Table of Contents
| Introduction | |
| Pt. 1 | Safe Stashing for Your First $50 | 1 |
| 1 | Institutional Cookie Jars: Banks | 3 |
| 2 | Credit Unions | 12 |
| 3 | Uncle Sam and Savings Bonds | 15 |
| Pt. 2 | The First $500 | 19 |
| 4 | Interest-Paying Checking Accounts | 21 |
| 5 | Money Market Mutual Funds | 24 |
| 6 | Bank Money Market Deposit Accounts | 32 |
| 7 | Certificates of Deposit | 36 |
| 8 | Mini-Investor Programs | 41 |
| 9 | Investment Clubs | 49 |
| Pt. 3 | The First $1,000 | 53 |
| 10 | Your IRA, Keogh, or SEP | 55 |
| 11 | Your 401(k) Plan | 65 |
| 12 | Utilities and Hometown Companies | 68 |
| Pt. 4 | The First $2,000 | 73 |
| 13 | Mutual Funds for Stocks and Ginnie Maes | 75 |
| 14 | Socially Conscious Mutual Funds | 87 |
| 15 | Treasuries for Ultrasafe Income | 90 |
| Pt. 5 | When You Have $5,000 | 99 |
| 16 | Bonds: Corporates, Munis, and Zeros | 101 |
| 17 | A Stock Portfolio for Beginners | 116 |
| App. A | Using Your Computer | 131 |
| App. B | Seven Steps Toward College Tuition | 133 |
| App. C | Nine Easy/Painless Ways to Save | 136 |
| Index | 139 |
Read an Excerpt
Part OneSafe Stashing for Your First $50
Institutional Cookie Jars: Banks
In your great-grandmother's day, the family savings were often tucked away in a cookie jar, stuffed under the mattress, or hidden in a deep hole behind the back porch. People who lost money when many of the banks closed their doors in 1929, put their faith and their money in the land, just as Scarlett O'Hara's daddy advised.
Yet for most of us, a savings account at the local bank still seems the most logical holding spot for that first $50. But not necessarily. Let's take a look at what your bank will do with your $50 and what other options you have.
Selecting a BankNot all banks treat all customers equally. So, don't make a mad dash to the first bank on your corner. It pays to shop around, even with only $50 burning a hole in your pocket. Eventually you will become a larger depositor and will need to use the bank for other reasons--a loan, a mortgage, or a checking account. Some banks offer estate planning, courses in financial planning, mutual funds, computerized investing--all services you may want later on.
Since most Americans are always in a hurry, the single most common factor in deciding where to bank is, of course, location. Yet, your nearest bank is not necessarily the right choice for you. Before opening a savings account, check out your neighborhood bank, by all means, but also make personal visits to several others. At each one make an appointment with the person in charge of new accounts. Describe your financial needs; see what he suggests. Don't worry about the quality of the wall-to-wall carpeting or the abundance of freshflowers. Decor is, of course, not the issue. But other things certainly are.
Check to see:
- What the minimum deposit requirement is for a savings account
- If all types of services are offered
- How well rush hour traffic is handled
- If there are express lines
- If there are branches near both where you live and where you work
- If there are bank officers available to answer questions, or if you are likely to be sent scurrying from one desk to another in a Kafkalike circle
- If there is written material available on interest rates and service charges--material that you can actually understand
- Then, compare fees and interest rates of all the banks you visit
And, check out credit unions.
Credit unions emerged in this country in the early 1900s to help those working class people who didn't qualify for loans from commercial banks. The members of a credit union pooled their money and made low-interest loans to one another. Today credit unions serve those people with a common bond (See Chapter 2 for more on these institutions). Although banks are free to pay whatever rate they choose, as of late 1992 they were paying 2.5 to 3.5 percent on savings accounts. Credit unions were paying around 4 percent.
