By some measures, Americans's saving rate is the lowest in the industrialized world. Some people claim the measurement scale is flawed and doesn't include all the places where we accumulate money and other wealth.

Whatever the situation, "saving for a rainy day" is good, after all, "when it rains, it pours." Things used to be fairly simple, you'd have a checking account at a local bank and a passbook savings account at a local savings and loan. Once in a while grandparents would give you a U.S Savings Bond. Eventually "NOW" accounts were created which were the first checking accounts that had interest. Passbooks went away as computers were much happier tracking savings on disk than trying to keep a paper book up-to-date. Regulations changed and banks were allowed access to a larger area. Consolidation, aided by a mortgage lending crisis, force banks to merge. My "local" bank is owned by the Royal Bank of Scotland.

I'm not real sure I why I have a local bank account any more except for free ATM use and an occasional signature guarantee. Our dog likes their dog biscuits and attention. Feel free to ignore most of the references to "local" below. I deal with a credit union in Massachusetts, a mutual fund provider in Philadelphia, a stock broker in, umm, I'm not sure, in addition to that Scottish "local" bank.

You may have had a savings account when you were in grade school. This was part to teach you the importance of saving when you were a kid, and also to keep you as a loyal customer in the future. If you still have that account, you probably will want to at least see what current options are. Banks seems to change products to attract new customers without telling you what's new and in your favor.

You will need a checking account. It used to be that the main electronic transaction was to deposit people's paychecks. That was good, and remains good. Sign up for direct deposit. Also sign up for bill paying by computer. I use that primarily for utility bills, but I manually pay the bill instead of signing up for the automatic payment feature. I have a policy of not letting utilities or anyone else automatically take money ouf the the account. That may be silly - I think there many ways that many entities can take money out of my bank accounts without my permission. Checking accounts pay miserly interest now. Currently I get 0.10% per year in mine. If I have a $1,000 balance, they'll pay me $1. That won't keep me in lattes.

So, you need something else too. I'm not sure why savings accounts still exist, but Citizens will be glad to open a "Preferred-rate savings available at no fee to Citizens Circle Banking customers." It pays 1.00%. That's ten times better, but still unconscionable given what the same bank will charge for a credit card loan. Some internet based banks see the opportunity and are offering their own savings accounts and pay a more reasonable 5.00% or so.

People still buy Certificates of Deposit, and some of those have rates of around 5.00%. A major drawback is that your money is tied up for the term of the CD, nine months to five years currently at Citizens.

A more "rough and tumble" savings vehicle is a Money Market account. The money market provides companies with a short term need for cash that cash, and the company pays it back in a month or two. The people who manage the system behind the accounts lend money to reliable companies who will almost certainly pay back the loan. While most Money Market accounts are not insured, there's really no need to. I've only heard of a couple cases where they lost money, and then only briefly.

Money Market accounts pay less than CDs, at least at Citizens. Their "personal" account requires a $2,500 balance and only pays 1.00%, but that jumps to 3.50% if you have $10,000 in it. Their "Premium" account doesn't make much sense unless you have over $25,000 in it, 'nuff said.

My all-time favorite financial institution is The Vanguard Group, which started as a provider of expense mutual funds. In fact, the rest of this page and the retirement savings page will be all Vanguard. Their Prime Money Market Fund needs a minimum balance of $3,000 and currently pays a little over 5%. There is an annual fee, but if you arrange to use their web interface and forego paper copies of statements, they'll waive the fee. You can have your paycheck direct deposited. The easiest way to get money out is via a free check writing service (checks have to be for $250 or more, so it's not a replacement for your local checking account). When you get low on checks, they send you a new checkbook. Where Citizens assures me that I'm "more than a PIN," Vanguard fiercely keeps their costs down and hence return to their account holders up. They manage to do that while remaining remarkably responsive. Several mutual fund providers have gotten into trouble with financial favors that hurt their customers, loss of personal information, etc. So far, Vanguard has a clean record. All in all, you can't go wrong and probably can't do better.

Money market funds sell "shares," but keep them worth $1.00. When you put money in and later take it out, there's no "capital gain" to muddy up next year's tax return, you'll only have to report dividends, and that's just like interest.

