Creating Wealth is an in-depth conversation between Bill Taber, an experienced financial advisor, and his millennial daughter about personal finance, investing, and financial planning.
Bill Taber is President of TABER Asset Management, a Registered Investment Advisor (RIA) and fiduciary firm located in Des Moines, Iowa since 1998. For decades, Bill has provided investment management services to clients, creating wealth, building wealth, growing income, and preserving capital for each and every client. TABER offers personalized asset management, wealth management, retirement planning, financial planning, and services such as 401(k) rollovers.
His daughter, Anastasia, works in accounting at a global law firm in Washington D.C. She enjoys discussing finances and her cats’ latest antics with her dad.
Episode 5: Bill and Anastasia discuss the basics of owning a savings account--the first step to building wealth. What is the difference between a savings account, a checking account, and an investment account and what should you use them for? What does it mean if your account is FDIC insured? What do you need to know about the different savings accounts you can own (e.g.- a money market fund) and what do they mean? Why do some banks offer better interest rates?
For questions and comments, you can email us at askcreatingwealth@taberasset.com.
Anastasia: Welcome to Creating Wealth, I’m Anastasia.
Bill: Hi, I’m Bill.
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Disclaimer: The views expressed today are our own, solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investment strategy. The views are subject to change and are not intended as a forecast or guarantee of future results.
Anastasia: Alright, so today we’re going to talk about various savings accounts - where to store your money. First question, how do you get started with a savings account or investment account?
Bill: Well, to do that you have to have a certain amount of money, which means getting a paycheck and paying yourself first, then establishing a budget that allows you to save at least 15 cents of every dollar that you’ve earned, and it’s that surplus that will build up to allow you to start a savings or investment account.
Anastasia: 15 cents. So is that on top of what you might be socking away to a 401(k) or is that including?
Bill: That’s including.
Anastasia: Okay, so just 15 cents of every dollar that you’re earning needs to be put in some type of savings.
Bill: Yes.
Anastasia: So what is the difference between a checking account, a savings account, and an investment account? Because there are a lot of different accounts out there, it’s very confusing, so maybe what are the various ways you can use each account?
Bill: The difference between the three of them is defined by what you use them for--a checking account is used to pay ongoing bills and expenses each month, and a savings account is used to provide funds for unexpected expenses. For example, your car breaks down, you need to replace some sort of device or computer; any unexpected expense.
Anastasia: Yeah.
Bill: And finally, an investment account is used to build wealth for something, a purpose, that is two years or longer into the future. So things like retirement assets and home improvement projects and college expenses.
Anastasia: I’ve heard you mention before with a checking account--I guess also savings accounts but there are different savings accounts where you can have the money be liquid, meaning that you can just pull it out and use it that day. So obviously there’s a difference, you’re not able to do that with an investment account, like you put that money away and you’re not going to be able to touch it.
Bill: Right, because investment accounts typically have investments that have assets that increase or decrease in value, and because you don’t know whether they’ll be up or down at the time that you need the money. you’ll typically want to use a savings account because those are put into things that are safe and you know what the value is going to be at any one point in time.
Anastasia: So what would you say for people who have considered withdrawing money from their investment accounts?
Bill: Well, if it’s a planned thing, that’s okay. One of the biggest, egregious problems that people have is maybe not budgeting, running short of money, and saying, “Well, where do I have money?” and looking at their retirement plan and saying “Oh well I have some assets there.” Or it’s a 401(k) plan and they can actually borrow against it. Those are the types of things that do not lead to long-term wealth building. You want to have enough liquid funds available, in reserve, to cover unexpected expenses. And to avoid the possibility of having to borrow money, to go into further debt.
Anastasia: Right, so it’s very important to have this mentality, when putting money away into an investment account that you should not touch it, cannot touch it--it is there until you are of the correct age so that you can then withdraw without receiving huge penalties.
Bill: Yeah, kind of the concept of if I’m going to, if I want to spend money on something, then I actually have to make more money to be able to do that. That you have a higher amount of income coming in and from that you save 15 cents. And from the difference, that then allows you to spend more money.
Anastasia: Yeah that’s a very good goal, like if you need more money, just earn more money. (Laughs)
Bill: If you have this long list of things that you want to do and you don’t have enough money, then you need to set about figuring out, “Well, how can I make more money so that I can afford those things?”
