What to do with $5,000?

I've struggling with a rather good personal finance dilemma since updating my net worth last month.

From the left side bar you can see that my Money Market for my Emergency Fund is nearing $15,000. I've made a rule of keeping at least $10,000 in my emergency fund which equates to a little over 5 months worth of expenses at my current spending. However, if a real emergency occurred I most likely would cut back on spending including eating out, entertainment, and savings which would extend my emergency fund to over 9 months worth of expenses. All in all I feel very comfortable with having an emergency fund of $10,000 even given my current work situation.

I have my pay checks and expense reimbursements direct deposited into my Money Market and then only transfer the funds I need into my checking to pay bills, this allows all of my savings to gather in my Money Market, plus earn a little extra interest. In the past when I reached $15,000 I would then take $5,000 and transfer it into a higher interest earning CD ear marked for my future house down payment.

I continued this method even after reaching my House Down Payment goal. I now have over $57,000 for a down payment which is over the 20% needed for any house I would choose -- the price range of houses I'd feel comfortable buying would be around (most likely less than) $250,000. So there's not a real need to put the $5,000 from my money market towards my house down payment funds.

So what do I do with this $5,000? (See I told you it was a good dilemma to have).

My options they way I look at it are:
- Earmark it for additional money towards a house
- Add it to my car savings pot so that I'm closer to achieving that goal
- Set it aside and forget about it until I really need/want to use it for something
- Invest this money in the stock market, since I don't really need it for anything it won't actually hurt me if its all lost
- Blow it --- but I can't think of anything that would really be worth $5,000, plus the saver in me really struggles to part with even a penny

I've basically ruled out blowing it, and I'm am just too overwhelmed by the stock market right now so I've ruled that out. That pretty much leaves my options as house, car, or hold on to it. Since I couldn't make up my mind I've opted to combine the three. I'm going to officially earmark the $5,000 towards my future car and add it to my emigrant direct savings account. I have decided to add $5,000 to my car savings, primarily so that my monthly contribution does not have to increase and now I have a reasonable chance of achieving $20,000 in the next 6 years when I would start thinking about purchasing a new car. And since all of this money is in a saving account its easily movable so I can always change my mind at a later date since most likely I'll be buying a house before I buy a new car plus I can always transfer the $5,000 to something else if I finally decide a reason to hang on to it.

I've also decided to increase my monthly car savings contribution to $150 in an effort to achieve the $20,000 with in 6 years. Hmm....now I have another financial dilemma, what should my next savings goal/plan be since I think I'm on track with everything else. I know I probably should start investing outside of my retirement accounts but to be honest it just plain scares me.

More Interest Rate Cuts :(

I thought dropping from 3.6% to 3.3% was a bad drop when I complained in my Bait and Switch post. I should have known it would get worse...I was updating my budget and logging into all of my bank accounts to upload information when low and behold I log onto Emigrant Direct and discover my interest rate has dropped down to 3.0% now! I guess Emigrant wasted no time after the Fed's cut interest rates by 3/4 a point yesterday.

I guess I'll just be losing more interest.

Is this a Case of Bait and Switch?

RRRRGGGG – I just logged into Emigrant Direct’s on-line banking to see if I had earned any interest since opening the account in February. Much to my surprise I discovered the interest rate on my savings account had dropped from when I had opened the account. When I opened the account the interest rate for a savings account was 3.6%. When choosing an on-line bank for my car savings the deciding factor to open up an account at Emigrant Direct was the interest rate as their services were nearly identical to their competition.

I decided to check out their competition and see if they had decreased interest on savings accounts too. This would prove to me that it was a market effect due to the economy and not just Emigrant Direct lowering interest rates. I log onto Bank Rate and wouldn’t you know, none of Emigrant Direct’s competitors had lowered interest rates. HSBC Direct was still at 3.55% and ING was still at 3.4%, both higher than Emigrant Direct’s current rate.

I’m not a happy camper. L I go to bank rate’s calculators to determine the interest I’ll be loosing by having a lower rates and in the long term having a lower interest rate is only the difference of about 3 months to meet my car savings goal with Emigrant Direct rather than ING.

I guess I’m staying with Emigrant Direct since I don’t want to be opening and closing savings accounts every month to chase after the best interest rates.

Roth IRA Update

After my wonderful banking experience on Monday I decided to tackle diversifying my Roth IRA today, which is one of my goals for this year. Haha…yeah – not such a great experience, not only did I not get the advice I needed to do what I wanted to do (which I can understand not getting my way) but more importantly I didn’t get very helpful, friendly or knowledgeable people. Usually I really like Vanguard, but then I guess I’ve never had to call their call center.

Currently my Roth IRA is invested only in an S&P 500 Fund. So in theory my Roth IRA is “diversified” in domestic stock but I’d like further diversity as in more than one fund. The one problem with diversifying my Roth is that there is a minimum initial investment per fund of $3,000, unless you invest in the Vanguard Star Fund (which after reviewing this fund, I’d rather stay all in the S&P 500). I only started my Roth in 2007 so there’s only slightly more than $4k in my account.

