Shades of Doubt
Posted on August 6, 2005 18 Comments
I started writing this article on the subject of money markets. I wrote two paragraphs before stopping cold.
Planning to invest in a money market when my savings account hits $5,000, I intended to write a joyus summary article to define money markets, outline my reasons for choosing this option and provide sample rates and vendors. Excited about my prospects and happy to identifiy a means of investing, I pulled out my trusty Suze Ormon library and jumped on the Internet (insert Six Million Dollar Man musical interlude here…).
I began my research on the subject of inflation. The purpose of investing with some risk (beyond a traditional savings account) is to ensure your money keeps up with, or bests, the rate of inflation. The national inflation rate has historically reached lows of nearly zero percent and highs of 23 percent, according to investorguide.com.
If those numbers make you cry, they should – can you imagine if Louis Vuitton purses suddenly cost 23 percent more (gasp!)? Thankfully, the Fed ( a system of 12 US banks that regulate the nation’s money supply) actively seeks to maintain a regular inflation rate between two and three percent per year.
How does inflation relate to your cash? Basically, you need your investments to earn more than three percent, or else you’re actually loosing money due to inflation (because as the value of EVERY dollar goes down by three percent, so does your savings). Needless to say, my savings account ain’t doin’ it for me.
All this brings me back to money markets – which are basically just a type of low-risk investment option. According to Suze Ormon, money markets are mutual funds that “invest in liquid, safe debt instruments, such as short-term Treasuries. Money-market funds offer investors access to their money along with higher interest rates than are available from passbook or checking accounts – and, in many cases, at a cost that’s far less than the monthly expense of a checking account (Ask Suze…About Mutual Funds and Annuities, p. 77).
I thought I could easily find a money market fund at Washington Mutual with a return rate between three and four percent (my savings account only earns .90 percent – a whopping 20 dollars so far in 2005). But after looking on wamu.com, I don’t even think the bank offers money markets.
That shouldn’t be a deterent, though. I like WaMu, but I’m certainly not tied to it. I tried looking elsewhere, shopping around at bankrate.com, only to find more disappointment. The highest money market rate I could find in my area was just above three percent. Feeling deflated, I thought to myself, “do I even know why I’m so set on money markets?” Beyond the fact that several readers posted advice here on the subject, and that I had an investment-savvy great aunt who seemed fine with them, money markets just seemed like a good idea. Heck, it’s an investment that lets you take out money when you need it. What more did I need to know?
Plenty, it turns out. Bankrate mentioned to look into fees, which can get pretty steep. WaMu’s risk assesor tagged me as a “moderate” investor, rather than low-risk, after I realized that loosing a few hundred bucks wouldn’t kill me if my investment didn’t pan out. Suze Ormon mentions that these funds are best for “emergecy” savings, and notes most are not FDIC insured.
At this point, my head was spinning… should I look into other options? Stocks, bonds and mutual funds, oh my! Too much information for me to possibly ingest in one sitting. And enough to make me second guess myself.
After all this confusion, I’ve added a few new words to my investing glossary but certainly have not plotted out a path. My next step. I believe, is to consult a professional. WaMu offers an investment service for free, and I think it’s best to hear an expert’s opinion anyway. I’m always afraid investment professionals are going to laugh at my small savings and shoo me away at the door, but since I’m already a paying customer I hope they’ll be nice to me.
At the meeting, I expect to share some personal goals and explore investment options. I probably won’t committ to anything right away, but at least I’ll have a second opinion.
Wouldn’t it be really funny if I ended up with a money market fund? Then this whole article will be for naught. Ah, well. At least I’ll have learned something in the process.
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August 7th, 2005 @ 2:04 am
I think Wamu is one of the better banks out there, but have you considered a credit union? I believe you’ll find that they offer more competitive rates because they are a non-profit organization. All the profit that they make comes back to you as a member as better rates and lower fees. I converted a few years ago and based on the outstanding service and highest rates, I’ll never use a bank again. And the online banking with my CU is GREAT. Anyway, just thought I’d mention it.
Hazzard
Everybody Loves Your Money
August 7th, 2005 @ 3:00 am
I don’t know that money market accounts are paying too much these days. I have a brokerage account at eTrade and they only pay 2% for an account with $5k to $50k. If you want to go a little riskier, you might want to consider looking into an index fund. Otherwise, I’d check out ingdirect.com. I’ve switched my savings from WaMu to them because they pay 3.15% on any plain old savings account.
August 7th, 2005 @ 5:47 am
I’m in the same boat, currently looking at moving some $$ from an Everbank savings account [2.76%] to either ingdirect.com or emigrantdirect.com [3.5%]. I’ll get around to it [between naps] one of these days.
August 7th, 2005 @ 2:02 pm
ING Direct is now offering 3.15% on savings; no minimums and no fees. They are supremely easy to use and you can have access to your money right away. I think the transfer time is two days.
If anyone wants to open an account I can send you a link that will give you $25. I’ve had an ING account for about four years and have been very pleased with the company.
August 7th, 2005 @ 3:30 pm
If those $5,000 will be money that you will not need for a while, try a CD.
CDs can be broken up. You can take the money out with a slight penalty (around six months to one year of interest). Usually you do not break them up and you keep the money.
However, if you want to be ahead of inflation AND taxes, you better look into something more aggressive. An Index fund is a great idea. Vanguard 500 is what I use.