Anastasia: I mean that is a good motivation. You know, obviously, it’s tough, it’s very tough. But it’s a good motivation to kind of view it as, “If I need more money, I need to go out and make money.” As opposed to, “Let me take it out of this 401(k) plan and there’s going to be a huge penalty and it’s going to reduce my ability to retire at the time that I want to and maintain my standard of living.”
Bill: Or worse yet, the effect of advertising in our country that you would simply, “If you want it now, then well, I should get it.” And so you open up your wallet and you take your credit card out and you put it on the credit card - with no real plan for when you’re going to have the money in the future to pay that credit card off.
Anastasia: Yeah, definitely do not take out money from an investment account to pay off credit card debt that was avoidable.
Bill: Exactly.
Anastasia: Okay, so then we can talk next about the various kinds of savings accounts that you can have, because there are a lot of them, so I don’t know, in what cases should we use them? What are they?
Bill: Okay, generally what you want are two things: First, you want to make sure the money is safe, that you know that you put a dollar into it, and a dollar will be there when you want it back. And second, that it’s what’s called “liquid.” Liquidity is the condition of being able to have immediate access to something. And so a good savings account has both of those qualities. And one of the things that you do to get safety is to pay attention to places that will cover your deposit in the savings account under what’s called FDIC, which is the Federal Deposit Insurance Corporation. It was set up, I believe, after the Depression to protect individuals who put money in banks against those banks going out of business. Initially, the coverage was a relatively small amount of money. It became an issue again back in 2008- 2009 with the near financial collapse, and Congress raised that amount of insurance to $250,000 per individual. So you can have money in a savings account at a bank, and you can have up to $250,000 covered against the possibility that the bank goes out of business.
Anastasia: Wow, so after $250,000 though then you might want to get a second account? Or, actually, I don’t know (laughs) what you do when you have more than that money. I can’t--that is a large amount.
Bill: I believe it’s per institution. So if you pick one bank and get up to the maximum with that, and you have more than that then you should pick a separate bank to have the separate coverage. Now, within those banks there are different types of accounts. You know, checking accounts which we talked about are things that you use to pay your monthly expenses. And in general, they pay no interest, or very, very little interest. The second thing is an actual savings account, which as I mentioned is something that’s called a demand deposit account. It’s something that you can put your money into and get the money back upon your demand. And interest rates for that are also fairly low. They’d be somewhere between a hundredth of one percent and half of one percent.
Anastasia: So little.
Bill: Well, interest rates in today’s world are fairly low. The third type of account that a bank will have is what they call a money market account and it’s kind of a term that they’re using in advertising to compete against money market funds, which I’ll mention in a minute.
Anastasia: Okay.
Bill: But money market accounts basically are for typically larger balances, and the returns on that can be anywhere from maybe half a percent up to a percent and a half. So the higher the amount of money that you have to put in there, the higher interest rate that you’re going to get, but in today’s world interest rates on these things are fairly low. You can say, “Yeah, I’m putting my money into something and not getting very much out of it.” But on the other hand, go back to what’s really important, and that’s that you want it to be safe and you want it to be available. When those two things come into play, that’s more important than getting a high return on it.
Anastasia: So, a money market account, is that the same as your basic savings account? Like, say I open an account with a bank like Wells Fargo. It comes automatically with both a checking and a savings account. Is that savings account considered a money market account or is that different?
Bill: It depends on each bank as to how they’re advertising it or marketing it.
Anastasia: So it’s just a marketing term?
Bill: It’s a marketing term. Now, the reason that the banking industry came up with this term “money market account” was because for years they lost a lot of their deposits to a different type of investment called a “money market fund.”
Anastasia: Okay.
Bill: And a money market fund is something that invests in short term government securities or municipalities or bank notes. And the returns on those are currently a bit higher. You can get, say, one percent to maybe one a half to one and three quarters percent on them. But the difference with these funds is that they are not guaranteed or backed by the U.S. government; there is no FDIC insurance on them. And their interest rates will fluctuate on a daily basis. And the money that you put into them actually buys shares that are priced at one dollar per share. That one dollar per share tends to stay level except under some extreme conditions, such as the tension that occurred in the financial system back in 2008/2009. So there was a point at which those things were considered pretty safe, but then under our really, really difficult economic situation, they lost some of their value. And that’s when people learned that they were not the same as having money in a savings account with FDIC insurance.
