interest rates Archives - Journey To Financial Independence

High Yield Savings Account

09/04/202309/04/2023Money Maroon

With interest rates as high as it is currently, if you have not looked into the possibility of opening a high yield savings account, you should. As the Federal Reserve raises interest rates, so goes the interest rates offered by banks. However, not all banks are created equal. Your typical brick and mortar banks may still be offering interest rates below one percent. However, if you perform a quick search, you can easily find banks offering significantly higher interest rates. Consider taking advantage of these interest rates as one aspect when building a diverse financial portfolio.

The Federal Reserve

The Federal Reserve, in an attempt to combat inflation, has raised interest rates some 5.25 percentage points since March 2022. The increase in interest rates have reduced inflation from 9% to about 3%. This increase in interest rates have led to a number of kick on effects. For one, an increase in interest rates increases to cost of borrowing money. For example, borrowing money to purchase a car or a home have become significantly more expensive. However, the raise in interest rates have been a boon for savers. Especially those with funds in high yield savings accounts. The higher the interest rate, the faster savings grow.

Compounding

The higher the interest rate, the faster your money will grow. This is compounded with a high yield savings account. This is a result of compound interest. As you may know, compound interest is interest calculated on the initial principal and the accumulated interest of previous periods. As such, this is a cycle of earning “interest on interest.” Compound interest will make a deposit grow at a faster rate than simple interest, which is interest calculated only on the principal amount. As such, the higher the interest rate, the harder your money works for you.

High Yield Savings Account

The national average interest rate on savings account is jut about 0.42%. Most high yield savings accounts offer interest rates that are more than 12 times this rate. Once you have decided that you will take advantage of these higher interest rates, you will then have to decide which bank is right for you.

As high yield savings accounts are typically offered by online banks, it is almost a given that there will be no local physical locations. As such, besides the interest rate, consider ease of use, account accessibility, monthly fees and minimum balance requirements when selecting a high yield savings account.

Conclusion

As the Federal Reserve raises interest rates, so goes the interest rates offered by banks. As you know, not all banks are created equal. Your typical brick and mortar banks may still be offering interest rates below one percent. However, if you perform a quick search, you can easily find banks offering significantly higher interest rates. Consider taking advantage of these interest rates in building a diverse financial portfolio.

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Have You Seen CD Rates Lately?

01/01/202302/25/2023Money Maroon

Have you seen certificate of deposit (CD) rates lately? I will give you a hint, they are high and expected to get a bit higher in 2023 in view of predicted rate increases by the federal reserve. As of the start of the new year, you can get 12 month to 24 month CDs in the 4-5 percent range. If you look hard enough, I am confident that you can find rates in the 5-6 percent range as well. This is in stark contrast to only a year earlier, when rates hovered around 1 percent. On your financial journey, it is important to assess whether or not CDs should be apart of your holdings.

The Stock Market

In 2022, the stock market did not do so well. All the indexes were in the toilet. The Nasdaq was down 31.1 percent. S&P 500 was down 19.4 percent. The Dow Jones was down the least but was down 8.8 percent. The massacre is expected to continue into 2023. This will provide an epic buying opportunity in 2023-2024, but we will discuss this buying opportunity in another post. While the stock market was going down in 2022, do you know what was not down? Savings and CD rates. Both started 2022 ridiculously low. However, as the federal reserve began to fight inflation by increasing interest rates, both savings and CD rates became more favorable.

CDs

A CD is essentially a savings product that earns interest on a lump sum for a period of time. The time period ranges from three months to about five years. Unlike a savings account, with a CD, the money must remain untouched for the entirety of the term or risk penalty fees or lost interest. Because of this lost of liquidity, CDs usually have higher interest rates as compared to savings accounts. As compared to stocks and bonds, CDs are safer and more conservative and offers lower opportunity for growth. However, unlike stocks and bonds, CDs, if allowed to run the term, have a guaranteed rate of return.