Money and Investing
August 7th, 2005 @ 6:31 pm
The good news is…mm rates are low as is inflation, depending on what you are buying. The bite is when mm rates are 12% plus and inflation is going to the moon. Good Luck! Steve
August 8th, 2005 @ 12:59 am
One note on a bit of confusing terminology. There are two types of accounts that are called “money market”. One is a “money market account”. This is basically the higher rate savings account that you can find at most banks.
The other type is a “money market mutual fund”. These are usually offered through companies like Fidelity, and Vanguard. They keep the NAV at $1 per share and you can write checks from it (but with usually with a minimum amount, like $100 or $250). There are also various tax-advantaged MMMFs, depending on which state you live in.
For liquid assets, I much prefer the MMMFs. Good luck with your decision.
August 8th, 2005 @ 3:38 am
You didn’t really specify what you’re planning to use these funds for, but if you’re really concerned about inflationary effects, the best solution is a Treasury Inflaction Protected Securities. These are US bonds where the interest payment is adjusted for any changes in the inflation rate. The “nominal” return tends to be less than other investments, although with TIPS, you’re “real” return is fixed and your intial investment is protected, regardless of inflation.
Alternatively, I’d suggest a CD ladder where a portion of the principle is maturing every 6 months, (or whatever duration you want). Unfortunately, if you think you’ll need access to the money at a moments notice, its hard to find investments that regularly outpace inflation.
August 8th, 2005 @ 2:08 pm
I second wubert’s comment about emigrant-direct. They pay 3.5% with no minimums, so you can have $10 or $25,000, and you will earn 3.5% on your balance. They are also very convienct, I have them hooked to two different checking account so I can transfer money around very easily. You can also set up direct deposit to an emigrant direct savings account.
There’s also I-bonds. They are slightly less liquid, but currently pay a variable 4.8%, and the interest earned is not subject to Federal income taxes (although you will likely have to pay state income taxes).
erin
Savvy Saver
August 8th, 2005 @ 5:15 pm
Thanks, yet again, for your helpful insights.
I plan to start looking up credit unions, index funds and ING direct.
Where would I be w/out all of you? At the very least, I’m happy we can shed our taboos regarding monetary discussions online. I certainly feel that I have a “community of support” here. Maybe one day I’ll be knowledgeable enough to return the favor on your sites.
(Who needs investment clubs when blogs come in so handy?)
August 8th, 2005 @ 6:39 pm
I personally use ING Direct and their rate keeps increasing every couple of months because of increased competition from Emigrant Direct. I try to deposit anywhere from $400-600 into the ING account a month and keeping only a minimum amount in my WaMu account.
Good luck!
Terry
August 9th, 2005 @ 2:04 am
I have my clients use ING Direct instead of money market accounts. And to beat that, a laddered T-Bill portfolio that you can set up yourself at Treasury Direct is a good way to get a good return and stay liquid.
http://www.treasurydirect.gov/indiv/indiv.htm
The minimum increment of $1,000 is all you need. And, there’s no fee! You have to complete an application and mail it in, but after that it’s all done online with transactions going in and out of your checking just like the online banks.
Here’s how to build your personal ladder if you start with $5,000.
Every month buy a 6-month T-Bill until you have the five working for you. Eventually you’ll be able to add another one for a complete set of 6 with one coming due every month. As you see that you are not needing that money you can extend it to a 1-year T-Bill rotation with one coming due every three months.
Current 6-mo T-Bill rate – 3.68%
This is how the big bond funds do it.
August 9th, 2005 @ 2:06 am
Almost forgot my link:
Uncle Jack
Have fun.
August 10th, 2005 @ 1:16 am
All the excitement re: ING and Emigrant has basically been due to no minimum, rates higher than most MMs right now, and FDIC insured
If you don’t need it all very liquid, ING has some decent CD rates, so much like the T-bill ladder Uncle Jack suggests, you could build a CD ladder (ING may not have the best rates, but they look pretty good to me) so that your money isn’t terribly tied up.
Good luck sorting it all out
August 10th, 2005 @ 12:56 pm
Please reconsider any thoughts that inflation is “low”. I live near Chicago and I am sure your food and energy costs have gone up just like mine. If the government tells you inflation is low . . . which they do via their CPI (Consumer Price Index) . . . they are lying. That number is so manipulated, it’s not even funny.
Please read this article about the truth of inflation: http://www.financialsense.com/stormwatch/2005/0624.html
August 10th, 2005 @ 11:58 pm
ING was definitely the first when it came to high-yield savings (not mm), but I think they might have to get a bit more competitive when it comes to getting new customers. Emigrant has consistently offered a rate 25bp higher (35 now), and now HSBC (3.25) and CapitalOne (3.45) offer higher rates. ING has the best interface, and most options for moving money around (to CDs, other investment vehicles), but for the emergency fund, a high rate and 3-day access is really all you need.
August 11th, 2005 @ 10:50 pm
Also, with ING, if you use Microsoft Money to manage your finances, I’ve noticed that when I download new statements, I will usually get a shortcut on my desktop to get $50 (instead of the $25 when you’re referred by a friend–which kinda stinks, as that’s the way I got in to begin)…anyhow, I’ve found ING to be simple and they have supremely competitive rates, especially since it’s just a savings account.
August 11th, 2005 @ 11:54 pm
Details of the ING / MS Money offer can be found at…
http://newagepf.blogspot.com/2005/07/get-16-off-your-sprint-pcs-bill-with.html
(along with some info about saving if you use SprintPCS and have ING). I’m not sure if the newagepf guy gets something out of it for the code he provides, or if it’s a non-referrer type code.
$50 up front sure beats Emigrant’s rate (assuming the spread stays the same), unless you’re deposting more than ~$14.3k.