I can’t believe it’s been a year since I wrote Learning how to save. Seems like a good time to post an update, especially after having made a number of changes since learning how hard the interest rate on my Wells Fargo savings account sucked.
So to recap. Last year I read Paul Farrell’s MarketWatch piece, ‘Dilbert’ deserves the economics Nobel (via Jeremy Zawodny), and decided to get my retirement finances in order. I rolled two pretax retirement accounts I had from previous jobs into a Traditional IRA. I started a Roth IRA, funded it for 2006 from savings and started automatically funding it for 2007 on a monthly basis. The money in both IRAs I invested in Schwab’s Target 2040 Fund because it seemed like the most dead simple choice I could make at the outset.
This year, I decided to sell my car which immediately netted a healthy chunk of change, funding our Vespas with a little left over. I opened a money market account at Wells Fargo to keep the money separate from my save-and-burn savings account, and of course because I thought the money market interest rate was supposed to be significantly better.
In August I took a closer look and discovered that with less $10,000 in the account, my interest rate was only 0.75% annually. That set a fire under me. At about the same time I discovered Schwab was offering a checking account with 4.25% APY (it’s now 4.0%)! Oh, and no ATM fees anywhere!!! That was the nail in the coffin of my relationship with Wells Fargo. It took a while to move everything over, but I haven’t looked back since.
The checking account came packaged with a Schwab One brokerage account, which I decided I’d play with as my medium to long term savings account. I also decided that rather than have my work direct deposit a portion of my paycheck into a savings account and the rest into my checking account, I’d have my entire paycheck deposited into my new high-interest checking account. From there I’d set up automatic transfers to my brokerage account, which I could adjust as necessary—without having to coordinate with my work payroll.
I transfered the combined sum from my Wells Fargo savings and money market accounts into the brokerage account. Then with that money, I invested in three different funds. First I came up with a rough number representing the money I’d need on hand if I was out of work for 6 months. Then I rounded it down to 5 months. Then I bought shares of a Schwab money market fund with a real interest rate (somewhere above 4%) in that amount.
With the savings I had left over, I invested 70% in Schwab’s S&P 500 Index Fund and 30% in Schwab’s Total Bond Market Fund. And going forward, after every paycheck, I automatically transfer a sum of money into my brokerage account and automatically purchase shares in both of those funds in the same proportion. There is risk involved, I could lose money (in fact I already have). But this is “travel the world between jobs” money or “down payment” money. In other words, future money. And investing in two different broad-based index funds seems like pretty conservative risk. And heck it’s a lot more fun actually doing something with my money, rather than letting it sit unrewarded in a Wells Fargo savings account.
Finally I decided to convert my Traditional IRA into my Roth IRA, which means this year my tax bill is going to be pretty hefty. But the IRA is only going to grow, so I figured better now than later.