There are investment advisors that suggest you put your entire salary into an investment account and then use an attached debit card to pay your normal expenses. The thinking is you can get a higher rate of interest than in a traditional bank account but still have access to your funds if you need it. Sounds like a win-win deal right?
Well there are definitely some pros to managing your money like that. The first is you have quick access to funds in an emergency. If there are no withdrawal fees associated with your account this is definitely an advantage. Another plus is you get the usual benefits of using a debit card such as you may get free travel insurance, points or some other reward. Of course there is the obvious benefit that investment funds have higher interest rates than your average bank account.
Personally, some of those pluses are minuses in my book. Firstly the quick access to funds could be a negative. Unless I’ve specifically designated this account as my emergency fund, the last thing I want is quick access to funds that I should be investing for the future. I guess if the account is a money market account that may be ok. Hit me up if you want to discuss emergency funds, just not in public because I’m usually drunk.
Another thing that concerns me is the associated fees. There’s the fee for the actual card and if you want a replacement card there’s also a fee. You didn’t think you were getting those for free did you? Also, while point of sale (Linx) and ATM transactions at your institution’s machines may be free of charge, the charge to use other institutions machines can be quite hefty. One institution charges TT$7 (usually TT$4 for banks) if you don’t use their cards with their machines. Not to mention some institutions may charge the usual withdrawal (redemption) fee when you take money out and depending on the account you might actually be paying out more than you’re earning.
Speaking of earnings, when you keep withdrawing from your investment account two things happen; first you don’t leave the money long enough to get the full benefit of compounding (money earning money, which Warren Buffett describes as the 8th wonder of the world). I tend to agree, compounding and Hendrick’s gin. The second thing that happens is that the portfolio manager (person managing the fund) has to invest in short-term assets to remain liquid enough to be able to give you back your money at a moment’s notice, like when you feel for a 3 piece and fries or decide to Linx a bag of sapodilla on the highway. What this does is it reduces the return they can actually pay you. Again, this might be ok for a money market fund because they are required to invest in short-term assets anyway and the return isn’t that glamorous to begin with.
Finally, if you were to take the “chain-up” and pass your entire salary through the investment account this could have implications on your ability to borrow. How so? Here’s why. Unless the financial institution provides access to loans you’re still going to have to go to a bank to get a loan or a credit card. If you want a mortgage, lenders make you pass or “assign” your salary to them. This allows them see how much you’re making and more importantly take what you owe them every month before you hit West Mall to buy out Wonderful World.
So, some people may think the pluses outweigh the minuses here but I’m not one of them. I think you’re much better off doing your budget, carving out whatever you plan to save and then putting it in the highest earning investment account that meets your risk appetite (sans a debit card). The less access you have to the money the better, that’s probably one of the few redeeming qualities of annuities (but that’s a story for another day). However, don’t do like me and over invest and then have to wait until month-end to buy new jockey shorts.