Yen & You: The financial accounts every 20-something needs

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Yen & You is a recurring feature written by Austin Morgan, a JET in Fukui Prefecture. Austin enjoys tossin’ a Frisbee, playing his guitar, and blogging about personal finance. Check out his blog, Foreigner’s Finances, for more personal finance insight for young adults.

By Austin Morgan

Personal finance is full of questions. How do I keep my money safe? What is the best stock to pick? How much money should I save every month?

In the end, we suffer from paralysis by analysis and often end up doing nothing with our money because we’re so sick of thinking about it. Large sums of money are left in no-interest checking accounts or wallets, left to be spent on another unexpected Lawson’s run. It happens to everyone. I’m a sucker for the American dog.

Not doing anything with your money is the worst financial decision you will ever make. Being in Japan makes it even more difficult because we don’t really want to think about the money sitting in our checking accounts back home.

The right financial accounts make everything easier. Paying student loans back home? It’s simple with automatic bill-pay features in the checking accounts featured below. Need to pay off your credit debt? Do it easily with free transfers from your new savings account. The sooner you have the right financial accounts, the easier your life will be and the more money you’ll save.

The key is to start now.

Why? Inflation.

It will eat your money and leave you longing for the financial opportunities you had in your 20s.

In America, inflation averages about 3 percent per year. Three percent! If your money is sitting in a no-interest checking account, it’s losing value every year. Need a better visual? Imagine a burglar signing into your checking account and taking out 3 cents of every dollar every year. You’d call the cops. You’d report the theft.

Three cents may not seem like a lot to you. Chump change.

Let’s assume you have more savings than my 11-year-old cousin, and take a look at how $5,000 in a no-interest checking account will be affected by inflation over the next couple of years. The numbers in the right column are what the original $5,000 will be worth in today’s dollar come five, 10 and 25 years down the road.

Original Amount
$5000
2009
In 5 years Worth: $4,293
In 10 years $3,687
In 25 years $2,334

This table shows how much money you’ll need in five, 10 and 25 years to equal your original $5,000 that you thought was safe in your checking account.

Original Amount
$5000
2009
In 5 years Need: $5,796
In 10 years $6,719
In 25 years $10,468

The good news is you can fight and dominate inflation. With the right financial accounts in your back pocket, you can get your money growing, save properly, and starve off inflation.

Here are the tools to do it.

Financial Accounts

Checking

In the introduction I bashed checking accounts about four times, but they’re the backbone of your money.

Everyone needs a basic, free checking account at a local bank. You’re in Japan, but you can sign up for one online.

Find one near your parent’s house or place of residence at home. They will almost always provide less than .75 percent in interest, but the biggest benefit is that your money is liquid — meaning easily accessible. You can go to an ATM and get cash easily.

It’s important to find one near your place of residence so it won’t be a hassle to make a deposit or withdrawal. ATM accessibility is also something you may want to look into. Some of the larger banks have thousands of ATMs all over the country, which is why they’re so popular for basic checking accounts.

If you have student loans or credit card payments, look for a checking account with a free bill pay. This will allow you to set up automatic payments from your checking account and you won’t have to worry about forgetting a payment and getting hit with a late fee. Tell your bank to send a certain amount to your student loan company every month and the bank will write a check and send it for free whenever you want.

All of your money will start in your checking account before it is sent off to bigger and better places.

Check out: Chase, Bank of America, or Citi. Once again, make sure the account is FREE and there are no minimums or required monthly debit transactions.

Savings

You may have a savings account already through your bank at home. I did too, but it turned out I was getting .25 percent in interest. I was letting the bank hold my money and in return I was getting a whopping 43 cents a year.

Luckily, online savings accounts are the new norm for young people and savings. These online banks don’t have tangible buildings, but exist online. This allows them to keep their costs way down, and they use those savings to award their customers with higher rates.

How much higher? I signed up for an online savings account last September and the interest rate was around 3 percent. Right now, interest rates are universally much lower, but the online savings accounts still blow away brick-and-mortar banks in the interest rate category.

Online savings accounts are known for great user-friendly interfaces and easy transfers. You can link your savings account to your checking and easily send money for free. It usually takes two to four days for the money to send, but this is a great trait that is helpful for savings. Savings accounts are less liquid than checking accounts but you can get to your money within a couple of days once you make a transfer to your checking.

You can also schedule transfers, which makes saving easy and automatic. Once you return home and have a consistent paycheck being deposited into your account, you can schedule a certain dollar amount to be taken out every week, two-weeks, or month.

If your monthly paycheck is $3,000 and you want to save 20 percent, you can easily schedule $600 to be taken out a day or two after your paycheck is deposited. Savings made simple and it guarantees it will be done instead of waiting for that perfect time in the future. With a car, house and family on the way, I wouldn’t bet on it. Start when you’re young and never look back.

Check out: ING Direct, Emigrant Direct, HSBC, or FNBO.

Investment Accounts

We’re not in college anymore so it’s time to seriously think about your financial goals for the future. Are you going to want to buy a house in 10 years? Start a business in 20? Retire in 40? The best way to save for these long-term goals is to invest in the stock market.

This doesn’t mean you have to sit around and watch the stock ticker on MSNBC every morning. There are some easy-to-use accounts that are great for younger people who may not be too interested in investing.

The most simple way to invest is through a lifecycle fund. You purchase these accounts from a brokerage and they do all of the work for you. Just choose your target retirement date — if you’re 23, 2045 or 2050 would be your probable retirement year — and figure out how much you want to invest. You don’t have to worry about re-balancing and making sure your money is safe because the funds automatically get more conservative the closer you get to retirement.

If you want to have more control of your money, index funds are a good investment vehicle to consider. These funds invest in a specific market, like large-cap or international stocks. Your money is spread out to sometimes thousands of different companies and these funds attempt to get the average return of the market. They’re a much safer way to invest because they’re not dependant on the outcome of one individual stock. So if a CEO is found guilty of money laundering, your return won’t be affected as much. You lose out on the chance of huge gains, but your investment is much safer.

You can get much more specific, but the key is to get started. Sign up for free with one of the accounts below and do some research about specific funds you’d be interested in.

Check out: Vanguard, T. Rowe Price, or Fidelity.

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Don’t let your money sit and lose its value. The accounts I highlighted will not only make you more money, but they’ll make your life easier. Once you have them set up, you can put them on autopilot and concentrate on more important things. Take control of your money now before you find yourself as a 45-year-old parent wishing you would’ve started saving when you were younger.

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