optimized living

With the purchase of a house coming up (another entry for another day), I have a need for a short term risk-free investment. We’ll define short-term as needing the money in 6 months. Very few options exist in this situation, basically either a savings account or a certificate of deposit (CD). Doing a quick search through current rates on 6 month CDs gave me a max rate of 2.50%. Basically nothing. Curious if there were savings accounts out there with good rates, I had a friend refer me to ING Direct.

The rate currently offered by ING Direct is 2.20%, not that far off the 2.50% for a CD. Seemed like a reasonable place to put some money needed in the short term. I figured there must be some sort of catch, so I checked the site out. “No required minimum balances… ever.” “No fees. No service charges. No penalties. No hidden costs.” OK, the site checks out. The one small catch is that you are limited in the number of withdraws you can make a month (to 6 I believe). No big deal, I can plan my withdraws accordingly. Not like I should be repeatedly withdrawing from my savings account. Talking to my friend who point me to ING Direct, he mentioned that he could officially refer me and get $10 and that I would receive $25. A nice instant boost to my short term investment.

So let’s do the calculation of my short term investment:
(Principal + Referral) x e^(rate x time) = Value at End of Investment

Let’s assume a $10,000 investment, $25 referral, 2.20% interest rate, and 6 months or 0.5 year:
($10,000 + $25) x e^(0.022 x 0.5) = $10135.88

So we made $135.88 on a $10,000 investment, which is 1.36%.

Let’s compare that to what we would have received on a CD at 2.50%.
($10,000) x e^(0.025 x 0.5) = $10125.78

So we would have made $125.78 on a $10,000 investment, which is 1.26%.

Of course this only works the first time you deposit into ING since we counted the referral as part of the interest. You could also refer some of your family/friends to get some bonus dollars. But even by itself, the savings rate is still very good. Besides that you do not give up access to your money like you would a CD (CD’s incur a penalty when withdrawing early). You may also contribute money to this at any time and without the hassle of setting up a CD.

So beyond saving for a short term purchase, what is a savings account useful for with such low interest rates? An emergency fund. One of the first accounts that you should fund is an account that contains 3-6 months of living expenses. This account should be completely liquid, and accessible on a couple days notice. It’s for those times when a job is lost or a medical need comes up. Remember that this should be living expenses and not 3-6 months of your salary since you do not want too much tied up in short term investments when long term investments result in much higher gains.

Besides an emergency fund, what else can the savings account be used for? I started to use mine in conjunction with my credit cards. Each month I pay off all of my balances. So during the month I put money from my checking account into the ING account. When it comes time to pay my bills, I move it out of the savings account and into the checking so that I may electronically pay the card. This allows you to generate interest off of the grace period of a credit card (usually 25-30 days). Most of this can be automated with memorized transactions at ING.

If you’re looking for an ING referral, email me and I will email you a referral code. Just trying to maximize by getting all of my $10 referrals :)