Do Yourself A Favor: Pay Attention To Interest Rates
Have you noticed how much interest you’ve earned on your savings account lately? If you haven’t, just wait until this time next month. You should be receiving a quarterly statement with your account summary.
You're lucky to get these from your savings account.
If you have noticed, you might’ve taken a gander at what else is out there. CDs. Money market accounts. These options have something big in common: They’re all yielding low interest rates and are doing little-to-nothing to grow your money.
Add insult to injury, if you factor in inflation (there’s that word, again) and the taxes you pay on any gains, you’ve actually lost money on the deal.
Yep…that’s a DAGGER.
Why? You see, the Fed is intent on keeping interest rates low. Its hope is that this will encourage banks to lend to businesses, for business to then hire, expand and grow, ultimately resulting in a boost in consumer spending – the primary driver of our economy.
When we reach a point where unemployment rates are at normal levels – approximately 5% – and consumers strike the appropriate balance of saving, investing, and spending, our economy can thrive and flourish once more.
But, of course, there are unintended results. Interest rates control the flow of money in the economy. High interest rates curb inflation, but also slow down the economy. Low interest rates stimulate the economy, but could lead to inflation.
Remember, none of the above is under our control. So, like I always say, focus on the things that are under your control. In this context, that would be identifying the appropriate places to put your money.
In reference to a past article discussing budgeting and cash flow management, the question that should be asked, is “what purpose does the money serve?” While asking that question, you also want to consider your where you are balance sheet wise.
1. Focus on your foundation
Probably not the best route to work.
Think of it like being at a circus and watch the trapeze artist walk to tightrope with no safety net. Your financial safety net would be to have things in place like, health insurance, emergency cash savings, and short & long-term disability insurance. Think of these things like the defensive strategies.
2. Invest for the future
Remember, invest for the goals that are furthest away because you can have the greatest impact them. Just remember my example of a snowball rolling down a 30 foot hill. The further up the hill you start your snowball (i.e., investing) the more you will have when you retire.
3. Beat inflation
If No.s 1 and 2 are in check, that means you have no useful purpose to hold liquid cash savings. Interest rates are low, you won’t earn anything, and you certainly won’t out pace inflation over time. In contrast, you don’t want to lock too many dollars away for the long-term. While saving for the long-run is important, you don’t necessarily want to lock away all of your money in places without access. So, that bring us to investing money in places where it won’t be locked up by tax or early withdrawal penalty, nor in a place will it will unlikely outpace inflation. The options you have available may fall into two categories: market based (e.g., stocks, mutual funds, commodities) & non-market based (e.g., permanent life insurance and real estate).
The long and short of our discussions on interest rates and inflation is that they should not be overlooked. In fact, those variables ultimately control how your money is working for you. And the decisions how your money should be allotted remain the same regardless of the economic climate.
Focus on the things you can control, and make sure you develop your financial household in an efficient and prudent manner.
