The Company
HSBC is a respected international bank with a reputation of credibility. They have good customer service (on the phone and through email) and a wide range of banking products. Because the savings account is provided by an established bank you can rest assured your money is safe.

Requirements
With this bank you don’t have to worry about minimum account balances and there are no inactivity fees. You will need to be over 18 and be a US citizen to set up an account. Make sure you have your social security number and an active checking account (to transfer money to their bank). Over all they don’t ask for anything more than other banks. As a security measure make sure your browser is up to date and that you actively run virus protection software.

Setting Up an Account
Setting up an account is fairy easy but verifying your settings is a little cumbersome. HSBC makes this as easy as possible but like most things online they could improve. But when your financial security is involved it’s worth it to take all necessary precautions. One thing that sets HSBC apart from other sign up processes is that they run a credit check as part of the account setup process. They’ll ask you three questions pertaining to your credit history just to make sure you are who you say you are. They also send you a letter containing a verification password (or temporary password). They actually mail this to your physical mailing address. It usually takes less then a few days. You will get a number of emails that are used in the new account creation. When you have everything you will need to enter it in the verification screen.

Time to Setup Account: 8 minutes
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Signing In
After you setup an account HSBC has some extra security measures. For example, they require you to enter your password through the keyboard and by typing it in using an online keyboard. Having more security is always a good thing so I don’t fault them in this area. I’ve noticed other banks following HSBC in many of their security measures.

Transfering Money
Like other online banks when you make a transfer in or out of your account there is a 3-4 day processing time. In my experience this in normal (even though it can be a pain sometimes). If you have a HSBC bank account the transfer time is next to nothing.

Summary
HSBC is a solid bank with a very secure account creation process. They will take care of you if you need help. They have a competitive savings rate tied to your own ATM card. Overall they have been one of my favorite banks to work with.
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If you spent $100 on something silly (e.g. new phone, lattes, fast food) how much is that really worth in the future. Thirty years from now what could have you purchased?

Assume you put your money in the stock market with an average 12% annual return. Your money is also growing tax free using compound interest.

In 10 years that $100 would be worth $310
In 20 years that $100 would be worth $964
In 30 years that $100 would be worth $2,995
In 40 years that $100 would be worth $9,305
In 50 years that $100 would be worth $28,900

If you want to calculate what $10 would be in the future just move the decimal to the left one digit. To see what $1,000 would be move the decimal to the right one digit and add a zero.

Devaluation of the Dollar and Inflation
Before we get carried away lets make sure we take into account inflation and the devaluation of the dollar. Using the Bureau of Labor Statatics Calculator we find that the money has much less buying power as it did in the old days. For example:

10 years from now $310 would only be worth $233
20 years from now $964 would only be worth $526
30 years from now $2,995 would only be worth $901
40 years from now $9,305 would only be worth $1,494
50 years from now $28,900 would only be worth $3,855

While it’s next to impossible to predict exactly the rate of inflation in the future these numbers give a ‘ball park’ figure. Using the calculator backwards I entered my compound growth amount in the first box with 2008 as the year. I set the second box back 10, 20, or 50 years. Pressing ‘calculate’ shows what $100 would be worth after inflation adjustments over the select number of years.

Talking about inflation always depresses me. The fact the it could take $28,900 and turn it into $3,855 is just sad. But the good news is that if you grew your investment in a tax sheltered IRA you get to keep every penny of that investment.

Inflation Calculator

Compound Interest Calculator

What is the ideal amount for a cash reserve?
Everyone has a different standard of living, career, and tolerance to risk. With that said, the primary reasons for having an emergency reserve are the same. Firstly, we don’t want to damage our credit when tragedy strikes. Next, we don’t want to be evicted from our homes. Lastly, the added stress of financial problems isn’t worth it. Extra cash adds a ‘buffer’ that protects us from life’s unexpected ups and downs.

An emergency cash fund should cover:

• Mortgage or Rent payments
• Insurance costs
• Utility bills
• Groceries
• Car payments
• Student Loans
• Minimum payment on credit cards

A standard cash reserve goal should cover six months of expenses. If your monthly expenses total $2000 you should plan on a cash reserve of $12,000. Six months is a starting point but there are other factors that you might consider. If your job is in high demand you might be able to lower your time from six months to three. The economy’s strength is a factor as well. In times of recession (or suspected recession) it might be wise to pull some money out of high risk investments and build your cash reserve.

Word of warning
While having cash handy for emergencies is a wise decision, too much cash can actually hurt you in the long run. There is a balance between cash and investments. Saving too much cash can undermine your investment and retirement goals. Excessive cash holding is risky in terms of opportunity cost. Opportunity cost is the difference between what you could have made VS. what you actually made. For example, an NBA basketball star could take over his families furniture store and make $100,000/year after graduation. On the other hand he could play for the NBA and make $10,000,000/year. The opportunity cost of taking over the family business is $9,900,000. That same idea of opportunity cost plays a big role in determining the ideal balance between cash and investment. A few percentage points makes a world of difference in terms of compound interest.

Where to keep your cash
Where should you keep your cash? Keeping your cash in an account that will keep up with interest is important. Stuffing money into your mattress isn’t going to keep up with inflation. With the Fed cutting interest rates the return on FDIC insured savings accounts have decreased from over 5% to 3.75%. While the decrease is unfortunate one fact remains; online savings accounts are still the safest (and most profitable) when compare to other alternitives — which aren’t FDIC insured. Read more about online savings accounts with high interest.

The CD Shuffle
If Certified Deposits (CDs) were more attractive right now this strategy would optimize the return on your cash reserve. Unfortunately CDs, according to BankRate, were all under what you could receive with an online savings account.

If the interest rates on CDs ever improve beyond online savings accounts you could use this strategy. The concept requires multiple CDs being opened with different expiration dates.

Your first purchase would include the following:

1 month CD (expires in 1 month)
2 month CD (expires in 2 months)
3 month CD (expires in 3 months)
4 month CD (expires in 4 months)
5 month CD (expires in 5 months)
6 month CD (expires in 6 months)

As a month passes your 1 month CD will expire. Take the money from that CD and buy another 6 month CD

2 month CD (expires in 1 month)
3 month CD (expires in 2 months)
4 month CD (expires in 3 months)
5 month CD (expires in 4 months)
6 month CD (expires in 5 months)
6 month CD (expires in 6 months)

As the second month expires take that money and buy another 6 month CD

3 month CD (expires in 1 month)
4 month CD (expires in 2 months)
5 month CD (expires in 3 months)
6 month CD (expires in 4 months)
6 month CD (expires in 5 months)
6 month CD (expires in 6 months)

After 6 months every one of the CDs will be 6 month CDs. As the CDs expire continue to buy new 6 month CDs.

6 month CD (expires in 1 month)
6 month CD (expires in 2 months)
6 month CD (expires in 3 months)
6 month CD (expires in 4 months)
6 month CD (expires in 5 months)
6 month CD (expires in 6 months)