I contacted Vanguard and talked to several people trying to find some way around this $3,000 minimum, such as using automatic deposit (which I’m currently doing) or paying a small penalty or really any solution and I was told no and given probably the same pat response that’s given to everyone “The minimum investment amount for all funds is $3,000”. Well I’d already done my research before calling and that’s not the case, there is one fund, the Star Fund, that you can invest in with a minimum of $1,000. So I’m very disappointed that that wasn’t even offered to me, not that I’d use it, but at least to prove to me the person I was talking to was at least familiar with the products offered.

Since it appears I’m not going to have any luck getting around this $3,000 minimum rule I now have a decision to make. I need to decide if I’m going move this goal to next year after my Roth has increased or if I’m going to have to dip into my other savings to fully fund my Roth at once. If I do choose to dip into savings most likely it will be my house down payment savings as I don’t want to dip into my emergency fund and my regular savings for irregular expenses (ie car maintenance) is not sufficient to cover this expenditure.

Here’s the Pro’s and Con’s of each options

Option 1 – Move Diversification Goal to Next Year
Pro: It’s the easiest and simplest option and it does not require adjusting current allocation of savings.
Con: I would have to continue investing in the S&P Fund for this year and then sell a portion to invest in a different fund, which would go against my philosophy of buying and holding.

Options 2 – Fully Fund Roth IRA for the Year at One Time
To do this I would have to dip into my down payment savings and would pay back my down payment savings by the end of this year with what would have been my monthly Roth contributions.
Pro: This would allow me to diversity this quarter and would theoretically be investing when the market is low.
Con: Loose the interest I’m currently earning towards the down payment. Investing in one lump sum means I am no longer dollar cost averaging. On top of that I would no longer have the artificial smaller paychecks with savings automatically directed to Roth savings.

What do you all think? Which option should I choose?

Author's Note: 2/27/08 Trent over at the Simple Dollar Appears to be having the same issues with Vanguard's $3,000 minimum, thought you all might want to check out his post too.

Internet banks are good, but IMHO nothing beats having a great relationship with your banker.

Don’t get me wrong, I just recently started a savings account at an on-line savings bank, primarily because this service could not be provided at my current bank at a competitive interest rate. But I have to say nothing beats being able to physically talk to someone who is really looking out for you and not just a call center staffed with minimum wage workers. So I feel compelled to share my great experience yesterday and why my banker is awesome.

I have an amazing relationship with my current bank, in fact despite moving about 4 hours away and not having access to my physical bank until I go home for a weekend I still stayed with my current bank. Don’t worry while I don’t have physical access to my bank I have online bill pay, mail in deposits etc so I’m not deprived, plus I go back to Atlanta at least twice a month so there’s always night deposits and ATM’s. I opted to stay because of the relationship with the people there and how they treat me plus the knowledge that I’d be moving back to that area in the near future.. The service amazes me, especially because my bank in located in down town Atlanta, a city of over 5.1 million people, not some small town where everyone knows your name.

Case in point of how customer relationship is what keeps me coming back. Yesterday I had a CD that contained a portion of my house down payment (all of my down payment savings are laddered in CD’s) that was up for renewal with a grace period until the 5^th of March.

I know I could have clicked on line to renew my CD and I did check online for interest rates before calling my bank’s branch manager Charlie. I’ve met with Charlie in person several times and have banked with him for a few years (note I say him not the bank, although I do love all the other people that work in my branch).

I call him up on his direct line, “Hey Charlie this is Future Millionaire ”. Immediately I get, “Hey , long time no see, how’s Valdosta treating you?” we chit chat for a few minutes and Charlie even glow about how his son just completed a drafting class at the high school and really wants to become an engineer and has started talking about going to my alma mater Georgia Tech. I’ve even met his son one time, because Charlie’s helped me out by coming to the bank on a Saturday when its normally closed so I could get into my safety deposit box. Another reason why I love my bank and banker, they work with you.

I told Charlie that one of my CD’s was up for renewal and wanted to see what my options where. Charlie went through the regular offers that I had already seen online, CD for 3.59 apy 3.65 (better than what I’m getting with Emigrant Direct for a savings account). My philosophy is it never hurts to ask no matter the situation (provided you are nice about it), half the time I get “honestly that’s the best I’ve got”, other times I get you know if we reclassified your money market then you’d qualify for this .1% bump making it 3.69 apy 3.67. Heck yeah! Thanks Charlie I’ll take that.

He was going to fax me the forms to sign and I’d mail them back to him. Ba-da-bing ba-da-boom CD renewal all taken care of and had a nice little chat.

A few seconds later, he called me back unfortunately he couldn’t make it fully work with the system and I’d be about .05% lower that what he said and have a rate of 3.64 with an apy of 3.71. He apologized and was very sorry but he’s already run the numbers and it would be about $6.11 less in interest for the four months, but to make it up he’d take me to lunch the next time I’m in town. No biggy, I’d have loved that extra $6 but I’m still fine with interest rate, its better than I can do anywhere else and I still feel great about the transaction.

I’m telling you, I’d willingly settle for slightly less interest (although not in this case) to talk to a person who is actually willing to help me out.