An Engineering Approach to Money

This post describes how I set up my personal short term accounts. I’ll talk about my long term stuff at a later date, that’s much more complicated, but this is just the basics that show how I set up the accounts how the money flows and how it allows me to get maximum interest, with the least pain.
I use a 3 tiered approach to my short term accounts.

1. Credit Union Checking
2. Credit Union Savings
3. Vanguard Short-Term Investment Grade Corporate Bond Fund

My paycheck gets direct deposited into my checking account twice a month. I then pay the bills for that half of the month and move the extra funds to savings as quickly as possible. This savings account doesn’t pay much interest, 2% or something, but it is convient and I can move money back and forth between there and Checking via the web, a phone call, or a visit to my local bank. There is also overdraft protection on my checking account so that they will pull money from my Savings account to cover me should it be needed. This happens every other year or so because of some screw up or other, and $1 for overdraft protection is much better than $30 for a bounced check. I tend to keep about $400 in my checking account, and let funds build up into my savings until I have $1000 or so to move over to my vanguard account.

The Vanguard Short-Term Investment Grade Corporate Bond Fund account is where I keep my cash cushion. It is also where I keep money that is waiting to invest long term. The balance in that account tends to fluctuate between $30K and $60K depending on how agressive I’m feeling about the market. If I want to be fully invested I’ll drain this down to my 6 month spending minimum, if not I’ll let it build up until the next time I’m ready to push some cash to long term savings. If I have big expenses comming up I’ll also let this grow. For example this is the account I used to purchase my last car. Generally when I need to spend some of this money I write a check and take it to the credit union and put it back into my checking or savings account, from there I can get a cashiers check for a large purchase if need be.

I chose this particular account for several reasons.

1. Vanguard is the low cost leader in this space.
2. My income is not high enough to put me in a tax bracket to want a tax free fund.
3. There is low risk to principle as the fund invests in short maturity bonds.
4. Investment Grade means that it invests in only stable solid companies.
5. The yield is much better than a money market, current yield is about 5% which is great for short term money.
6. The account has free check writing for checks over $500.
7. This is a joint account my wife and I share so we both have to sign all checks which forces us to touch base when drawing money out of this account to make sure we are on the same page.

Because this is not a money market account, the value of the money you put in will fluctuate, but because the maturity on the bonds is so short it will not fluctuate very much, I’ve held the account for several years and shares have varied from $10.34 to $11 or about 6.5% at the extremes, since I move money in and out fairly frequently it all balances out and the higher yield is worth it to me.

As the money comes in it normally flows into accounts with higher and higher yield (interest) until it is ready to be put to use in one of my long term accounts. I keep no more than a couple of thousand in my local Credit Union accounts which means that should someone ever clean out my checking account it would hurt, but not be devastating to me. Because this is short term money it is easy to access with a check and spend in an emergency.

This entry was posted on Tuesday, September 26th, 2006 at 11:03 am and is filed under My Set Up. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.