The Green Stuff

Money is probably the weirdest stuff on the planet.

People have none of it seem to have to work very hard to make a little, but people who have a lot of it can make a lot more with practically no effort. It irritates the hell out of me that a millionaire can double his money just with some crafty maneuvering of accounts and interest and dividends and all kinds of complicated nonsense. There are people who make money just by having money.

If you somehow acquired one million dollars, you could put it into a savings account and five years later it'd be worth an extra $250,000 from the interest dividends. And this is just a simple savings account you can open online and never have to interact with a human. If you had a few more million dollars you could literally live off of the interest that your bank pays you. Your only occupation would be having that money, and your income would be in exchange for leaving it in a bank.

Savings and investments never really crossed my mind until a few months ago. When my charger thing was in Popular Science I made a lot of money. More money than a 19 (then) year old with no real job who kept dropping out of college should rightly make. I was wise enough at the time to know that me having so much money would be a dangerous thing and that could very easily blow it all on crap that I might want now but in two years will be old news.

So, savings and investments started to cross my mind. First, I wanted to be one of those people who could make money by having money, and secondly I knew from all my high school math classes that the surest way to have a comfortable retirement is to start planning for it as early as possible.

The first thing I did was open a savings account. Through ING Direct I opened an online savings account in about an hour. The experience was very much unlike when I opened a simpler savings account at my neighborhood bank.

Short-Term Savings

A savings account is considered short-term savings because, although you could leave your money in there for a hundred years, you could take it out at any moment.

The key things you need to know about a savings account are:

1. The interest yield (APY)
2. The minimum balance
3. The fees

The interest yield (#1) is how much the bank pays YOU for your money. When you put money in a bank account, the bank is actually using your money to make money for themselves; they're floating it through money market accounts and using it to issue loans to other customers so they can make money from the interest. Because a bank is using your money to make money, they offer an interest yield as a "reward" and to convince you to put more money in your account. You might only be familiar with interest as it applies to you owing someone else money, but for once it can actually be someone owing you money. It's kind of like you're loaning the bank.

Interest will almost always be calculated as APY (annual percentage yield), so it will look like 0.025% to 7% and up. The actual number cited as the APY is calculated with some odd formula that even Wikipedia can't explain to me, but it's basically just that they'll give you that percent of your money each year. So if you have $100 in savings and the APY is 5%, at the end of the year they'll owe you $5, making your balance $105. It gets trickier, because they usually pay you the interest monthly, so they give you what WOULD be 1/12 of your interest if your balance didn't change. In the 5% APY over $100 scenario, they'd pay you about $0.42 per month.

The minimum balance (#2) is how much money you HAVE to have in your account. Banks try to complicate things by having different savings accounts for different amounts of money. Such as, if you put $10,000 in you'll make 3% APY and if you put $100,000 in you'll make 5%. Since you probably don't have either, minimum balance as it applies to us basically means that if your balance falls below the red line they'll fine you. They say this is to help you, as it encourages you to save your money; but basically it's just a way for the bank to make more money. Any way they can encourage you to put more money into their bank is fair game.

The last thing to consider (#3) are fees. Most banks I've encountered will impose a monthly handling fee over your savings account, typically between five and thirteen dollars. In many cases, they'll waive that fee if you keep your balance above a certain point, so the minimum balance can benefit you at points too. Watch out for banks that charge you a fee no matter what, they're double-dipping. In our 5% APY account with $100 in it, if the fee was $5 a month you might make $5 per year in interest but you'd be paying the bank $60 a year for the pleasure of giving them your money. Not cool.

Now, onto practical examples as they apply to me.

Before I was making any money I opened a savings account at my local bank just as a place to set money aside, not with any of intention of pulling any money out of it. if I just let my money stack up in my checking account I'd be tempted to spend it, whereas if I could slide it over to savings it'd be like putting pennies in a jar and writing "motorcycle fund" on it.

At my bank, the only account I qualified for was one with a $50 minimum balance that paid 0.25% APY. Yes, that's one-quarter-of-a-percent interest. If I left $100 in the account for a year, I'd make $0.25. It didn't matter though, for it was just a penny jar to me. Also, they charge $4 if I make more than 5 transactions a month, and if the balance fell below $50 they'd charge $12 a month.

Then once I made all that money, I started shopping around and found ING Direct. Their savings account has no minimum balance, no fees, and a fluctuating APY that goes up or down depending on how the bank itself is doing. When I opened the account, the APY was 3.15%, right now it's 4.35%.

