Money Talks: Savers

So now that I have finished berating the spenders of the world, next on the chopping block: savers. Now don't get me wrong, saving is extremely important. If you happen to fall in the "saver" category, I tip my Yankees fitted cap to you. But the question then becomes: How are you saving your money? Is it stashed under your bed or in your top drawer? Or have you started to make your money work for you instead of the other way around?

Many African-Americans are experts at spending their money, but have no clue how to save it. They keep it their wallets (making it more accessible and easier to spend), under the bed (don't feel like bothering with banks), or have it in traditional checking and/or saving accounts, earning 0.20% APY. 10-second finance lesson: APY is the acronym for Annual Percentage Yield. It's the rate of return on your investment or deposit that takes into account the effect of compounding interest, which is the ability to earn more interest on top of interest already earned on that investment/deposit.

Let's say you got smart and opened a high-yield savings account (discussed below) that offered 5.05% APY. If you deposit $100 at the beginning of the year and no more, at the end of year, your balance would be about $105. You're probably saying to yourself, "$5 in interest? That's it?"

News Bulletin: When you spend money on clothes and other depreciating items, you earn $0 in interest. In fact, you earn what I like to call "negative interest". Basically, your money is worth less now than when you had it in your wallet, shoe, or bra. Why? The reasons are:

1. you no longer have the $100
2. you have forgone the interest (FREE MONEY) that you could have earned if you had invested the money

Puts things in perspective, doesn't it? Now back to our regularly scheduled program......If you really want to increase your wealth, you have to save AND invest in the right places.

One of these right places is a high-yield savings or money-market account (MMA). As the name suggests, this type of account offers a higher yield (rate of return on your deposit) as compared to other traditional savings accounts. You are able to fund your account directly from the checking account you already have, and you have the ability to write checks (limited number) against the account. For many high-yield savings accounts, the initial minimum deposit can be as low as $1. For some MMAs, the initial minimum deposit can be much higher, in the vicinity of $1000. But others, like those offered by Capital One, allow you to open an MMA with the minimum deposit of $1 as well.

Another "right place" is a Certificate of Deposit (CD). It earns higher rates of return like the high-yield savings and MMAs, but your money has to be deposited for a fixed amount of time. If you withdraw the money before the maturity date or end of the fixed term, you have to pay a substantial penalty. The fixed terms range from 1 month to 5 years. The minimum deposits can start at around $500 or $1000, but can be as high as $100,000.

Above I've provided just a few ideas as to where you can save your money, and actually receive more money than you deposited without lifting a finger. As I mentioned earlier on, interest is free money! Think about it: For those of you who have education loans, this scenario should make the picture a little clearer. Let's say that when you started college, you took out $10,000 in student loans with a certain interest rate (APY). When you graduate, the balance is $14,000+. You become frustrated with the idea of having to pay back the $10,000 in principal as well as the interest that has already accrued (and will continue to accrue) on the loan. Essentially, you are giving the lender FREE money on top of the $10K he loaned you. He didn't have to clean your house, scratch your back, or wash your car to get it. Simply put, the interest is the ever-increasing fee you pay for using the lender's money. Wouldn't you rather be on the receiving end of that kind of deal? When you put your money in a high-yield account or CD, the bank pays you interest (FREE MONEY) in exchange for allowing them to use (borrow) your deposited funds when they provide loans and mortgages to other consumers/businesses. Now that it's put that way, it seems to make more sense to save some money than spend it all, doesn't it?

For my friends who are interested in bigger numbers or have more money to invest, stay tuned because we are going to get into some savings/investment products that can earn you bigger returns, but aren't FDIC-insured. 5-second finance lesson: FDIC stands for Federal Deposit Insurance Corporation, which is an independent agency of the U.S. Federal government. Most banks within the United States are memebers of the FDIC, which means your deposits with the banks are insured/guaranteed by the Federal government up to the first $100,000. For example, let's suppose you have a savings account with FDIC-Insured NoWheresVille Bank. The balance in that account is $50,000. If the bank happens to go bankrupt (that wording seems a little redundant), the Federal Government will make sure that you get your $50,000 back. So even though NoWheresVille Bank becomes non-existent, you don't lose any of your $50,000. In the next post, I'll begin to talk about investment products such as stocks, mutual funds, etc. that don't have deposit insurance, which means there is the possibility that you could lose money (Enron, anyone?). But if you make smart investments, even though there is always the possibility to lose, you can reduce your risk AND make a decent profit. If you're interested, stick around!

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