As I read “Savings Account Beckons Investors with Better Rates” from the Wall Street Journal it made me wonder two things. First, do people really think they are getting good rates on savings accounts and second, do they know what they are in for.
I can’t imagine there is a huge buzz because you can get a little over 2% in a savings account. I understand that the article is intended to help people get another percent or more on their savings. The best point it makes is to pay attention. You can’t seem to pay enough attention to banks nowadays. They seem to be increasing fees, dropping rates, or in credit card cases, rasing rates; doing anything they can do to make extra money. They are a business.
I can’t help but think the change isn’t a search for good rates as much as it is fear of what the market will do next.
To my second point. How closely do you look at the christmas present you bank sends you every year? Did anyone just ask what xmas present? I mean the one with the big 1099 in the corner. Well if you just moved all your money to fixed accounts in search of safety you can most likely expect a bigger present. In this case it might not be a good thing. As most people are in search of safety they are shifting to fixed accounts such as saving, money markets, CD and some forms of bonds. Most of these account will pay interest that is fully taxable, the biggest exception being municipal accounts. In the short term that might not be a big deal. A little extra taxable interest but if you either leave it there for a longer period of time or you have a decent amount of money, you might get a very unpleasant surprise at the end of the year.
If you are single and make between $33,950 and $82,250 or are married filing jointly with income between $67,900 and $137,050 you will be in a 25% federal tax bracket for 2009. Plus I live in Massachusetts so that would be an extra 5.3%. Let’s round off to 30%. That means for every $100 of interst you earn you owe $30 in taxes. So let’s say you have $10,000 in a 1-year CD that’s paying 2%. That means next year you’ll earn $200 interest and owe $60 in taxes. Where does this money come from?
Most people pay this money out of pocket. That means it reduces your spendable income. The only other way to do it would be to take a distribution from the CD interest to pay the taxes. I’m sure you’ve heard before that compounding is an investors best friend or something along those lines. If you are paying the taxes out of pocket not only are you enjoying compounding interest but also compounding liabilities. Did you realize you are letting your debt compound? What do you think of compounding debt?
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I definitely agree, and I think this is why $25 sign up bonuses aren’t worth it (because it’s more like a $17 bonus), but there’s something to be said for paying now to get money later. Essentially it’s like investing. Sure, you’re not getting the full $200 now, but by paying taxes out of pocket, you get to keep all your money later. This is a big part of personal finance: making sacrifices now in order to ensure a better future.
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