Try to consider the reality of that. My bank was offering me 0.25% (essentially nothing) and ING offers over 4% with no minimums or fees. You can set up your account so you can wire money from a checking account to your ING Savings account. With $10,000 in that savings account, I make over $30 a month just for letting it sit there.

So, as I said, I put the bulk of my money in there. I don't consider this "retirement" money, but more like "whenever I really need it" money. Because it's a savings account I can pull or add money to it whenever possible, which isn't theoretically ideal for long term.

Long-term Savings

For log-term savings, the choices are pretty much an IRA (Individual Retirement Account), which is pretty much ONLY for retirement savings and basically just floats your money on the stock market, or a CD (Certificate of Deposit) which is just like a savings account but with a higher APY because you agree that you won't withdraw your money for a number of years (the longer the CD, the higher the APY); banks LOVE this because it means that they KNOW they can fool around with your money (issue loans, earn from money markets) for a given period of time, whereas with a checking or savings account you could pull your cash out at any minute and they'd be screwed. So, if you open a 6 month CD they might offer 5% APY and if you open a 6 year CD they'd offer 5.5%.

However, CDs are not always as good as it might sound. Banks and bankers always extol the virtues of CD accounts, but only because they work out the best for the bank and not for you. The only thing you get is a bunch of money that you cannot touch for several years. The other problem is that in most cases, the interest doesn't get added to the balance. Most people elect to have their interest disbursement sent to them as a check every month or transferred to their checking account. With a savings account, the interest is added to the balance, so every time you make more money from interest, you're then earning interest off of the interest. Every month, you'll make more money. With a CD, people get the interest themselves so the CD never goes up in value, so it will never earn any more money than it does at day 1.

ING Direct also offers CD accounts. The longest-term account they offer is 60 months (5 years) at 5.25% APY.

Lets say you have an extra $10,000 sitting around that you'd like to turn into more money. With that5 year, 5.25% CD you'd be looking at a situation like this:

At the end of your 5 year untouchable-money period, you've made almost $3,000 for your trouble. Making $3,000 after 5 years isn't really that big of a deal, that's only $50 per month. It wouldn't be that hard to just slip $50 under your mattress each month, and in five years you'd have saved up $3,000 or if you actually needed the money you could always get at it (whereas with a CD it's pretty hard to get the money out should you need it).

So a 5 year CD of $10,000 at 5.25% is basically like earning an extra $50 per month that you don't touch until after 5 years. But what if, instead of waiting 5 years to make $50 a month, you just save $50 a month?

Instead of crippling yourself with a CD, you could just put that $10,000 into a savings account. Sure, a savings account won't have as big of an APY as a CD, but will that matter? My savings account now has a 4.35% APY, so if I put $10,000 into it and every month added another $50 that I saved by maybe not buying so much pointless crap, how would things look in 5 years?

In 5 years I'd have an extra $5,781 on top of my initial $10,000 instead of less than $3,000 if I'd used a CD. By saving money instead of waiting for it to materialize, I'm up over two grand. Better yet, if something came up and I needed that money, I could always pull it out without any penalties or paperwork. If I added $55 per month instead of $50 (what's an extra five bucks?), I'd have $16,117. If I could manage to save $100 a month, I would almost double my money in five years ($19,138).

By turning a short-term savings plan into long-term one, you can come out on top. The main appeal to a CD is its very flaw: you can't touch the money. Some people like that, however. If someone has extra money now and isn't sure if he'll have extra money in five years, he could lock it away in a CD.

A lot of parents do that for their children's education money. If someone's got an 8 year old that's going to need to go to college in 10 years, they might put some money into a 120 month CD so that it'd be worth a little bit more at the end and they know that they won't accidentally spend their kid's college money.

And after all this, which most people probably didn't even read all the way through? I guess if I've learned anything from my adventures with money, it's that banks are always going to try to screw you and that actually saving money is a lot better than waiting for money to magically appear. With my ING account, I have it set up to automatically deduct a few bucks from my checking account every month and put it in savings so I don't have to think about it.

I haven't mentioned actual investments, because they are confusing and risky. I have a small Roth IRA set up now that's worth less than when I opened it 4 months ago, but I'm just going to not think about it and hope that in a few years it'll be worth it. Remember that investing isn't like gambling, it is gambling.

And when your math teacher told you to start saving money as soon as possible, he/she/it wasn't just trying to fluff the powers of math. Monies are like bunnies, put enough of them together and after some time they'll start to reproduce.