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Multiple Online Savings Accounts

Did you know that you can have multiple savings accounts? Many people here the acronym FDIC and think that this insurance locks you into one account or at least bank. The truth is that each person is federal insured up to $100,000 per financial institution. For example, let say you (individually) have $30,000 CD, a $50,000 CD, a $25,000 savings account, and a $5,000 checking account all with the same bank. $10,000 of those holdings is uninsured by the FDIC. Totally you have $110,000 with that institution. You should look to move $10,000 of that money to another institution.

If you have too much liquid money, you must diverse your use of banks, this is the only absolute. Of course, if you had that much money, I would say go for mid to long range investments instead. Let's face it; the scenario of having too much money does not hit most if any of us. So, why should you move your money between multiple banks:

1. It makes you feel like you have less money and it curbs spending.

Imagine you had $10,000 in a savings account or what if you had twenty $500 savings accounts. If you had the $500 accounts, would you buy that $1,000 item? I know this is a ridiculous example, but if you are an impulsive spending freak like me, you will appreciate this example. It's also the reason I have not made a large unplanned purchase in the last 4 years.

2. It helps you develop accounts for specific purposes.

I had 2 piggy banks when I was little, now I have 7 actively used savings accounts. I also hold accounts in over 20 online banks, but they are under $50, if that. Each account has a specific purpose. One is for my personal nuisance fund, what I would call in college "Beer Money". One for maintenance, one for home improvement, one for entertainment, one for emergencies, and of course one for general savings.

3. Allows you to take full advantage of new rate trends.

There is a recent online savings account battle going on right now. I see the top dogs battling every couple of weeks. If you want to get the most for your money, you cannot constantly keep switching banks. You will lose more interest than you could ever gain, just by waiting on the holding and transfer periods to complete. During those periods of time you do not gain interest. You would be better off keeping your money in a lower interest account, than continually switching to a slightly better interest rate.

 

To benefit from the rate battle, I open small accounts in the top ten banks. When I have a good sized deposit to make, say $1,000 or more, I will put it in the account that has had a steadily high and fairly constant rate. Make sure not to fall for promotions. Over the years, I have seen a ton of promotions where the rate drops close to 50% after the promotional period. Look for a good steady performer.

A savings account should consist of money that you need immediately. You can gain access to the money with days, if not hours. Because this money remains complete liquid, you will not get anywhere near the return you could expect with a mid to long term investment. For example: buying a stock, index funds, or some decent mutual funds. On average, at least since I have been around, the return is one third to half of what you would see by putting your money into the market.

So don't get fooled into thinking that an online savings account is an investment. You should try to sock away 3 to 6 months of expenses for yourself and all dependents. The length of time depends on the nature of your work. If you are in a stable career, for example school teacher, 3 months should be plenty. Assuming you continue to enjoy your job, you should be working for a long time. If you work in a less stable field, like my father did in the electricians union, you would need to save 6 months if not more. My father would be out of work 4 months out of the year on average due to his career.

Also take into consideration the month you choose to determine your expense average. I always choose the holidays months to calculate my average.

Another good idea is to consider 3 month CDs when you think the rate will drop or if you come across a promotional rate. This will be for some one who is maintaining greater than 3 months of expenses in their account.

Money beyond your 3 to 6 months of expenses should be invested in the market. I would highly suggest Vanguard index funds, if you are uncertain with where to put your money. Also consider a financial advisor. You have many that will not require money up front. If you don't know someone I would suggest looking into a franchise. I use Edward Jones. To date after all the commissions have been paid, I'm seeing 14% back every year on my money with them.

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