Why hiding your funds under a mattress makes you lose money (and not because it was stolen)

In June of 2011, three weeks after college graduation, I packed two bags and boarded a plane to New York City. I had landed a job working as a page for an iconic late night talk-show host. A fun, rewarding job but certainly not a well-paying.

Even though I came prepared to be broke…

IMG_3092(Yeah, I ferreted away hotel shampoos and soaps in preparation to be too broke to clean myself.)

…the cost of New York City living shocked me.

Everything I budgeted for seemed to be hundreds of dollars off. My measly paycheck of $200 a week (thanks taxes) didn’t even cover monthly rent. The time to “hustle” had arrived.

Like many millennials I turned to Craigslist. Those ads were terrifying. What did people want to do with my feet?! For the record, “Talent” rarely means credible acting gigs.

craigslist-new-york-city-classifieds-for-jobs-apartments-personals-for-sale-services-community-and-events_1250476179720After losing a lot of faith in humanity, I started applying to babysitting gigs (not on Craigslist) and also got a job working for the world’s largest coffee chain. Being able to make barista-level drinks sure looks good on a resume.

starbucks_getty--525x400(Green is a good color on me.)

Babysitting/nannying is the mainstay of struggling artists, students and financially-destitute New Yorkers. We endure spoiled kids, leering fathers and emotionally-distant mothers for the opportunity to walkaway with cash at the end of the night. Some families are great, but sadly many Manhattan parents should be forced to take parental aptitude tests before procreating. The Nanny Diaries are pathetically accurate.

ScarlettJohanssonsdenimshorts(Check out the Nanny Diaries trailer here for context. Oh, and nanny cams are a real thing.)

However, babysitting (and tips from Starbucks) resulted in quick cash-in-hand. Cash that went right into envelopes. Four envelopes to be precise.

IMG_3104Shortly after getting my influx of cash, I developed the “envelope system.” The envelopes represented different expenses in my life. The cash I earned was divided into:

  • 50% – Rent
  • 25% – Money for Anna (Anna was my roommate and the utilities were all in her name so I’d just pay her in cash when the bills came.)
  • 25% – Savings

IMG_3101(It’s always important to have money goals. I wanted to have saved $500 by May and set aside $50 each month in order to achieve my goal.)

The “fun times” envelope only got love on nights I received a tip from babysitting, or earned more than anticipated. That envelope usually was found wanting.

The methodology behind the envelope system is great, allocate money to the appropriate causes and then save some. The practice is really, really dumb.

For one, I usually had hundreds of dollars “hidden” in my room just begging to be stolen. Second, all that money in my room wasn’t doing anything for me. Money in the bank earns interest (also commonly referred to as compound interest). Money under the mattress just sits there.

money-under-mattress(Nope, not where I hid my money! I’m far too clever for that.)

When you’re ready to diversify your financial portfolio (or start one), IRAs, bonds or CDs (certificates of deposit — insert lame pun about music here) are excellent ways to invest money for long-term gain. IRAs and bonds will be addressed in the future. For now, I’ll break down putting your money in a CD.

Unlike the stock market, CDs are a low-risk way to save money. The interest rates are higher than those of a regular savings account and they are protected by the same insurance as other bank accounts. By choosing a bank backed by The Federal Deposit Insurance Corporation (FDIC), you are guaranteed to get at least a portion of your assets back in case the bank goes under. Typically around $100,000. One reason it’s important not to have all your money in one place.

bank-run-wonderful-life(Points if you know the movie and reference.)

The first step of purchasing a CD is to have a designated amount of cash that you won’t need to access. This money should be separate from any sort of emergency cash fund, because once you put funds in a CD there are early withdrawal fees. CDs have various maturity dates: 6-months, one-year, five years, etc. Once the date hits then you can withdraw funds in full.

The second step is to investigate the best CD for you. Banks vary on the cost of early-withdrawal fees. They also vary on the rate of interest and annual percentage yield (or APY). APY is the rate of return you will earn each year and it accounts for compound interest, making it different from APR (annual percentage return) which does not account for compound interest.

Don’t strain your brain, let this fun, online calculator do the math for you.

If you’re a broke millennial like me, I understand wanting to put off investing until later. However, the earlier you start investing the bigger your return when you’re pushing retirement age. If you want to be a millionaire, now is the time to start.

millionaireusa                                     (All about the timely pop culture references)

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