So, a Vanguard Money Market account is a fine place to save some money. You should be saving for at least:

• That "rainy day"
  Rainy days are bad days - days when you loose your job, your car's transmission self-destructs, you get your first property tax bill, etc. People generally suggest you try to keep around two to six months of your salary. Basically, keep enough to keep things going until you get a new job or get the car back. I.e. when the sun comes back out.

• The next big expense
  These include Christmas shopping, the rest of your property tax bills, tuition for a course or degree program that you need, the nose job you don't need, etc.

• The next big thing
  Things are generally more fun than expenses, huh? Paying for a car with cash is cool, especially if you get a big rebate instead of a 0.00% car loan. While 0.00% car loans are neat too, there's usually a catch that makes them not all that neat. You should also save for that wide screen TV you really don't need, and of course, for that replacement car when the old one isn't worth enough to spend money on a new transmission.

A money market fund is a good, safe place to put cash you may need at a moment's notice. It's not a good place to find returns that get you excited about the magic of compound interest. For that you need to find a riskier investment. I'm not going to say much about high-risk investments, largely because I don't have any, but I readily agree that you need investments that stand a risk of losing value. Even investments that are all but certain of losing value sometime.

Let's start with a paragraph about state lotteries. Why do people buy lottery tickets? Because they might win, and might win big. Overall, everyone who buys a ticket some week will lose about 50% of their cost. For some reason, it's a risk that they are willing to accept. Mathematicians (and engineers and scientists) like to call lotteries "a tax on people who didn't learn math." Actually, lotteries are not very risky - it's virtually certain you will lost about half the money you put in.

I have a fantasy of being a substitute teacher in a high school math class during the probability unit and showing how lotteries do just one thing well, and that's to transfer money from citizens to the state. Much of the state's aid to schools comes from the lottery, so my fantasy ends without a second stint.

Investing in stocks is risky, but the payoff is much greater than lotteries. While they won't pay big like the lottery does, they don't lose 50% in value in a week. (Except for a very few weeks.) In general, you can expect most stocks to gain value, but it may take a while to see that. If you want excitement, go to race track, casino, or a convenience store that sells scratch tickets. If you want to see your money grow, come to the stock market.

It used to be that investing in the stock market meant dealing with a broker who took such a slice of your money that a winning year became a losing year. However, the stock broker would provide you with recommendations about what to buy and sell that might work out you, but were certain to work for him.

The idea behind mutual funds was to make the process more efficient and reduce the overhead by soliciting money from many investors and letting a team of skilled investors decide what to buy and sell. All in all, a vast improvement and there are now more mutual funds available than there are companies in the stock market! People began to notice that most mutual funds made less money than stock indices like the Dow Jones Industrials or Standard and Poors 500. It turns out those high paid professional management teams aren't all that special when you have a whole bunch of them picking over the same companies.

So, people got this idea of getting rid of most of the managers and just keeping a portfolio that matched a broad index or the market as a whole. It wouldn't be able to beat the index, because there would be some expenses, but as long as it beat the professionally managed funds, the fund holders would benefit and be happy. Vanguard was one of the pioneers in the "index fund" arena, and being so fond of low expense funds, it was a natural for them.

If you want to invest in the stock market, you pretty much have three choices:

1. Use better professional management
   Good luck - very, very few mutual fund beat their market niche consistantly. There are a few, but always remember that past performance is not a guarantee of future performance.

2. Pick stocks yourself
   With the discount brokerage accounts that exist you can get involved in "day trading" which may or may not work out for you. If it does, it will probably be thanks to spending a lot of time studying the market, and basically it will be a second career. Even people who try to pick the best of the managed funds can lose a huge amount of money. Some big name companies created high-tech stock funds before that bubble burst and lost 90% of their holdings. Human nature also interferes, the investors in such funds often put the most money in near a peak, and took the most money out when the shares were worth much less.

3. Put money in an index fund
   Put money in, take it out when you need it. Let the long term investment give you the long term average return. You won't be able to talk about picking stocks that doubled your money in six months, but you won't be mauled by the dogs either. I've only recently embraced index funds as the way to go if you don't want to spend a lot of time pick stocks. The first index fund I bought was Vanguard's Small Cap Index Fund. It's been around since 1960 and has had an annual rate of return of over 11%. That means investments have doubled in value approximately every 6-7 years, and that's a pretty good return on a pretty safe investment.

Contact Ric Werme or return to his home page.

Last updated 2007 Aug 7.