stock market

Have you seen CD rates lately

Have You Seen CD Rates Lately?

Money 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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I Bonds

I Bonds Are Offering A 9.6% Return

Money Maroon

As interest rates increase and the stock market falls, more and more pundits are pushing I Bonds. So let us dig into I Bonds and why it may be an option for those looking for a return on investment as the stock market falls.

What are I Bonds?

I Bonds are savings bonds that earns interest based on combining a fixed rate and a variable inflation rate. To simplify, bonds are debt instrument issued by governments, corporations, and other entities to raise money. For the most part, bonds are issued and have a set period to mature. Over that time, interest is typically calculated based on the purchase value. In the case of I Bonds, the time to maturation is 30 years, unless you cash them first. As I Bonds are back by the US government, they are essentially risk free.

In view of the effects of inflation on interest rates and the low risk, I Bonds are very attractive in high inflation periods. For I Bonds, the interest payment increases or decreases based on the official inflation rate.

Interest Rates

I Bonds feature a combination of a fixed rate that stays the same for the life of the bond and a variable inflation rate that is set twice a year. The variable inflation rate is based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers. As far as timing, the U.S. Treasury changes the inflation rate component of I Bonds every May and November. 

If you purchase a new I Bond in April or October you will get the “old” rate for the first six months of ownership, and then in the second six months of ownership, you will get the rate that was announced a month after the I Bond was purchased.

Once the interest rates are determined, interest is earned on the bond every month. The interest is compounded semiannually (twice a year:  the interest the bond earned in the previous six months is added to the bond’s principal value, thereafter, the interest for the next six months is calculated using this adjusted principal.) The total interest and principal are paid out when you cash the bond.

Today, June 2022, I bonds currently have a fixed rate of 0%, but a variable inflation rate of 9.62%. I Bonds are becoming popular because where else will you get such a return currently? So how do you purchase I Bonds?

Purchasing I Bonds

Two of the easiest ways to purchase I Bonds are via the US TreasuryDirect website or via mail when you file your federal tax return. Electronically, the minimum that can be purchase is $25 via the US TreasuryDirect website and  $50 via the paper route. On the other hand, the maximum that can be purchase via the US TreasuryDirect website is $10,000 total each calendar year and $5,000 total each calendar year via the paper route.

When Can You Redeem I Bonds

I Bonds earn interest for 30 years unless you cash them first. An important aspect of I Bonds is that I Bonds cannot be redeemed within a year after purchase. If you will need your funds in the next year, I Bonds may not be the best vehicle for you. Note that you can cash I Bonds after one year, however, there is a penalty. If you cash your I Bonds before five years, you lose the previous three months of interest. As an example, if you cash an I Bond after 20 months, you will only get the first 17 months of interest.

Conclusion

During this inflationary period where the stock market is correcting, it is difficult to find a financial winner. To protect your portfolio against inflation, I Bonds may be a winner, at least in the short term. I Bonds are backed by the US government, as such, there is very little risk. Further, the value of I Bonds do not go down. More importantly, I Bonds are currently offering a 9.6% return. Based on your financial position and strategy, I Bonds may be right for you.

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Video Summary

The racial wealth gap

Closing The Racial Wealth Gap

Money Maroon

You would have to be living under a rock to have not noticed or heard of the racial wealth gap in the United States. This article will not address biases or racism, implicit or explicit. The focus of this article will be on high level ways to address the racial wealth gap. More specifically, what can minority groups do to increase their wealth.

Racial Wealth Gap Explained

The Federal Reserve reports that “In the United States, the average Black and Hispanic or Latino households earn about half as much as the average White household and own only about 15 to 20 percent as much net wealth.” White households hold 87% of the wealth and account for only 68% of the population. Blacks account for 16% of the population, but owns only 2.9% of the wealth. Hispanics hold about 2.8% of the wealth and accounts for about 11% of the population. These numbers are very telling. 

A striking stat is that the 400 richest American billionaires have more total wealth than all 10 million Black American households combined.

On average, the net worth of a typical White family is about 10 times greater than the average net worth of a typical Black family. Based on some calculations, Black families are expected to have $0 net worth by 2053. The same is expected for Hispanic families just 20 years later.

All things being equal, we would expect the proportion of the population to equal the proportion of the wealth. This is however not the case. 

Wealth Building

To really look at the wealth gap, let us take a look at the wealth drivers in the United States. Huge wealth generation traditionally comes from entrepreneurship, ownership of real estate and stock market returns. 

To address the racial wealth gap, these three areas are prime targets.

Entrepreneurship

When we look at businesses, and entrepreneurship generally in the United States, Whites owns about 70% of businesses, Hispanics 14% and Blacks 6%. In view of the wealth statistics, this is not surprising. Additionally, for all the amazing work being done in the start-up space, less than 3% of total venture capital funding went to Black and Hispanic founders.

The industries that minorities operate in further exacerbates the racial wealth gap. Minorities generally own firms in the service and retail industry, many serving low-income and minority communities. Therefore, many minority enterprises have missed out and are missing out on the boom happening in the high skill sectors and the tech industry.

