cash management in puerto rico
“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.”Nassim Nicholas Taleb
Building the life we wanted for our family in Puerto Rico meant we had to leave behind many things we cherished. Our extended family in the states. Our circle of friends. Our favorite haunts. We can and do still visit of course. However, the fact is we can’t be in two places at once.
Without a doubt though, the scariest thing to walk away from was the steady paycheck. As the primary breadwinner of the family, I had to build the belief in myself that I would be able to make the money we needed to survive. This took time. First, we started saving as much as we could while I still had a paycheck. Then, we purchased a rental house, which gave us a little more confidence. Finally, I heard about Act 22 as I was in the middle of learning how to trade. Every one of these steps made the leap seem a little less daunting until I was finally ready to slip out of the golden handcuffs.
Now having taken the bumpy road to be my own boss, I still don’t really have a steady paycheck. The amount I bring in month-to-month can vary dramatically. Because of this, if I don’t plan properly and then have an unexpected drop in income, it can cause quite a bit of stress. I HATE stress. After all, stress ages you and who wants to age faster? Therefore, after a recent unexpected drop in income, I resolved to prioritize building up an emergency fund.
“automating” our finances
Around the time I started working on this, I ran across an article by Ramit Sethi about automating your finances. In short, he recommends direct depositing your income into your checking account each month. Then, set up automatic transfers to pay your credit cards and other bills every month from that account. Staying on top of all of our due dates was quite a chore, so the idea of automating this was extremely appealing.
One of the reasons I had never seriously considered doing this before is because I had a hodgepodge of accounts and would often make payments from a different account from one month to the next. However, since I was just getting ready to embark on building up an emergency savings account I wondered if these two separate objectives could be combined.
two birds, one stone?
So what are the considerations of these competing objectives? Generally speaking, an emergency savings account should have at least three months of living expenses and as much as 12. This is a decent chunk of change. Ideally, you’d like to get a respectable interest rate on it. A money market account seems like the obvious choice here.
On the other hand, if you are going to be paying all of your monthly bills from this account, you want to ensure you can make as many withdrawals as you need to without penalty. Because of the six withdrawal limit per month on savings and money market accounts, a checking account seems to be the only option here.
At first glance, this appears to be an irreconcilable puzzle. Money market accounts pay decent interest, but don’t allow more than six withdrawals per month. Checking accounts allow unlimited withdrawals per month but generally pay little to no interest.
the “perfect” emergency savings account?
Fortunately, those of us in Puerto Rico have an unlikely ace up our sleeve; the cooperativa (cooperative).
“Cooperativas”, like credit unions in the states, are basically less bad versions of the banks. Although they are definitely inferior to credit unions with no free checking, eDeposit, etc., they have special characteristics that make them ideal for this use case:
- They are apparently not subject to regulation D as I routinely have 7 to 9 automatic withdrawals a month at Coop Rincón without penalty.
- These accounts pay decent interest. My savings account at Coop Rincón has a respectable annual percentage yield of 1.01%. That’s 20 times more than what the average checking account pays.
For those of you with Act 22 (now Act 60), this solution gets even better. As a part of the IRS test on whether you have a “closer connection” to Puerto Rico or the mainland, they look at the “location where you conduct your routine personal banking activities”. There is some controversy on how the IRS would view First Tech FCU, which I had previously recommended for banking. This is because, although First Tech has locations on the island, its headquarters is in Oregon. Setting up a cooperativa as your primary personal account from which all your bills are automatically paid, removes this doubt. Further, the interest you receive from your emergency savings would be “Puerto Rico-source” which is tax-advantaged.
cash management in puerto rico
After months of frustration, I am finally happy with our banking situation. The combination of First Tech FCU and Coop Rincón has been a match made in heaven. I use First Tech for my business account, eDeposit, free checking, and ACH transfers and Coop Rincón for bill payments and emergency savings. So far I have automated everything except PREPA (electricity) and AAA (water). If any of you know how these can be automated as well, please let me know!