Latest posts by Wanderer (see all)
- Investment Workshop 51: Let’s Go To Vanguard! - December 6, 2017
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Hello again and welcome back to the Millennial Revolution Investment Workshop! New readers, please click here to start from the beginning.
A reader emailed us the other day asking “Can you write about emergency funds?”
Us: “Emergency funds? What’s there to say about that, other than to have one?”
“No, I mean, what do we do with them? Do we put them in a CD, or a GIC, or a checking account?”
Us: “What are you talking about? Just HISA-Hop!”
And that’s when we had one of those lightbulb moments. HISA-Hopping is something we started doing nearly 10 years ago, and because of the time that had passed we had just kind of assumed that it was just common knowledge and everyone already knew about it. Turns out, not so much. Whoops.
So to reiterate, the bulk of one’s net worth should ideally be in some kind of long-term investment, like a low-cost Index-hugging ETF like the one we build in this very Workshop. But we also advocate keeping a cash cushion to deal with short-term day-to-day expenses, like food, shelter, and booze. You know, the necessities of life.
These funds, naturally, must be kept at liquid as possible (for easy conversion to booze). It’s meant to buffer day-to-day and emergency expenses, so it makes no sense to keep it in a vehicle with a term limit, like Certificates of Deposit (CDs) or Guaranteed Investment Certificates (GICs). You want to keep these funds as cash, or at least as close to cash as possible.
So what’s a soon-to-be-FI’er to do? Simple.
HISA stands for High Interest Savings Account. And Hop stands for…well, hopping.
Here’s how it works.
Most major banks offer shittily low interest rates on savings accounts. As of the time of this writing, the Canadian bank CIBC is offering 0.65% and Bank of America is offering a pointless 0.03%. 0.03%?!? I could make more money digging for change out of my couch!
The reason for this is that those big banks have branches everywhere. Maintaining that army of ATMs and branch tellers isn’t free, and those costs dig into the interest rate those banks can offer you.
That’s why online-only banks and smaller credit unions can offer a higher interest rate. They don’t have to maintain ATMs all over the country, or pay bank tellers to stand behind a counter. That lowers their operating costs, and as a result, they can pass those savings onto you.
But at the same time, that army of ATMs and branch tellers DOES come in handy. Who wants a bank account that they can’t easily get cash out of? Emergency funds are named that way because they’re supposed to be able to respond to emergencies! If I’m sitting down to a pancake breakfast and my maple syrup runs out, I need a solution RIGHT THE HELL NOW. I can’t afford to wait 3-5 business days for THAT bullshit.
So basically, we have a classic tradeoff. On one side, we have yield. How much does the account pay you? But on the other hand, we have convenience. Can I get my money out whenever I want?
And as always, we take one look at an either-or tradeoff situation like this and we call BULLSHIT. You can have both. And the answer is HISA-Hopping.
Basically, you open up a checking account with one of the big national banks. The ones that have ATMs at every corner. They will, naturally, pay you almost nothing, and often try to charge you ridiculous bank fees for keeping your money with them. However, depending on the account type, there will often be an account type where if you keep a certain balance level the fees all go away.
This is important.
Bank fees, as we’ve written about in a previous article, do nothing to improve your happiness. So you want to eliminate them completely from your life. So here’s what you do.
You keep the minimum balance level on your convenient checking account to avoid any banks fees. Anything about that level, however, you ship off to a HISA.
And again, HISAs are often smaller institutions like credit unions or online-only banks. So it’s extremely important to make sure that the bank in question if insured by CDIC (Canada) or FDIC (USA). These are government regulatory bodies that insure your account balance in the case of institutional failure.
That means that as long as the institution is CDIC or FDIC insured, your risk level is basically zero. Any savings you put into this institution is guaranteed by the federal government. So you want most of your money sitting in the highest-yielding government-insured bank you can find.
Which finally brings us to HISA-hopping.
May of these banks will occasionally offer bonus interest rates for parking your money with them. They’re often a percentage point (or more) higher than their competitors, and the idea behind that is to get you to move all your money to them during the promotional period, and then hopefully you’ll forget to move it out when the promo period is up. That’s what normal people do, right?
But we’re not normal people, are we? We’re Revolutionaries. So HISA-hoppers like ourselves keep watching out for promo interest rates and just shift our emergency fund from online bank to online bank, taking advantage of the higher interest rates while shouldering precisely zero extra risk, since the institution is backed by the federal government.
And at each HISA you open, you set up electronic transfers between your checking account and your HISA so you can easily move money in and out. This way, you get the best of both worlds. Convenient access to your money via the big banks, plus the higher yield of online-only banks and credit unions with the amount above the minimum deposit thresholds.
The HISAs we use right now as Canadians are PC Financial, Tangerine, and EQ Bank. Tangerine is currently offering a promo bonus of 3% on their savings account, so that’s pretty rad.
Aside: If you’re Canadian and thinking of opening a Tangerine account, please consider using this link with our Orange Key 34753654S1. You’ll get $50 if you do.
To our American friends, you might want to check out your local credit union or online savings account. Current rates in the USA seem to be a surprisingly anemic 1.15%, but we can expect as the Fed continues to raise interest rates these savings accounts will also start yielding more.
So that’s HISA-Hopping! Do any of you HISA-hop? If so, which banks do you use?
We won’t be doing a buy this week, as our bi-weekly buys have drifted a bit from our normal 1st-and-15th buy schedules. We will resume our regularly scheduled buys next week.
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NOTE: Due to their recent changes for their commission-free ETF program, we can NO LONGER RECOMMEND TD Ameritrade. We are currently seeking out a new brokerage to partner with and will let you know when we find one.
2) Personal Capital
Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.