Contrarian Finance

I know I usually post about the market and such (and yes, I do need to update you on my current thoughts on Citigroup and their ilk), but I recently had to sort out the whole Business Savings Account thing, so I thought I'd share my experience (for what it's worth).

The basic thought process here is that I need to stash cash away each time I get an invoice paid from a vendor, which I will later need to pay estimated income taxes on. I only pay these taxes once a quarter, so why not earn some money on the float? Also, I have to stash my (potential) SEP contributions somewhere. When I say "potential" that's because I set the money aside, and determine the actual contribution amount in late November, so as to maximize my benefits (read: minimize my tax liability).

I'm making the assumption you're not a sole proprietor here (I'm an LLC), because you'll get better rates in a personal account, if you're not required to keep your business funds separate. But then again, you should probably keep them separate regardless, as a best practice. But that's another topic.

So here's what I came up with, let me know if I've left off a good option:

Straight Savings / Money Market

Capital One Direct Banking
Their business savings (money market) account is paying 3.00% with no minimum and no fees. Simple and to the point.

ING (Orange for Business)
Their business savings (money market) account is paying 3.15% with no minimum and no fees. Equally simple and to the point.

Brokerage Account / Money Market Fund

Fidelity Account for Business
Technically you can buy stocks and bonds (the usual brokerage suspects), but since we need (nearly) guaranteed returns here (this is our tax money!), I'd stick with a classic money market like Fidelity Cash Reserves (FDRXX - currently yielding 2.97%). You can also go tax free, which would be something like Fidelity Tax-Free Money Market (FMOXX - currently yielding 1.72%). The minimum to open is $2,500, but technically there's no minimum balance. If this is your 'core' account (your only account with them) there is no annual fee.

NOTE: Generally, if you're in the 25% or higher marginal tax bracket, you'll benefit from the tax free funds, which aren't available in a traditional savings type account. Disclaimer: I'm not a tax guy, so if you need tax advice consult someone who is.

Vanguard Account for Business
Also a full brokerage account. I'd go with either Prime Money Market (VMMXX - currently yielding 2.76%) or Tax-Exempt Money Market (VMSXX - currently yielding 2.22%) here. Their fund fees are either .24% or .10% (respectively) versus Fidelity's fees of about .43%. And since we're only talking about 2-3% to begin with, .43% is a big chunk! There's a $20 annual fee for accounts under $10,000, but you can dodge it by signing up for full electronic delivery (which I'd do anyway). $3,000 needed to open, but again no technical minimum balance once the account is open.

Once you accumulate more savings (like future retirement stuff) you could always shift over into Investment grade stuff, like short term bonds and the like. For those of you who know me, this is one of the only settings in which I actually recommend bonds, but again, that's another topic completely.

To sum up, the traditional accounts have the advantages of 1) slightly higher rates, 2) being "just cash", and 3) having no minimums at all. The brokerage accounts offer 1) a tax-exempt option and 2) numerous other investment choices. And honestly, if you haven't got at least 3K to play with, this probably isn't worth the effort anyway.

Final decision for me: I'm going with Vanuard. I've had stuff with them before (I use USAA now), and loved them. Low fees, great phone support, a great website, and reliable electronic documents - what's not to like? Also I've go the tax exempt route, and their high(er) yield and management fees beat Fidelity's funds.

Upcoming posts - "Why I (Still) Haven't Sold My Stake in Citigroup (C)" and "Enough Already, What Do You Own Other Than Citigroup?!".

Soliciting Feedback - What would you like to see blog on?