Ask Money

Doing well by doing good

Chris Farrell Jan 14, 2011

Question: I am 25 years old and have an entry-level job at a small advocacy nonprofit, making about $24,000 a year before taxes (excluding health insurance and employer 401k contribution). I have two related questions:

1) I have $7,000 in a savings account at the same regional chain bank where I have my checking account. I used to be with a credit union where my savings earned a very small interest payment each month. However, I have only had two tiny interest payments in the year and a half that my savings has been at the current bank. Is this just a consequence of the economy, or is there a place I can put this savings money where it would earn greater interest?

2) After all my regular monthly expenses (rent, utilities, credit card bill) are paid, I am left with very little in my checking account. I have occasionally had to rely on transfers from savings and checks from my parents to maintain a healthy balance. My employer makes an 8% pre-tax contribution to my 401k with each paycheck (every 2 weeks), and I also make an 8% employee contribution, but aside from that, I feel I can’t afford to put anything else into savings on a regular basis. Is this cause for concern? How much should I be looking to save each month? Malcolm, Washington, DC

Answer: First of all, I want to congratulate on how well you’re doing. You have money in the bank. You’re funding a retirement savings plan and taking full advantage of the employer match. You have a job with health insurance. I’m also assuming that since you’re working at an advocacy nonprofit that you’re getting paid to do something you believe in.

To your first question, the fraction of a percent you’re making on your savings–it’s almost an imaginary interest rate it’s so little–largely reflects the combination of a still weak state economy and the Federal Reserve’s monetary policy.

You could make a bit more interest shifting some of the savings into a short-term certificate of deposit. (I wouldn’t put money into a long-term CD; you won’t make enough money to justify locking it up for longer than 6 months to a year.) The trade off for a marginally higher interest rate is that you won’t have access to the money if you needed it in a pinch.

You could also see if you wanted to change banks and put your savings into one of the major online banks. Online banks tend to reward savers better than their brick-and-mortar peers. They’re passing along some of the savings from their lower cost business model to customers. The rates still aren’t great, however.

Now, to you second question, you are doing well on the savings front and you probably need to save more than you think over time. You can look at this post to get more details about how much to save. I would also check out the comments section to the post. There are thoughtful comments disagreeing agreeing with my perspective.

As I said, I think you’re doing well. The trick going forward is to automate as much as your non-retirement savings as possible, even if it’s only a few dollars a month. Right now, that may be all you can do, but once the discipline is established you can always hike the sums going into savings as your income improves and your career advances.

You’ll be fine if you embrace the combination of automated savings in retirement and non-retirement accounts and frugal spending.

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