To combat the racial wealth gap, increase minority representation in entrepreneurship, the high skill workforce and the tech industry.

Stocks

On average, about half of Americans are investing in the stock market. For the most part, stock ownership is highly concentrated in the upper class and the highly educated. Greater than 90% of those in the top 10% based on income owns stocks. Looking at the top 10% in wealth, 94% of those individuals own stocks. Minorities are not well represented in the top 10% in wealth and income.

Looking at the racial breakdown, about 64% of Whites own stocks. Only 35% of Blacks and 24% of Hispanics owns stocks. Looking specifically at wealth, for Whites, 24% of assets are in the stock market. On the other-hand, only 13% of Blacks and 10% of Hispanics’ assets are in stocks. This have huge implications. 

What this states is that over the past decades of growth in the stock market, minorities participated less and have less of their funds in the stock market. The end result is that minorities have reaped and continues to reap significantly less benefits from the stock market boom. The losses are significant. 

Therefore, to close the wealth gap, increase minority participation in the stock market.

Real Estate

You cannot approach the effects of real estate on the wealth gap and not appreciate the effects of governmental policies such as redlining. The past policies of redlining have detrimentally affected the wealth of many in the United States to the benefit of others.

Today, Americans have a home ownership rate of about 65%. However, 73% of Whites own the home they live in. Only 48% of Hispanics and 42% of Blacks own their homes. But owning a home is not enough. Where you live matters. The value of the home you own matters. For minorities, it is a double whammy. Not only do minorities own less homes, minorities homes are less valuable.

It is no secret that home prices have been on an astronomical rise since the housing crash of 2008. Based on the above, this raise in prices and in turn equity benefits those who own, more specifically those who own high priced properties. 

To close the wealth gap, increase real estate ownership in minority communities.

Conclusion

To close the racial wealth gap will take a multi-pronged approach and it is a more complex issue than we have addressed. We have not addressed the effects of slavery, and Jim Crow segregation. We however, identify three areas that are the foundation for wealth generation in the United States. These areas are entrepreneurship, ownership of real estate and participation in the stock market.  By increasing minority participation in these areas, we can begin to address the racial wealth gap.

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Video Summary

Opportunities

Take Advantage Of Financial Opportunities During Pandemics

Money Maroon

As someone much smarter than I once said, it is wise to be “Fearful when others are greedy and greedy when others are fearful.” Although the coronavirus has shutdown businesses and have caused mass unemployment, it is important to see and seek opportunities in this time of fear. Let us be clear, we are not down playing the coronavirus or future pandemics. However, it is important to remain level headed and keep your eyes on your goals. In this vain, I implore you to seek, find and take advantage of financial opportunities during pandemics.

Unthinkable And Unplanned

Opportunities may present themselves in the form of a new business opportunity, returning to school or investing in property. Whatever the opportunity is, the opportunity will most likely not appear at the most opportune time or planned. As the coronavirus spreads, different opportunities will present themselves, none of which were thinkable just three months ago. As these opportunities come into view, it will be up to you to take advantage of the opportunities.

Is It Time To Enter The Stock Market

In this coronavirus environment, the most obvious opportunity may be that of taking advantage of the stock market. As a reminder, to build wealth, it is important to live below your means, save and invest. Living below your means allow you to save. While saving is important, saving alone will likely not bring wealth. The power of your saved dollar will be eaten away by inflation.

In view of inflation, investing may be necessary to build wealth. Investing can take the form of investing in a property, yourself, a business or the stock market. 

With regard to investing in the stock market, this act is typically one of the last step taken by most. Due to the risk associated, investing happens to be the step that most are most hesitant to take. However, once most individuals begin to invest, the number one regret tends to be not starting earlier.

What We Can All Agree On

I could go into details about the market providing about a 10% return (not taking into account inflation). However, let us look at the numbers. The stock market hit a high of 29,551.42 on February 12, 2020, and have later dipped below 20,000. This is a drop of more than about 33%.

Will the market go lower? I don’t know, no one does. However, what we can all agree on is that it is highly likely that over time the market will rise from its current levels. This is the opportunity. Buy low, sell high.

Taking Advantage Of Opportunities Involves Risks

If you do decide to jump into the stock market, ensure that you understand the risks associated. All investments carry some degree of risk because nothing is 100% certain. 

Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss.  Most importantly, loss of principal is possible. 

While nothing is certain, taking calculated risk can provide substantially return on investment. Further, by doing your due diligence, taking calculated risk can aid on your journey to financial independence. As such, seek, find and take advantage of financial opportunities during pandemics.

Conclusion

In this pandemic like all pandemics, fear is plentiful. As someone much smarter than I once said, it is wise to be “Fearful when others are greedy and greedy when others are fearful.” In this vain, I implore you to seek, find and take advantage of financial opportunities during pandemics. In 2020, the opportunity may just be the obvious, the stock market.

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