CD Rates In 2023

At the start of 2023, CDs are paying 4-5 percent for eighteen month to twenty-four month term. For example, Marcus’ 12 month CD pays 4.3 percent and the 18 month CD pays 4.4 percent. Ally CD rates are 4.25 percent for 18 month, 3 years and the 5 year term. Synchrony on the other hand is offering a 4.6 percent rate for their 14 month term CDs.

Diversify

In life, it is usually best to diversify. By now, you are likely aware that it is likely best to diversify your income streams. You also may know that it is probably best to diversify your investment portfolio. While saving accounts are not necessarily the growth vehicle of the stock market, you should consider diversifying your money beyond investing in the stock market and having a savings account. In view of the current CD rates, investigate if CDs would be beneficial to your bottomline. If a CD is, open one. As the market tanks, instead of losing money, CDs may provide a reprieve. Instead of losing 20 percent in the stock market, gain 4-5 percent in a CD.

Conclusion

CD rates are high and expected to get a bit higher in 2023. These increases are in view of predicted rate increases by the federal reserve. As of the start of the new year, you can get 12 month to 24 month CDs in the 4-5 percent range. If you look hard enough, I am confident that you can find rates in the 5-6 percent range as well. This is in stark contrast to only a year earlier, when rates hovered around 1 percent. On your financial journey, it is important to assess whether or not CDs should be apart of your holdings.

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Rising Interest Rates

05/12/202205/18/2022Money Maroon

There is a lot to note when interest rate changes. Rising interest rates typically result in lower stock market returns and an increase in bank lending rates. For many savers, rising interest rates typically translates to increase interest payments on savings and certificate of deposit accounts. However, one of the most interest thing to watch when interest rates increase is the speed at which banks raise interest rates on deposit accounts. The speed of raising interest rates on deposit accounts is typically inverse to the speed at which interest rates are reduced. Why? The answer is simple. This is the business model of banks.

Falling Interest Rates

Once interest rates are reduced, banks are typically the fastest to reduce interest rates on savings and certificates of deposit accounts. The speed of interest rate change is much slower with regard to the interest rates on loans. The reason for this is quite simple. Banks are able to make more money this way. By reducing interest rates on what has to be paid out (interest on deposit accounts), banks are paying out less to customers, while keeping the interest rates on loans high. In this case, banks are obtaining funds from the central bank at a low rate, lending the money at a high rate and paying customers at a low rate. This tactic maximizes the gains of banks.

Rising Interest Rates

On the other hand, when interest rates begin to rise, banks are the fastest to raise interest rates on specific instruments. Specifically, banks quickly raise interest rates on loans but are delayed on raising interest rates for savings and certificates of deposit accounts. Again, this is the business model. Banks obtain money from the central bank at a specific rate. Banks then charge customers on loans more than the rate a which they obtain money from the central bank and pay out less to customers for certificate of deposit and savings accounts.

The Business Model

The best business you can run is one that gains a return no matter what the economic environment. Banks are in this position. Banks have found a way to gain no matter what the economic situation. Interest rates go up, banks make a profit. Interest rates go down, banks make a profit. This dynamic is not news to anyone who tracks the industry. Banks are positioned to benefit from fatter lending margins as the central bank raises rates.

What Can Consumers Do

Consumers can also play this game to their advantage. One of the many things that consumers can do as interest rates changes is to borrow or to refinance any loans they may have when interest rates are low. Know that the market operates in cycles. Interest rates typically will rise when there is a lot of easy money and/or inflation. As the central bank attempts to restrict inflation, the central bank will increase interest rates. On the other hand, interest rates are reduced if there is a recession or too little money or economic activity. Here, the central bank tries to stimulate the economy by lowering interest rates and increasing the money supply. Consumers need to pay attention to this cycle and act accordingly.

Online Banks

To take advantage of higher interest rates, consumers can also search for online banks. Online banks typically pay interest rates that are multiples of that of the typical brick and mortar banks. But also, online banks tend to increase interest rates on deposit accounts at a faster rate and to higher levels as compared to brick and mortar banks.

