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Where to put your money (Part 1: Banking+Credit cards)

This is a multi-part blog post about how I deal with money and what has worked for me. I have broken it down to 3 parts: Banking+Credit Cards, Investment, and Income generation.

These posts are about how I put aside money, and what I have done so far financially. Many people don’t share this information with others. I am not sure why talking about money is so taboo in society. Full disclosure: I’m not affiliated with any banking industry, this post is for my friends and family on what I know about the best ways to do finances.

I’m also not trying to become the Nerd Wallet (if you haven’t seen the site, it’s a treasure trove of knowledge). My intent with these posts is a simple overview.

Lesson 1: Don’t use debit cards

Any bank is willing to give you a credit card, even if you have bad or no credit. If you have bad credit, you may first need to get a ‘secured’ credit card (alternate list: here) but it’s still a good idea. Here’s why: say your card number is stolen, and the baddies made a bunch of charges to it. If you used a debit card, you’ll have to work with the bank to get your money back (and thus you are at their mercy). If you had your credit card stolen, then you call up your company and say you’re not willing to pay those fraudulent charges, and it’s up to their well-trained lawyers to get that money back for themselves (and thus they are at your mercy).

Credit cards often give you money back when you use them. Currently, my favorite card is Citi Double Cash. It gives you 2% back on all purchases. That’s pretty good! There are other cards out there that give you 3%-5% on special stores, but then you go into the business of having to remember which card is for restaurants, which is for department stores, and which is for groceries. A pain in the bum if you ask me.

There is one exception. Our largest spending category is groceries. For that we use AmEx Blue Cash Preferred which gives 6% cash back at grocery stores for a $75 annual fee. If you spend more than $1250/yr on groceries, then you’ll make back the annual fee. As a reference, in 2016, according to the US Bureau of Labor and Statistics, the average American spent $7200/yr on food.

Lesson 2: Use a checking account as your central money flow

I’ve started using a checking account as my primary account. It’s where paychecks go, and where bills are paid out of. Out of this account, you can have infinite transactions (compared to savings accounts which are federally limited to 6 transactions per month). Note that we apply lesson 1 by having our credit cards paid out of this central checking account as well. Whenever I apply for a credit card, I always turn on auto-pay in full. By this I mean, that at the end of the billing cycle, the entire card balance is paid in full. This may feel like it’s going against lesson 1, but the difference is that you have a month of time to notice the fraudulent charge and create a dispute, unlike a debit card which instantly removes the cash from your account. The likelihood of getting my card number stolen is very small compared to the likelihood of forgetting to set up a monthly payment.

I consider savings accounts as little piggy banks. Most banks will give you free accounts given that you do certain things (like one transaction per month, or some minimum balance).

Lesson 3: Not all savings accounts are created equal

For savings, you should use a high-yield savings account. These are generally online only banks. Some examples are: Personal Savings by American Express, Ally Online Savings, and Synchrony High Yield Savings. These banks give around 1% APY (depending on the markets). Other banks may only give 0.01%!! They’re hoping that the customer will not notice the extra ‘%’ symbol in their advertisement.

Now that you have a couple of online piggy banks, you can start putting money in them. Start off with as little as $1, or whatever you can afford. It’s amazing how quick money can accumulate, especially when it’s a magical piggy bank that has interest!

Lesson 4: Eliminate having bounced checks or payments

While you should do your best to not spend more than you have, with all these automated systems accidents happen. To protect against that, you should link your savings account to your checking account at the same bank. Many banks offer balance protection services. The main idea, is when you try to cash a check (or pay for a credit card bill) and you do not have enough money in your checking account, the bank will automatically transfer money from your savings to your checking (for a fee). It can be a hefty fee (~$30), but the cost of not paying your mortgage or credit card bill may be an even bigger fine.

Lesson 5: Manage your all your accounts in one place

I’ve been using Mint by Intuit for many years now. It was great at first to have a visual overview of all our accounts, net worth and cash flow. While it’s the first of its kind, there are better services. Recently, I came across Personal Capital which has a nicer interface. Before I started giving all my account information to Mint, I wanted to understand their business model. Why would a service do something for me for free? Well, it’s a win-win situation. Mint will give you suggestions on which credit cards and accounts to open up based on your spending, and in doing so, they get a kick-back from the company they recommended.

Similarly, I use Credit Karma to monitor my social security number to make sure there are no new accounts created using my identity. It will e-mail you when something on your credit score changes. Their business model is similar to Mint and Personal Capital. They monitor your credit score from all 3 bureaus (Transunion, Equifax, and Experian) and offer you suggestions on which accounts to open for a kick-back from the recommendation.

Lesson 6: Use a password manager

With all these accounts, you should not have all the same passwords. For this, I used to use Keepass, a local encrypted password vault. The trouble is that the vault kept getting changed: more passwords added, updated passwords, etc. There’s an online version that I’ve been using called LastPass. The way it works is similar to keepass: you use a master password to encrypt your password vault. The difference is that the vault is stored on some server by LastPass. They promise that your vault is stored in such a way that not even they can open it up. I believe them because they don’t actually want your passwords. If they did, then every hacker would want to get at their database and it would be a PR nightmare for the company. Let’s look at how they make their money then. They sell premium services to companies as well as families. You can share your vault with your family for a monthly fee. Your company could have a master password database for all their systems for a premium price.

LastPass has a nifty add-on for your browser that can automatically fill in the username and password prompts. You can then feel free to have very long, hard-to-remember passwords without having to worry about writing it down on a yellow sticky note or save it in a text file on your desktop.

Continue reading here next week for tips about how to start investing and having your money grow.

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