Anastasia: So that’s when FDIC became super important?
Bill: Yes, it became much more important as a way of protecting your money.
Anastasia: Gotcha, so, I guess why would people choose to put their money into a money market fund then, in today’s world?
Bill: For a little bit more interest.
Anastasia: Okay.
Bill: You know, I’ve been in the investment world for many years and actually the very first thing that I put my money into other than a checking account was a money market fund. Because at the time that I did it, which was several decades ago, you could actually get about 6 percent (laughs) by moving it into a money market fund, as opposed to getting maybe one and half percent from a savings account.
Anastasia: Wow, that’s quite a lot. That’s like investing in the stock market.
Bill: Well, yeah at the time that was kind of the entree to learning how to get into other types of investments. In today’s world, interest rates are as low as they’ve been in the last 50 years and so there’s not a whole lot of difference between the rates on these different accounts.
Anastasia: Good to know! So, I guess the last thing we can talk about is, because I have had a few friends question me, should they be trying to store their money in an account that has a higher interest rate? Because there are online banks that because they don’t have brick and mortar stores, that expense, they’re able to offer a higher interest rate of return?
Bill: I think the answer to that is again, safety and liquidity are the keys. But beyond that, sure, shop around. If it’s a local bank or if it’s a regional or national bank, or if it’s an online bank and some of them are offering higher interest rates than others, it could be that the banks are basically at a point with their business operations where they need to attract deposits to be able to make loans. Because that’s what banks do, they take money in deposits, they put it out in loans and the difference on what they pay for the deposits versus what they receive from the loans is called their “spread” and that’s what keeps them in business. So there are times when banks are more hungry to get deposits because they have loan demand that they want to be able to meet. So they’ll pay up for the deposits, and you as a savvy consumer can take advantage of that. So I think that’s a good thing to do is to look for the most competitive interest rate that you can. There’s only one circumstance that I would kind of back away from that on, and there’s relationships that you can develop with banks over time where you have a long-term relationship with them, and you keep money there in deposits, and they’re grateful for that because that allows them to make loans. And the situation where it can be advantageous is if you need a loan, and you go to them and say, “I’d like to borrow this amount of money for this future purpose.” And they say, “Yes, we’ll do that because you have deposits with us.” If you don’t have deposits with them, then they’re less likely to give you the loan.
Anastasia: But that doesn’t mean though that I need to be banking with an institution for ten years in order to get them to say yes, it’s really just that I have money in an account with them?
Bill: That’s the key, yes.
Anastasia: Okay, because I think millennials in particular, we--just with the nature of how everything works nowadays--we don’t feel like we need to stay loyal to our, you know, have the same job for our entire life. We can go shop around and get the best deal. If this bank is offering a really nice interest rate this year, but maybe next year their interest rate has dropped--I don’t imagine why that would happen--but suddenly a better deal is elsewhere. Maybe it makes the most sense to then move your money to that account. I don’t know if there’s a problem with that.
Bill: I don’t think there’s a particular problem with it other than you’re just having more paperwork and more forms that you need to take care of (laughs) at the time that you file your taxes.
Anastasia: True (Laughs). True, that is a pain.
Bill: But, yeah. No, it’s particularly with the millennial generation, I think they’re making the industry much more competitive, so you have a valid point.
Anastasia: Okay. Well, that’s all I wanted was to have a valid point. (Laughs.)
Bill: (Laughs.)
Anastasia: So, I think that is all that we need to discuss in this episode. Is there anything else that you wanted to mention?
Bill: No, again, I just think that understanding the savings account landscape is important because it’s basically the first step into actually accumulating wealth. It’s a very short step from there to get involved in investment accounts, which we’ll have future conversations about.
Anastasia: Yeah, yeah, great. We will definitely get more into the weeds of that in future episodes and if anyone has any questions, any specific questions that they want answered, they should go ahead and ask those, and we can always discuss them in our podcast. That’s all I had for today.
Bill: Thank you very much.
Anastasia: Thanks, Dad.
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