I received a question from a Troy FPU participant. He asked "I was researching the money market account my credit union offers. They require a $2500 minimum balance with a 0.100% monthly return. Is this good or are there better money market accounts out there? What would you recommend?"
This is a question inevitably more people are asking. Here are a few suggestions to consider. The reality is at the Baby Step 1 level the interest rate is really irrelevant. At today's interest rates this is $2.00 per year.
I suggest putting your Baby Step 1 Emergency Fund in a Savings Account or Money Market Account at the Bank or Credit Union your main Checking account is at. This way the funds are not in your main Checking account (I don't recommend this). My Credit Union does not pay interest until you have a $2,000 balance. The friend that asked this question indicated his Credit Union doesn't pay interest till $2,500. To keep it simple when on Baby Step One focus less on interest rate and just that the $1,000 represents a mini-emergency fund. Define what constitutes an emergency for you and your family. Get an accountability partner for your emergency fund. This person is who you connect with when you want to use it. Poor budgeting should not be defined as an emergency.
A few more thoughts on Emergency Funds & Sinking Funds. We use Capital One for our Car replacement Fund. It seems to have the highest interest rate @ 0.75%. You can check their current rates here. If you want to maximize your interest for Baby Step 1 this is a good place to go. Transfers are electronic and the account is linked to your main checking account. One caveat - If your new to budgeting having your Emergency Fund at another financial institution from your main checking account will take a few days to get the funds into your checking account.
We talked about SmartyPig last week as a good place for Sinking Fund savings. SmartyPig is great for things like Christmas, Back to School, Property Taxes, or other things you pay annually. SmartyPig is not good for your Emergency Fund. It is too hard to move funds back and forth to Smartypig and when you need the funds you close the Saving Goal, it doesn't allow partial withdraws from a goal either. So I wouldn't use it for Emergency Funds.
The Orion FPU classes started last night. Attendance was strong with over 60 people coming to learn how to manage money God's way. A huge thank you to Denise and Debby for making this class happen. You guys rock.
We have moved to larger digs to accommodate the great response to this class. We will be meeting in the chapel located just off the main Lobby in the north east corner of the building. Please park in the west parking lot and use the west entrance. The chapel is at the end of the hallway just across the lobby. See you Monday!
I read an article this weekend in Money magazine that got me thinking. So many of the people I meet are focused on Baby Steps 1-3. These steps are foundational to personal financial stability. When your focused on these steps Baby Step 4 and beyond seem like a long way away. So what happens when you get there? In most cases your unprepared. Below I will unpack your options and hopefully provide a matrix for you to consider your own situation. For more info on the Baby Steps click here
So what is all the hub bub that Dave Ramsey and investment professionals are jousting on twitter about? I'm not going to debate the "Can you get 12% returns" in this post, it has already been done ad nauseam. The article did get me thinking about the types of investment professionals you can partner with and how they are compensated. I manage our own investments and help my Mom with her's I have chosen to use more than one of the options below. My learning through this process is that there is not one answer that fits all situations. The #1 thing to building wealth is to get out of debt, pay cash, live on less that you make and to intentionally invest consistently over a long period of time. Or win the lottery, sorry I couldn't resist please don't start playing the lottery now.
In general the more "actively" your money is managed the higher your cost will be to you. This range can be from 0.15% on the low end for passively managed ETF's up to 2% for a combination of a active fund management and mutual fund expenses. Over the course of your investing lifetime this can really add up. Most of us can meet the Baby Step 4 recommendation of 15% invested for retirement through our employer sponsored retirement plan. If your employer sponsored plan does not offer a match and your not subject to AGI phase out limitations you should consider a Roth or Traditional IRA contribution into a personal account before participating in the employer sponsored plan. This is a little extra work but opens up significantly more mutual fund families you can pick from. Research tells us most of us will switch jobs, employers, and even careers multiple times during our working lifetime. This can result in multiple investment accounts with multiple investment companies. I recommend you consolidate these accounts with the investment professional / strategy that you decide to use rather than keeping them in the old employer account or rolling over into the new employer.
