The 9 Steps to Financial Freedom (32 page)

CD: How often do you have “repeat offenders”?

NFCC: The rate is not high. Unfortunately, we don’t have solid numbers. What I really find is the number one reason why people have so much debt is because they don’t have the skills or they didn’t implement them. So, in other words, they’re not tracking where their money is going. They don’t have a spending plan. And they don’t have their goals. It’s like they’re driving around and they’ve got no map and they have no idea where they’re going. You need to do all this planning and preparation.

Be very careful if you think that you can escape your money problems by filing for bankruptcy. It is not easy to qualify to file for protection under Chapter 7. Instead, the likelihood is that you will be required to enter credit counseling, and if you still can’t work out a repayment plan with your creditors, you will be required to file Chapter 13, in which your debts will not be forgiven; the court will set a payback plan for you.

Once out of debt, you’ll find the pleasure of not creating debt far exceeds the momentary thrill of buying something on credit that you really don’t need, can’t afford, and won’t really care about much beyond the time you get it home. What is more, all the money you’ve been pouring into interest charges can now go instead toward creating wealth, investing in yourself and your future.

If you saw a quarter on the street, would you stoop to pick it up? Of course you would—we all would. Would you throw a dollar on the street for someone else to pick up? I doubt it. Yet without even knowing it, you may be throwing away hundreds or thousands of dollars in found money for you and your future just by the way you’re dealing with your financial life.

Most people try to set up their lives for convenience, to make things easy. But easy can be costly. Respecting yourself and your money means wanting to put every penny you can to work for you. Respect attracts money, remember? You might have “found money” right now, a few hundred dollars a year here, a few hundred there, or more. Wouldn’t you like to find it? You can if you are just willing to look. If you’re willing to rearrange the pieces of your financial life just a little, you’ll be able to see the solution to the puzzle—and find the money.

“I suppose I could be making more money on my money,” said Rob. “I guess I’m just too lazy to figure out how.”

You and your money must keep good company, remember? If there is a company, bank, brokerage firm, credit union, mutual fund company, or anywhere else that’s offering you a higher interest rate or lower fees than where you are currently keeping your checking or savings account, it is your duty to yourself to transfer your money into a higher-paying account. You put time and energy into finding the lowest rates for your credit cards, right? That same kind of energy needs to go into finding the highest rates for your cash. Going through Rob’s
checking account statements for one year showed me that for four months during that year he had $45,000, give or take, in his checking account. Talk about throwing dollars on the street! During those four months alone, had he kept the bulk of his money in a money market account earning, say, 2 percent, his money would have earned $225. Over the course of the year he was losing much more.

Rob’s case is unusual, in that his money is seasonal, but not unique—I’ve had plenty of clients who receive bonus money, sizable tax refunds, and big checks and simply deposit them into their checking accounts, or savings accounts where the interest isn’t all that much better, then just leave it all there until it dwindles away. I also have had clients who keep a lot of money in their savings accounts so that they’ll have free checking at the same bank, when they could be making much more if they moved their savings to a money market fund. By saving the checking fees, they are giving up much more that their money could be earning for them elsewhere. And I have had clients who keep huge balances in checking accounts, just “so they can see their money at a glance.”

I tell them what I told Rob, you can see your money just as well in a money market account or a bank certificate of deposit that pays more than your checking account.

It is very important to keep some of your money absolutely safe and sound. This is money you want to be able to tap quickly in the case of an emergency. I believe the best way to be respectful to yourself is to aim to have at least eight months of living expenses set aside in a safe emergency savings fund.

The safest place for your money is a bank or credit union account that is federally insured. If your money is at a bank, you want to make sure it is a member of the Federal Deposit Insurance Corp. program (FDIC). One quick way to confirm that a bank is federally insured is to check its website homepage or the door of a branch location; you will see an icon that says “Member FDIC.” You can also check online at the FDIC’s deposit insurance website:
http://www.fdic.gov/deposit/
. If you use a credit union, your job is to verify that your credit union participates in the insurance program run by the National Credit Union Administration (NCUA). If you see “NCUA” on the website or front door of your credit union, that tells you members’ savings accounts are in fact federally insured. You can learn more about NCUA insurance at
www.ncua.gov/NCUAsafe.aspx
.

The insurance coverage for both banks and credit unions is virtually identical. In the event anything were to happen to your bank or credit union, the government agency (FDIC or NCUA) steps in and promises to make sure that you do not lose a penny in your savings up to certain limits. Here is what you need to know about how deposit insurance works.

The financial crisis that began in 2008 has caused the interest rate on safe savings accounts to plummet to near zero. In late 2011, a one-year CD typically had a yield of less than 1 percent. And the Federal Reserve, which controls short-term rates, has signaled it intends to keep rates very low through mid 2013. As frustrating as it is to see your money sitting in accounts that
earn so little (or nothing), remember what this money is for. Safety. Emergencies. You want to know that at a moment’s notice you could access the money and know it will all be there. Sure, there are other investments that may pay you a higher interest rate—for example, I happen to think stocks that pay dividends are a great investment. But saving is not the same as investing. Keep your savings safe in a federally insured bank account. That’s how you protect yourself and your family. Now, that said, I want you to scour your bank or credit union offerings to find an account that pays you something, especially if you have a very large sum at the bank. For example, if you have $150,000 in a non-interest-bearing savings account, you’re earning nothing. Shifting that into an account that earns a little something, even just 0.25 percent, would earn you $375. Earning something is better than earning nothing. And once interest rates begin to rise (though it looks like that may not happen until at least late 2013), you will see the rates on these savings accounts rise as well.

As I explained earlier, money market mutual funds are not the same as money market deposit accounts. Money market funds are typically the cash accounts available through the fund company or discount brokerage where you have your money invested. MMMFs are not eligible for federal deposit insurance. The reality is that they have historically been extremely safe. They invest in the same types of short-term securities as a money market account at your bank or credit union. But in the
event a money market fund runs into any trouble, there’s no insurance program that will make sure shareholders get every penny back. One rare event occurred in 2008 during the financial crisis: a money market mutual fund that had a big investment in a short-term security of Lehman Bros. got into trouble when Lehman Bros. went out of business. The impact for investors in that money market fund was a loss of 3 percent. While no one wants to lose 3 percent on any investment that is super safe, it is important to realize that in the depths of such a crisis, the impact on this money market fund was pretty minor. Still, if you want to make sure your savings are 100 percent safe and sound, I recommend you stick with a money market deposit account at a federally insured bank or credit union.

Money market mutual funds are also handicapped by the fees they charge to shareholders. The fee is typically very small; it might be just 0.20 percent a year. But when rates are very low, you can’t really afford to give even that much away. Consider that in 2007 before the financial crisis, the average money market mutual fund paid about 4.5 percent interest. Paying 0.20 percent or so for the convenience of having a cash account with your investment portfolio wasn’t a big deal when you were earning so much. But in late 2011, the average money market fund pays about zero interest. I don’t think it makes a lot of sense to pay anything in a fee when you’re not earning anything.