I’m terrible at saving money. I’ve read all the books, seen all the shows, joined the online groups, and still, I’m bad at it. I know HOW to do it, I just don’t practice it very well. I can put money into savings, but it’s only there briefly…until I need groceries or there’s a good sale on kids clothes or I spy some yard sales or…you get the idea.
So, I need to save in such a way that my money is difficult to convert into cash. I don’t have much to set aside, so CDs and such aren’t a good way to go, but savings bonds…hmmm. I could afford to buy them, they’re a pia to change into cash on short notice, and I can put them aside easily.
I know the interest rates aren’t astounding, but other than that, is there any reason I shouldn’t save this way? It’s better than not saving at all, I suppose…
As a WAG you could put your extra money into principal payments into your house or some other real estate you own, then its saved and you can’t get it back unless you get a home equity loan or sell the house. There is alot of talk about an upcoming real estate crash but I don’t think there will be any real estate crash in the midwest since you can still get a decent home for 70k here. The crash talk is about the coasts where a crappy condo costs 220k.
Another option would to have a certain portion of your money automatically tranfered to a mutual fund every month. I would go with an Index fund - they tend to provide good returns over the long run, have fewer fees, and fairly low risks.
If you’re saving for the long-term, open a Roth IRA with your bank. The money won’t accrue interest unless you buy something with it, but the account doesn’t just have to hold cash: you can put up to $4,000 a year (more if you’re over 50) into a Roth IRA, invest it in something like an S&P 500 Index Fund (VFINX is a very popular one), and you’re set. Here are the advantages:
The money can’t be taken out of a Roth except to make college payments for kids, or to pay for a house, or until you’re 55 (IIRC).
The interest and gains are taxed before they go into the Roth, so when you do take the money out, it’s not taxable income!
The penalties (and the hassle) of trying to get the money out for any other purpose are enough to make even the worst spendthrift reconsider.
You could invest the contents of the Roth IRA in savings bonds (but interest rates are going up right now, so your performance will be non-optimal), shares of Google (GOOG), or damn-near anything you want.
In defense of savings bonds, you can allot any amount to them that you like. $5 a paycheck is certainly doable. When I did them, my minimum amount was half the buy in cost of the bond.
EE bonds were available for half the face cost; at maturity they were full face value.
I bonds are bought at full face, and accrue interest in the usual manner. They also have tax advantages if you use them to finance an education.
Savings bonds have the following disadvantages:
You HAVE to hold them for 6 months from the date of issue before you can redeem them. No exceptions. If you have trouble saving money, that can be an advantage.
The interest rate isn’t all that hot, but it’s not too bad, either. Currently, the rate is better than a savings account. High interest rate means risky investment, BTW.
If you can put away enough money into bonds that it’s not trivial, but you can also live without if you have to tap into the savings account, you’ll be surprised how fast that little pile of bonds builds up.
Why am I not doing bonds myself? I got out of them when I had a real 401K at my old employer and a brokerage account on the side. Then I got laid off, and wiped both out to stay alive until I got a new job. Cash flow at the moment is not good enough to resume buying bonds.
My money situation is such that, while I want to save and I don’t want to just be able to pop in my atm card for a spending spree, I also want to be able to access my savings should an emergency arise.
Right now we have zero emergency funds. ANYthing that comes up comes out of the money that is already allotted for groceries or utilities or other payments.
If my check were automatically deposited, it would be much easier to have deductions taken out thta I could “forget” about. Since it comes straight to me, though, it’s harder…I just don’t have the discipline to pay myself first, even though I know I should.
It’s hard to start saving when you walk such a fine line, but the only way to do it is to…well, DO it. That’s why I’m considering savings bonds…at least I have to wait a few months before I can use them, and once I have a few, I won’t be as likely to find an excuse.
Hmmm. Plus, you can buy them online. That’s handy.
In terms of providing discipline, I think savings bonds lag a bit behind IRAs/401k’s, but are better than non-tax deferred savings/investment instruments. In addition to the 12 month wait period you have the IIRC 3 month earnings penalty for early withdrawal before 5 years, which would add to the discipline as well.
But I would still think that an IRA/401k would provide better discipline AND more flexibility, because if you really needed the money you could withdraw it. It’s just that if you do you’d face the 10% plus income tax penalty most of the time.
However, savings bonds generally earn better interest than short term bonds or CDs. So if you fit all these categories:
– Maxed out your IRA(s)
– Maxed out your 401k(s), or don’t have one or have extremely crappy choices
– Don’t need the money in 12 months
– Are satisfied with the rates
– Want some medium-term flexibility and so don’t want to pay loans off early
I’d think it’d be a good fit. Besides the 12 month wait period, I’d say they’d be a better choice than non-tax deferred bonds or bond funds or CDs, because savings bonds are tax-deferred: in most tax situations, you don’t pay tax on the earnings until you withdraw them.
However, you DO pay tax on both the earnings AND the principal, unlike the IRA or 401k in which you only pay tax on the earnings OR the principal. But the tax on the earnings is deferred till cash-out (under most accounting situations with personal bonds,) allowing a greater buildup.
Me, personally, I have some savings bonds purchased when I was maxing out my 401k and Roth IRAs. But I stopped when the rates fell to their current low levels.
Sounds like you need a short term savings. Set up a non-ATM-linked savings account at your bank and have $xx dollars automatically transferred into it three days after payday every month (just like an automatic bill-pay thingie).
Once you have your bills paid down, and need a longer-term plan, ask your employer about a 401(k) program that will take a specified number of pre-tax dollars out of your check.
I think this is an excellent idea. I did something similar when I was a grad student and was only paid 11 months a year. (The first year I just saved when I could, which of course meant I came up completely short.) If the money is gone from your check when you get it, you don’t think of it the same way as if you yourself put it into a savings account. Once you have a good-sized balance, you can invest a portion of it in things that will earn you more interest, from CDs to index funds. But for the first few months, I would focus on figuring out how much you can save without painting yourself into a corner.
That’s why I’m considering savings bonds…at least I have to wait a few months before I can use them, and once I have a few, I won’t be as likely to find an excuse.