken from your check and invested in a 401K account. This money grows over time with the stock market and by the type you retire you’ll be able to sip margaritas on the beach in Mexico (if this quarantine ever ends!!!!)
Talk to employer and ask if they offer 401K, if they do great! Open it one up, it’s easy! Ask an HR rep to walk you through the steps, choose how much you want to contribute, the money will be taken out of your check automatically so you won’t miss it and be placed in your 401K account. The cool thing about 401K is that most companies match, meaning if you contribute $1000 a year to your 401K so does your employer! Only catch is that you cannot withdraw the money until your 59 and a half years old. They do offer loans or early withdrawal options, but those are a bad idea, they come with huge penalties and taxes.
If you want more information on a 401K how it works, how to open one up send me a message. There is much more to the way it works, such as what funds to invest in, the tax advantages it offers and much more. And if your employer doesn’t offer a 401K plan don’t fret, there are plenty of other retirement accounts to choose from, more on those later.
It’s all right if you don’t have a retirement account yet, but it is important to set up on soon. This is the first step towards beginning to manage your money. You now know if you’re paying any fees on your checking account and if you are you’ll have them waived with direct deposit. You now have a high interest savings that offers 1% interest on your savings, and you now have a 401K account open with your employer. Congratulations.
-Sumit Singh Randhawa