Here are a few investment concepts to familiarize yourself with:
Passive Investment Strategy
Active Investment Strategy
Rule of 4%
Below is a list of the most common investment compensation structures
1) No Load Mutual Funds and ETF's - There are a number of high quality no load mutual fund company's that have low costs and lot of options. You can select an asset allocation that meets you needs based on risk tolerance and stage of life. This method is going to be more hands on and require some level of comfort and knowledge on your part. This is the self serve route. You can use Money Magazine, Kiplingers Personal Finance for a good list of funds they recommend. This is what I do personally and try to model my investing on the advice of Jack Bogle. I also use method 4 below for funds I'm a fiduciary for.
2) Mutual Funds with a sales load (commission) - You will meet with an investment professional that will make recommendations on how to invest your money. They are compensated based on the funds you purchase via whats called a "sales load" usually up to 5.25%. This is the most common way, according to the Money Magazine article above, that Dave Ramsey's ELPS are compensated. You need to screen for the heart of a teacher not a salesman here. If you think they would be selling used cars if they weren't selling mutual funds, run! This person will not have a legal fiduciary responsibility to you. A fiduciary is required to put the clients interests first and this is a good thing.
3) Fee based financial adviser - The financial adviser charges for their advice. Usually an hourly rate. This separates the advice and compensation components of the relationship. It would not be unusual for the adviser to act as a fiduciary and be willing to commit to this in writing. For a list of fee based advisers please visit: http://www.napfa.org/
4) Percent of assets under management financial adviser - The financial adviser charges a fee for their services based on a percentage of your assets. The fee can be up to 1.5%. This fee is received regardless of performance of your investments. Depending on the types of investments the adviser is selecting your total cost of advise can exceed 2%. The advisory may or may not be acting as a fiduciary with this structure. I recommend one that is a fiduciary. I also use this method.
If you have assets to invest outside your employer sponsored retirement plan this can be a complicated and emotional decision. There are very sophisticated companies and investment professionals competing for your patronage. I encourage you to go slow and make your decision based on research and information, not emotion or fear. There is no one size fits all answer. Regardless of which investment option is best for your situation being actively involved in the decision process is critical.
If you are a FPU graduate or attendee and want to check out the new FPU format we would love to have you join us. Its a great opportunity to jump start your Total Money Makeover. You do not need any new materials to attend. If you want the updated workbook they are available to FPU members that purchased the previous membership kit. These are not available at the Dave Ramsey store and are only available through host FPU locations. I put up a mini-store here to purchase online. You can pick it up on the first night of class. Sorry no shipping. Purchase Here
This article is a good one for parents with college age kids, like me. Interesting stuff.
(Money Magazine) You've pored through financial aid forms, knocked the priciest schools off your list, reviewed borrowing options, and nudged your kid to think more about engineering and less about English lit. So you figure you've got this college thing under control. Not quite. Those expensive schools you ruled out? They might actually cost you less in the long run than some cheaper private or public institutions.
The federal loans for parents you're looking at so your kid doesn't graduate with debt? They may not be a better choice after all. As for thinking a technical major will be more helpful to Junior than a liberal arts degree ... sorry, it doesn't always turn out that way.
Even among savvy parents, myths and misinformation abound. Yet with the average four-year tab ranging from $71,500 at in-state public colleges to $240,000 at elite private schools, the last thing you need is to pay more than necessary, borrow more than you can handle, or pass up a college that can provide a great education at an affordable price.
What follow are the straight facts you need to make smart college choices.
READ MORE AT LINK BELOW
Do you need help developing and implementing your personal financial plan? Attending FPU is the #1 catalysis to people beginning to win with money. Please visit our class info page and register to attend. Sometimes another set of eyes to help you unpack your personal plan is needed. The first step to getting this help is completing the Pre-Work forms. Once we receive the completed forms one of our Dave Ramsey Certified Coaches will review and be in contact with you.
Dave Smith is part of the KCC finance staff and a Dave Ramsey Certified Coach.