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.

Update: Learning how to save, two years later

I love this:

When I start seeing rap stars flashing euros instead of U.S. dollars, I know our economy is in trouble.

Having to photoedit the wallet bulge out of my right ass cheek recently was the last straw. Enter Slimmy:

I tried putting it in my front left pocket along with my cell phone, but as I don’t have one of those new iTelephones, it felt like the bulge had only migrated. So back it went into my back pocket.

Going slim also meant I had to cut down on all the useless plastic I hauled around everywhere. Out went the Zipcard, the REI card, the National Parks Pass, and sadly, the pictures of my siblings.

So what’s left?

A few bills folded in half in the front; debit card, credit card, and license in the middle; grocery card, health insurance card, and office key card in the back. So far so good. And you know what—I can totally drop that grocery card.

I’ve never really been one to squabble over my bank’s interest rates. Historically I haven’t saved that much, and the interest I’ve earned on what I have saved has always amounted to such a pittance (~$10 or $20 per year), that I decided it wasn’t worth my time to relearn those formulas from Algebra I.

Recently though I sold my car, which netted a healthy chuck of change. Some of which I used to buy our scooters, and the rest I put in a money market savings account I opened at Wells Fargo (my bank). In the month between selling the car and buying the scooters I got the largest interest payment I’d ever seen, something like $16. I was livin’ large. But after that, I’ve been getting like $2 and change a month. So out of curiosity I decided to find out why.

My checking account at Wells Fargo pays no interest. This is pretty much par for the course. My savings account only pays 0.5% interest per year. That means if I have $1000 squirreled away, by the end of the year I’ll have $1005. Considering inflation hovers between 2 and 3%, my savings account is losing me money.

When I had over $10,000 in my Wells Fargo money market account (after selling my car), my interest rate was a whopping 1.54%, hence the “big” payout. But after purchasing the scooters and dropping below 10k, my graduated interest rate dropped too, to a measly 0.75%.

Now somewhere, someplace I got the idea that a good savings account should return between 4 and 5% interest, a long term CD between 5 and 6%, and a diversified stock market portfolio between 7 and 8% (over the long term). So I’m not sure why I’m suffering sub 1% interest rates at Wells Fargo.

Truth be told, the real reason I decided to look into all this was that I was checking on my IRA at Schwab when I saw them advertising an FDIC insured checking account with no minimum balance and an APY of 4.25%!

That itself wasn’t what caught my eye, because at the time I didn’t have a clue what sort of interest rates my Wells Fargo accounts had. What did strike me was this: “Zero ATM fees. We’ll automatically reimburse any ATM fees you’re charged.” Which for me would translate to no more hunting around for Wells Fargo ATMs, and no more worrying about stupid $2-3 per withdrawal ATM fees every time I need a twenty. That’s huge.

What’s the catch? You have to open it with a Schwab One Brokerage Account—basically their umbrella investment account for trading stocks, bonds, and mutual funds. My IRAs don’t count—they’re different. But I’d already been toying with the idea that it might be useful at some point to throw some money at the stock market. So this seems like a really good deal. After discovering how much my current savings accounts at Wells Fargo suck, it’s starting to look like an amazing deal.

More info here: Interest in Schwab’s checking

Update: Learning how to save, one year later

So we got this flyer in the mail advertising something called “The Hayes.” Turns out it’s a new complex going up at Page and Gough, which is strange because it’s actually a few blocks south of Hayes.

The front of the flier reads “Still Renting? Start Owning.” Which caught my attention. On the back is the following table:

Compelling eh? The fine print at the bottom reads:

“The Hayes monthly payments are based on the following: Studio purchase price at $419,000; 1 bedroom purchase price at $599,000; 2 bedroom purchase price at $799,000. Monthly payments shown reflect after-tax savings. … Interest rate based on 5/1 ARM Interest Only, and is fixed for 5 years. … First loan amount assumed to be 80% of purchase price or less, with a minimum down payment of 10% of purchase price. Interest rate and payment on second loan will be based on prevailing market rates and amount of down payment.

So what have I learned? A new 1 bedroom apartment (653-855 sq ft) costs $600k. That it’s between 75 to 280 sq ft larger than our current apartment with a study. A 10% down payment is $60k, so tack on another year to my “$1000/month savings plan” (that’s 5 now!). But their adjustable rate interest only mortgage (of the devil) only covers 80%! So I’d still have to get another loan to cover the remaining $60k (unclear whether that is is factored into their numbers above).

So that concludes our San Francisco real estate minute.