It seems to me that most personal finance advisors recommend we have a way to save part of our income, that is, regularly put something away and don’t spend it on our everyday expenses. The reasons for doing this are many – such as saving for retirement years or having a nest egg for an emergency – but the basic recommendation is to stash some money someplace that is accessible, but not too handy so getting to it requires a deliberate action. So what’s a good place?
Well, there’s the old reliable cookie jar, or perhaps an envelope under the mattress – and I know of a guy who has a real honest-to-goodness old fashioned piggy bank where each evening he “feeds the piggy” with the quarters from his pocket change. He calls it his “just in case” money. Whatever, right?
As for us, we have been with a local bank for forty-some years and have had both savings and checking accounts all this time. Through the years we have budgeted a regular savings deposit and, once our mortgage was paid off, we put that amount into savings too. We stash money in our savings for both known future expenses, such as our annual real estate tax bill, and unexpected ones such as when the washing machine died and those pesky roof leaks needed tending to. It’s nice to have a readily available financial cushion against those unexpected expenses. (Unlike savings accounts, Certificates of Deposit (CD’s) another mechanism for saving, tie up our money for months or years, have penalties for early redemption, and do not permit incremental additions or partial withdrawals.)
We also have both checking and savings with a credit union. I think that began when we financed a car there some years ago and once the car was paid off we just continued our deposits. I suppose the idea was to accumulate money to help with the purchase of a replacement vehicle when the old one wore out – but we still have that car so the account continues to grow. After all, cars don’t last forever, and we might want to use that cash for a new one.
So why has this subject of “savings” come up? Well, we recently were faced with an unexpected bill of several thousand dollars – whoda thunk hearing aids were so expensive? We didn’t want to finance that amount on a credit card – not at the interest rate those cards charge. The obvious answer was to tap our savings – after all unexpected expenses is one of the reasons we stash cash. The question was which savings – those from the bank or the credit union. A small dilemma, huh?
Both the bank and the credit union pay interest on our savings although we hadn’t paid much attention to the rates – we were more interested in the accumulated amounts. We decided to take the money from the account that would “cost” us the least amount in interest earned so I calculated the return we were getting from each. I used $1000 as a baseline number figuring the results would be easier to understand for comparison. We could then simply do the multiplication to determine how much interest we would “lose” from the different accounts and choose the one drawing the lesser amount. Here’s what I found.
Our bank statement shows the interest rate on our savings account is 00.01 per cent. To calculate the return on $1000 requires converting the percentage to decimal form and multiplying times $1000 (.0001 x $1000). The result is $0.10. Yep, $1000 in our savings account at the bank earns us one thin dime a year.
Our credit union account, on the other hand, pays 1.01 per cent. The same process using the credit union rate (multiplying .0101 times $1000) shows the return on $1000 to be $10.10. Folks, the return we get from the credit union is 100 times that we get from the bank. How about them apples?
This discovery led to two actions on our part. First, we paid the bill from our bank account at a loss in interest totaling less than a dollar a year. Second, we withdrew half the remaining money in our bank savings account and moved it to the credit union. Even though the interest rate at the credit union is small, the difference in rate of return just couldn’t be ignored.
What now? Well, there are a number of reasons to keep accounts with both the bank and the credit union, but we gotta do some serious thinking about what to do with our savings in the future. It kinda looks like we’ve been feeding the wrong piggy. At least that’s how it seems to me.