The stated rate, however, is only the tip of the iceberg. It is also important to know exactly how often the interest will be paid, because every time your account is credited with interest, you will have that much more money to calculate on the next time interest is paid. In other words, the more frequently interest is compounded, the more money you will earn.
So, open your account at a bank where interest is compounded daily; it will provide a better return than if interest is compounded quarterly.
Passbook and Savings Accounts If you have a small amount to invest, you'll obviously need to begin with a bank that will accept your deposit. In a small-town bank it may be only $5, while a larger bank may require $100 or more.
Historically, banks offered two types of savings accounts: passbook accounts and monthly statement accounts. Although many have done away with the passbook type, there are still plenty around. Savers receive a thin booklet in which the bank records all deposits, withdrawals, and interest payments after each transaction. You take the book to the bank each time you put in or take out money. With a statement account you do not have a booklet. Instead you receive a printed monthly statement detailing all transactions. Its advantage: You do not have to worry about losing your passbook.
Most banks have either a passbook or a statement type account and do not give you a choice. Some, however, have both, paying slightly different interest rates on each. Be certain to ask if the bank offers both and what the rates are on each.
Fees In many banks, if your balance falls below a certain amount, you will be assessed a monthly charge or you will lose interest, or possibly both. For example, a bank may require a $500 minimum to open a statement savings account, on which it will pay 3.5 percent, but if your balance falls below $500, a monthly fee of $1.50 is slapped on. So you could actually lose money because of the monthly charge! Or the bank may have a passbook savings account, available for as little as $5, but it pays only 2.5 percent. Check these details carefully when selecting a bank for your first $50. And remember, if your account is inactive, meaning you have not made a deposit or withdrawal during a certain time period, banks typically charge a small monthly fee.
Yield Banks often advertise two figures: the annual interest rate and the effective yield. The difference between the two comes from how often interest is credited to your balance, thus increasing the principal on which interest is paid. A 3 percent interest rate has an effective annual yield of 3 percent if the interest is credited annually. If it is credited quarterly, the effective yield is 3.094 percent, and if interest is credited monthly, the effective yield is 3.116 percent.
Bank Savings Account For Whom
- Small savers
- Those with less than $500
Where to Open - Bank
- Savings and loan association
Fees and Minimum Balance - No opening fee
- Monthly fees vary if balance drops below certain level
Safety Factor- High
- Deposits insured up to $100,000 at all FDIC (Federal Deposit Insurance Corporation) insured institutions Advantages
- Safety
- Geographically accessible
- Withdrawal upon demand, aka "liquidity"
- Principal is guaranteed up to $100,000 by federally backed insurance corporation if bank is FDIC insured
- When account is sizeable, it can often be used as collateral for a loan
Disadvantages - Interest rate is low and fixed
- Checks cannot be written against the account
- Monthly fees on low balances may mean you will lose money
Coupon ClubsIt's certainly gimmicky, but if it helps you save, then give the bank coupon club a try.
The coupon club is the generic name for a myriad of programs devised by banks to attract business. These include Christmas clubs, Hanukkah clubs, vacation clubs, and so forth. They are also offered by many savings and loan associations and credit unions.
If you decide to join one, each week or month, depending upon the club, you will make a specified deposit or payment, enclosing a coupon with your money. At the end of a stated period, usually a year, your coupons will all be gone and your account full of money. In some clubs you cannot withdraw your money until the stated period is over.
Couponless Plans In some banks, you can sign up for automatic savings deposit plans if you make the arrangements. You designate the monthly amount you want to save, let's say $35. This amount is then automatically taken out of your checking account and deposited into your savings account where it will earn interest. The record of your transaction is then attached to your regular checking account statement.
Coupon Clubs For Whom - Undisciplined savers
- People with large families who have to buy lots of holiday gifts
- Those who like tearing along perforated lines
Fee Safety Advantages Disadvantages - Some clubs pay low interest or no interest at all
- Some pay interest only if you complete the full term of the club
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