Consumers should be careful when locking in interest rates on certificates of deposit. When interest rates are risings, when you lock in a rate, you may miss out as interest rates further increases.

Conclusion

Rising interest rates typically result in lower stock market returns and an increase in bank lending rates. For many savers, rising interest rates typically translates to increase interest payments on savings and certificate of deposit accounts. However, one of the most interest thing to watch when interest rates increase is the speed at which banks raise interest rates on deposit accounts. The speed of raising interest rates on deposit accounts is typically inverse to the speed at which interest rates are reduced. Why? The answer is simple. This is the business model of banks.

Play the game and put your money where you will get a better return. This is often referred to as the only free lunch in finance. Increase your returns without increasing risk.

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Video Summary

What Is Inflation And Should You Care

02/13/202202/13/2022Money Maroon

Inflation is the overall general upward price movement of goods and services in an economy. Put it simply, when asked what is inflation, it is a general increase in prices. Why is this important, this is important because as prices rise, your purchasing power decreases. Unless you have obtained a pay increase that matches or exceeds inflation, your purchasing power is being eroded.

What Is Inflation

A simple example of inflation is the price of an item at your birth versus current prices. I can remember when a can of soda from a soda dispensing machine was only 25 cents. Today, the same soda would cost at least about $1.50. My friends, that is inflation. This also shows how much your purchasing power have decreased. 25 cents cannot purchase what it use to. As prices rise, you are able to purchase fewer goods and services with the same amount of money.

Why Is Inflation Important

As inflation rises, purchasing power decreases, costs of living increases, and economic growth may decrease. If prices increase and consumers cannot purchase goods and services, guess what happens next? Without a pay increase, consumers will not be able to purchase goods and services at the same rate that they did in the past. If consumers do not purchase goods and services, companies providing these goods and services will not be profitable and may begin to go into debt. Companies that do not make profits, will over time reduce staff and may eventually go out of business. As such, unemployment rises and further exacerbates economic hardships because without a job, consumers will purchase less and the cycle continues.

What Is Inflation And Why Does It Occur

Many believe that inflation results when the money supply growth outpaces economic growth. What this means essentially is as money becomes more available prices increase. It becomes a matter of products are sold at the prices that the market is willing to pay. With increase money supply, some in the marketplace will be able to pay the increased prices, but not all.

With income inequality, there will be a class of folks that will be able to absorb increases in prices. But when inflation rises dramatically, the effects of inflation will be more apparent. Most in the middle and the lower class will not obtain pay raises that will allow them to continue living the lives that they once did. If anything, once this cycle begins, the middle and lower class will likely be most affected. Meaning, when businesses begin to layoff workers or go out of business, the middle and the lower class will be most affected.

Winners And Losers

As asset prices increase during an inflationary period, those who own assets will likely benefit. For example, those who own precious metals, real estate, and stocks. In fact, some borrowers benefit as well if they have locked in a low interest rate. For borrowers, their asset price increases but their rates are locked in. The losers are often those on a fixed income, as they will unable to afford increase prices. But in an inflationary environment, things can change very fast as uncertainty increases.

What Is The Fix

To slow down inflation, governments typically try to reduce the money supply. This can be done in a number of ways, but one method is typically used. Increasing interest rates. As interest rates increase, it costs more to borrow money, it costs more to do business and as such, less money is in the marketplace. Of course, these policies must be balanced.

As money in the marketplace is reduced, credit may tighten, businesses may not be able to borrow money and in fact may not be able to make pay roll or invest in growth. This may lead to a recession leading to layoffs and business closures. To put it simply, monetary policy is complex. Knowledge is power.

Conclusion

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Video Summary

The Federal Reserve

Compounding

High Yield Savings Account

Conclusion

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The Stock Market

CDs

CD Rates In 2023

Diversify

Conclusion

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Falling Interest Rates

Rising Interest Rates

The Business Model

What Can Consumers Do

Online Banks

Conclusion

Video Summary

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What Is Inflation

Why Is Inflation Important

What Is Inflation And Why Does It Occur

Winners And Losers

What Is The Fix

Conclusion

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