Graduate school for the most part is an exercise in counting pennies. We live paycheck to paycheck; there has to be a way around some of the insanity. One thing that I was encouraged to do in graduate school was to use a high-interest savings account. Typically, bank savings accounts have an interest rate of 0.01% because of the amount of overhead they charge. High interest accounts tend to be based online and have a variable interest rate. Most high interest accounts are around 3% right now but do be careful, a lot of them have a required minimum balance to achieve the best rate. Read the fine print.
So how can you manage your savings? A target goal in your savings is 1 month's salary in a very flexible account and 3-6 month's salary in a higher interest, but less accessible account like a money market or a mutual fund. These goals can be reached by a "Pay yourself first" strategy. Most financial advisors recommend saving 10% of your monthly income, but even a small fixed amount like $25 or $50 can help build this habit. The reason I brought up the high interest route is that your money works a little harder for you and you do not sacrifice your access to the money.
If your standard bank checking account requires a savings with a minimum balance, keep this savings account at its minimum balance and leave it alone. Consider it like your security deposit on your apartment. When you close the account, you have that money there. However, keeping it at its minimum helps you avoid the bank fees.
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9 comments:
I totally agree with the pay yourself first idea. I have done that for years. I give myself an allowence every month. I also have money taken out of pay every check which goes to my IRA.
I totally agree with it too, even though when I first heard about it I thought "Where the f&%$ am I supposed to get myself money to pay myself first?" But I do manage to put $25 of each paycheck on my credit card. Its not much, but it makes me feel like I am at least acknowledging and making an attempt at reducing my debt.
I also completely agree. It can be hard to get started, but it's really true that even putting a little bit away can add up over time. Having an emergency fund is SO important.
I think there's two points you make about pay yourself first that are important when you are poor:
1) A high yield account is only useful if you have enough to avoid fees. Fees will rapidly overwhelm any interest you are earning unless you have LOTS of money. Personally as a student, I had help maintaining a minimum balance. My parents gave me the money I needed to have an interest bearing/no fees account ($750) and I put it in the account and then acted like that money wasn't there. (When I closed the account, I had to give them that money back).
2) With regard to savings and debt... you should primarily be saving (pay yourself first) if you only have no debt or "good" debt (student loans/mortgage). If the interest rate on the bank account is less than the interest rate on a credit card or the short term debt you carry, you should pay off the credit card first. Then save.
3) Pay yourself first for me required a separate bank account. So I just bought a house (4 years post PhD). But I wasn't very good at pay yourself first in my regular savings account. I do best when I have a short term savings account (which contains about 1 mo's salary and functions as a cushion against emergency trips home, car break downs, conferences, and the like) and a goal oriented savings account (new car, house downpayment, other major purchases).
4) I agree with psychgirl that the amount doesn't matter. Just the habit. With life circumstance the amount will change but the habit will keep it all going up.
All that is true, but I'd add that some of the newer online-only banks have really low minimum balances. Mine has a no-minimum IRA if you agree to the automatic investment plan, but even without that, the minimum is only $250. It also offers a savings account that pays more than regular banks with just $250 to start (I think).
Some online banks like ING Direct do not have fees or minimums. Just a thought.
I have ING. It's easy and free, and while it's simple to transfer money back to my regular checking account, having it in a separate bank earning interest makes me less likely to touch it.
However since the fed cut interest rates, the rate has dropped to around 3% and I don't get much interest these days -- about $2 per month. The main benefit is that I don't spend it.
I'll add this: If you have to take out student loans, see if you can work it out so that you can put the bulk of them in short-term CDs - they tend to have better interest rates than savings accounts. Of course, the long-term type have even better rates, but it can make a difference.
Okay, this too: I despise credit card debt. I didn't want to take out student loans, but I decided that it was better than credit card debt. I take out the max for subsidized loans (no interest until payment time) and use just what I need. The rest goes into interest bearing ventures. If I pay the remainder of those funds back before the interest kicks in, it shouldn't hurt as much in the long run. It takes some self-control, but I like to think of it as an emergency fund. And, by paying off my credit cards every month I have them available if I have a really serious emergency and need them.
Oh, another thing. If you have trouble keeping track of how much you spend when you use a credit card, just use cash or a debit card. Having said that, I actually use my card for everything I can because I get rewards in the form of either cash back or gift cards for various retailers. These really come in handy when I have to buy a baby gift or a birthday gift or whatever.
A Penny Saved is worth more than a penny earned due to taxes.
When my wife and I were in grad school, we had an emergency fund in a Roth IRA. We did not have enough savings for both an emergency fund and a Roth. The great thing about a Roth is that the contributions can be taken out at any time for any reason with no tax and no penalties. However, if you do not contribute in a given year, you do not get to contribute anything for that year. A Roth can be set up at most banks and it can be liquid. Yes, you do lose out on the greater rate of return from stocks and bonds. But the trade off is that we got to fund both the Roth and our emergency fund. We were fortunate and never needed to raid the emergency fund. Another benefit of funding a Roth as an emergency fund if you can not afford both is that the money in a Roth can also be pulled out penalty and tax free for the down payment of a first home.
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