Tag Archives: high yield checking

Personal Finance 101 – Banks vs. Credit Unions

When the time comes to open a savings or checking account, most people don’t realize the impact of their decision, or the number of options they have in the process.  While most people will go to the bank that their parents patronized to open their accounts, there are many better options out there,  and often there is quite a bit to be gained from joining a credit union  over patronizing the bank.

Go back and read that last line again. Notice the difference in wording?  This is a very important difference, because when you are part of a credit union, you own part of the nonprofit entity, whereas with a bank, you are paying them to provide you with a service. Don’t believe me? Call up your local Wells Fargo, Chase, or Bank of America branch and ask them what the interest rate on their free checking accounts are.  The answer is easy: It’s 0.00%. When they offer interest, it’s normally with an average daily balance of $5,000 or more. Contrast this with a credit union, and it’s easy to find free interest checking accounts with a rate of 0.5%  up to 4% .

On the flip side, look at loan rates. You’ll often find better interest rates at your credit union than you would at a bank, including single-digit interest rates on your credit cards, as well as car loan rates  under half of what you could find at a dealership (depending on credit).  By combining these two, you’ll save more in the long run, earning interest on your deposits, and pay lower rates on the money you borrow.

Bank

Credit Union

Ownership

Stockholders

Members of the community

Interest on Checking

0.00% (some rare exceptions)

0.1%-4.0% (Varies by area)

Credit Cards

Retail Rates, Up to 29.99%

Average between 8-17%
Auto Loans

As low as 3.59%

As low as 2.79%

 

As you can see above, credit unions win out on the major categories for financial services.  One place where banks can have an edge, however is nationwide availability. It’s quite easy to find Wells Fargo branded ATMs on the east and west coast, and while you can use the ATM, you usually will be charged a fee by its operator. As a result, many credit unions will offer ATM fee refunds when you meet the qualifications for their interest checking (normally 10-15 debit card transactions, electronic statements, and direct deposit each month), making them a bit more appealing at the end of the month.

Overall, moving your finances to a credit union is one that makes sense for your wallet. You can even find some that have less-frequently seen features like free coin counting, and even student loans at better interest rates than you might see elsewhere.

Until next time, go find an interest rate you can sink your teeth into!

Revisiting the Rattlesnake

When discussing the different personal finance animals, we took quite a harsh stance on the rattlesnake. Looking back, I thought it would be a good idea to discuss them a bit more, and explain why there is such a harsh attitude.  There are some good points to the rattlesnakes. The fact that they carry very little debt, if any is certainly a great quality, and something many people strive for in their personal finance goals.  The biggest issue is that they leave too much on the table for their own good.  Below is a side-by-side comparison of the tiger and the rattlesnake, and their financial decisions:

  Tiger Rattlesnake
Interest Rate – Savings/Checking 1.5% 0.0%
Real Compounded Average Investment Return (Tiger – Stocks, Rattlesnake – Gold) 1980-2010 7.7% annually 0.3% annually
Value of spending rewards 1.75% 0.0%

 

The worst part of this is how much money the Rattlesnake loses to inflation.  Notice in the second line of the table, we’re using Real Compounded Average Investment Return. This means that, after adjusting for inflation over the time period, this is the growth of the investment.  In the meantime, over a 10 year period, the Tiger has seen his investment grow to more than double in terms of real value, while the rattlesnake would have been better off keeping his money in Treasury Inflation protected securities (TIPS) that provide a protection from inflation a small premium (normally ½ of 1%, or 500 basis points).

The most important thing to take away from this is that the rattlesnake doesn’t just hole up in his house every day and skip work from fear that he’s going to get hit by a bus, but he does that exact thing with his money.  If the rattle snake sent his money to work, it would mean that soon he would be able to be the one that stays home.

Understanding Cash Flow, or How to Make (a Little) More Money From What You Already Have.

Pop Quiz, Hot Shot.

You have the following credit cards/checking accounts with the following attributes:

Card 1: 24.99% APR, 30-day grace period, $500 limit, No balance, 1.5% Cash back on purchases, accepts balance transfers; no cash back on balance transfers

Card 2: 19.99% APR, 30-day grace period, $900 limit, Current balance of $300 (accruing interest), does not accept balance transfers

Card 3:  10.5% APR, 15-day grace period, $1500 limit, current balance of $900(accruing interest), accepts balance transfers, balance transfer rate is 13.5%, with grace period

Checking account:  2.53% APY, Calculated on the average daily balance of the account

How do you optimize your monthly cash flow over several months with an income of X dollars per month, paid in 2 equal installments of X/2 over the course of each month, when you have monthly expenses of  .75(X)?

You might be thinking, “Whoa, now. The SAT’s were a few years ago, this is awfully complex. Why would I need all this math?”
The answer of course is to maximize the resources you have. A 1.5% discount on your spending might not seem like much, but it’ll make for a nice start when you’re looking to save up.

Basically, this question is about being able to understand and allocate resources in an efficient manner. So, how do you solve this problem?

  1. Balances from Card 2 should be transferred to Card 3, and paid off on the last day of the grace period.
  2. Monthly expenses should be put on the Card 1 to earn cash back,  and then transferred to Card 3 at the end of the grace period (to avoid interest and allow for an extra 15 days grace period),
  3. The existing balances should be paid off at a rate of .25(X) per month, to minimize interest.
  4. (Optional) Call Card 1’s issuer and ask for a limit increase,
  5. After balances are paid off, you should be earning  1.0253(1/12) * (1.5 X + .26125(X*N-1) + (previous months’ interest))  each month, since you now are able to keep  your cash for ~45 days (1.5 months), and thanks to the cash back, you are spending 73.875% of your income on expenses instead of  75%. N represents the number of months since all cards were paid off. Card 2 would be kept open and paid off, both for emergencies, and to lower your utilization.

Right about now, most people are thinking, “What the What? I don’t even…”
Here’s a breakdown of what we did, step-by-step:

  1. Moved the high interest debt to a lower cost opportunity, including 15 days interest-free.
  2. Change the spending habit to put the monthly expenses on a card that gets cash back. This has the net effect of either lowering the amount you pay for things, meaning instead of spending $75 of every hundred dollars, you’re spending $73.875.
  3. Now, we’re aggressively attacking debt, meaning debt will get paid off in the shortest time frame possible with our available resources.
  4. With a low-limit card, a bit more breathing room will make sure you can afford to put as many of your expenses as possible on the card and earn cash back.
  5. This step is a projected balance for few months down the road, but here’s what’s going on:
    1. Your monthly account interest is 1/12 of 2.53% Annual Percentage Yield, so to get that, we use the compound interest formula of 1 + interest rate ^(period).
    2. We multiply our monthly account interest by the balance in the account, which is the sum of
      1.                                                                i.      1.5X – Three Bi-weekly paychecks (45 days)
      2.                                                              ii.      .26125(X*N-1) – Your Monthly Savings Rate (100-73.875=26.125) times the total number of months (N)  since you paid off your credit card debt, minus 1 (which is included in the three bi-weekly paychecks.
      3.                                                             iii.      The sum of the interest paid to you for the last N-1 months.

All of this is a very powerful system. Now, instead of paying around $30 in interest each month, you’re getting $15 from the credit card company, usually applied to the balance of your purchases. Depending on the card, your own spending habits, and the offers available you could end up with double or even triple that amount. The key to all of this is ensuring you keep your credit cards paid off each billing cycle. By doing this, you’re holding on to your money as long as possible, being paid by companies for the privilege to loan you money interest-free, and earning interest.

Until next time, eat a little more debt.