Financial Fridays
Financial Fridays 1/9/09: How to save, what to do with IRA CD Rollover
By Bill Jenkins - Countybank
Jan. 09, 2009 at 05:09 PM
The place to start saving is an emergency fund held in a basic savings account. Why is that a good place to start?
Basic savings accounts usually require smaller opening balances; $100 or less. They also allow easy access if you need to get to the money. Once the account is opened, you may be able to have a regular transfer go into the account each pay period from your checking. We don’t spend what we don’t see! Start with a small amount you know you can live without. It’s not the amount that’s important at first, but getting into the savings habit. Once your balance reaches a certain amount, you can look at CDs or Money Market accounts that will pay even more. The other reason we recommend you begin with an emergency fund is that it keeps you from pulling out the credit cards when small emergencies come up – the washer breaks down or we need tires on the car.
How much should you keep in this type of account?
At a minimum, I like to see people have 3 to 6 months living expenses set aside in their emergency fund. We’ve all heard about, know someone or have been directly affected by layoffs in our area. Having that emergency fund available can help you get through tough times by keeping a roof over your head and keeping the lights on while you work through these types of set backs.
Great advice, right? But how do you save money when you’re living paycheck to paycheck with nothing left to save once the bills are paid? That’s a great question. Most of us can find money to save if we know where our money goes. A really powerful tool is to carry a small notebook and jot down everything you spend for a week or two to see how you use your money. Unlike your check register, debit or credit card transactions, a log helps you track your cash. Most of us just don’t have a good handle on what we spend and where we spend it. I’ve actually seen some pretty surprised expressions on people’s faces when they realized how much they spend on eating lunch out, soda in the vending machine, candy bars and snacks, etc.
So, other than just being aware of what we spend, what else can we do to find money to save? Spend smarter. Look for bargains. Become a coupon clipper. Consider two six packs of diet coke for example. You can buy one at the grocery store for $2.99. If you grab a soda form the vending machine at $1.50 a piece, that same six pack is $9. That’s a difference of more than $6. If you drink a six-pack a week, you’ll save more than $24 a month or almost $300 a year! Another trick is to spend greenbacks (folding money) only. Put all your change in a jar at the end of every day, then deposit it monthly into your savings account. Small things like that really do make a difference. Remember too, the sooner you get started the better. Re-think all your spending and re-evaluate your “needs” to see if in fact they are needs.
We did have another specific question from a viewer concerning savings.
“I have a small CD with less than $10,000 that is about to mature. Current interest rates are half of what I’m currently earning. What’s the smartest thing is to do? I was thinking of renewing it for an additional 6 mos to see what rates will do. It’s an IRA so I don’t want to be penalized for withdrawing.”
Without knowing the age of our viewer I’m not sure if they would be penalized for withdrawing the money; but they would definitely have to pay tax on the withdrawal so I certainly wouldn’t recommend withdrawing the money since it doesn’t sound like they “need” the money to get by. The bottom line: CD rates have come down and with the economy still sluggish, they probably won’t go up much over the next 6 months. Unless you’re willing to take more risk by going into the stock market, and perhaps getting a bigger return there, you’re probably doing the right thing to renew the CD for an additional 6 months and re-evaluating the situation then.
Just two cautions: short term rates are low everywhere right now. If you see something way out of line, like ads for 7% APY (Annual Percentage Rate), be very cautious. If it looks too good to be true, it probably is. Secondly, if you decide to enter the market, and there are some great bargains out there right now, but now is not the time to get into the market by yourself. You need the help of professionals, so go where you can get advice and they have a good reputation. And yes, we can help with that if you don’t know anyone.
