What Higher Interest Rates Mean to You
Interest rates have risen dramatically over the past year. That is both good and bad news. In this episode, we discuss the pros and cons.
Speaker 1 (00:07):
Welcome back to 30 Minute Money, the podcast that delivers action-oriented smart money ideas in bite-size pieces. Today, joining me at Roc Vox recording in production in Bushnell's Basin in New York, Steve Wershing from Focused Wealth Advisors.
Speaker 2 (00:21):
Scott, how you doing?
Speaker 1 (00:22):
I'm doing very well today. Uh, you know, everybody is always talking about interest rates up and down and what's the Fed doing and everything like that. Well, you're going to tell us what it means that we have higher interest rates.
Speaker 2 (00:33):
Yeah. What it means to you. So let's go back a year. Let's look a year back in the, well, sure. First, let me, let me say this. So right now, as we sit here in the studio, if you buy a one year treasury bond, you'll earn 4.66%. If you buy a two year bond, you'll make 3.96%. You buy a 10 year bond, you'll get 3.45%. So one thing that you might think about when you hear that is, wait a minute, shouldn't I pay get paid more if I go farther out? And that's, that's one of the reasons we su we know a recession is coming, is because it flips up upside down like this. Huh? So that the short stuff pays more than the long stuff. Cuz you know, it logically it doesn't make sense. However, what we're gonna talk about today is where it's come since last year. So a year ago that, remember the one year right now is paying 4.66% last year at this time, the one year was paying 1.8399999999999999%.
Speaker 1 (01:30):
Wow. So is that a good thing or a bad thing? Well,
Speaker 2 (01:33):
It depends , and that's why
Speaker 1 (01:36):
Never an easy
Speaker 2 (01:37):
Answer with you. Whether it's good or bad depends on who you are. So, okay. Um, it's bad if you're trying to buy a house and you need a mortgage. Right. It's bad if you have a lot of credit card debt, because a lot of times that's pegged to the, uh, to other interest rates in the economy. Um, it's bad if you have a line of credit or if you have a business loan or something like that, because most of those will adjust periodically to whatever the local, you know, whatever the current interest rate is.
Speaker 1 (02:03):
You know, I think I I was, I noticed that, I noticed that my, my business loan, the, uh, it went up like 4%. Four points. Yeah.
Speaker 2 (02:13):
Speaker 1 (02:13):
Thankfully I don't have much, I'm almost done with it, but I Well,
Speaker 2 (02:16):
That's good. That's that good, you know, that, but it's bad for a lot of people who are not in that position whose loans are still pretty big. And that, you know, whenever you hear that, you know, everybody's heard the, oh, you know, the term, oh, prime plus some percentage. Yeah. That's a floating rate loan. Right. So it's, it's whenever, whenever prime changes or whenever, whatever the benchmark is, changes what you have to pay for it is, is gonna change too. And so that's bad. Now it's good for some other people. It's good for people who are, uh, income investors. So for a lot of retirees it's good because for a lot of years it's been really hard to try to find income producing investments that made anything right. It, it would CDs and bonds and money market instruments, I mean, they, they were all paying so little money, it was really hard.
Speaker 2 (03:01):
And a lot, and a lot of retired people were really getting pinched because they were, they were counting on that. That's when they retired. They had a lot of investments in those kinds of things, and that's what was generating their income. And over the course of years, it went down and down and down and down and really put 'em in a pickle. So right now, you know, it's, it's a much better time for them. Um, it's good for savers. If you have money in the bank, um, you should be making more than you were a year ago. Um, because that's, you know, the, the, those treasury securities are reflected also in what banks do. Um, it's good for you if you haven't accounted a bank. It's bad for the bank. Mm-hmm. . Um, because it means they have to pay a lot more. And this, this is what happened with, uh, with Silicon Valley Bank a little while ago, is that, um, you know, they just did a bad job of managing what kinds of, you know, they, they did what the government told 'em to do.
Speaker 2 (03:52):
They did what, you know, one of the basics of prudent management was they put all of their reserves in government securities. That's good. They put 'em in long-term government securities that turned out not to be a great idea because they're all still, you know, they were stuck at low interest rates. And when interest rates went up, the value of those things went down and people started drawing their, their money outta the bank. And the bank didn't have securities that they could sell to pay 'em back, because all of, so those securities had gone down in the meantime. So that's where that came from. And we, and we're probably not done with that. You know, Silicon Valley was a, an extreme example of it, but we'll probably see that stuff kind of rippling through. So on one side, it's good for, it's good for the depositors, good for the good, for the savers, not so good for the bank.
Speaker 1 (04:38):
So, I mean, have we gotten through the, the Silicon Valley, uh, thing with, there was a couple of other banks weren't there that, that was going down as well? Are we through that woods or is that, or other banks are now starting to get in trouble?
Speaker 2 (04:50):
Well, all the people that I read, all the stuff that I read, were probably not done with it yet. Like I said, it's an extreme example. They may not go down in flames like Silicon Valley Bank did, but, uh, we're probably gonna see it. I mean, even, even some of the big money center bank CEOs are talking about instability in the banking sector. So that's something that we're gonna, that we're probably gonna see more of. There are probably lots of other banks that are still in, in danger. So one of the things that you, you know, there are a couple things you can do about that. One is, um, you know, tr don't lock yourself into an, uh, income investments that are, that are for the long term. Like, don't buy a five year cd, don't buy a 10 year bond. Um, because that's, you know, you're gonna have to rely on those people to pay you that interest over the course of that time. But it also, you know, it's lower interest rates now. So, but one of the other things, um, that you can do is to put it into investments that are outside of a bank account. So if you put money in a bank account, it becomes part of the bank's assets and that's what they use to loan money out or to buy government securities and those kinds of things. And if a bank goes down, it's those bank assets that, um, that get called into question that they can't necessarily afford to pay back.
Speaker 1 (06:02):
What about a one year cd? Is that a, is that a good idea?
Speaker 2 (06:06):
One year? CDs are okay, but these are kind of funny times. Um, you're better off, from my perspective, it's not bad to buy a c d you know, CDs have a place in your portfolio, but I wouldn't overemphasize it. And, and most banks are gonna be okay, but you want to have some money diversified away from the bank. So right now, money market accounts are paying a lot. Like, you know, the money market accounts in, in the, in, in the portfolios that we have are paying like 3.74%. And in these times, when you go to the bank and they tell you a one year CD would be 4%, it's not worth locking it up. Right? Right. It's not worth, it's not worth the, the, the, the penalty that you'd have to ca pay getting it back out again. And so from my perspective, it's just better off to, to get these kinds of investments that are not actually part of the bank's asset.
Speaker 2 (06:56):
So if you get a money market fund or a money market, uh, money market mutual fund, something like that, it's not part of the bank's assets. It's separate, segregated. If the bank goes down, your money is still someplace else. And that gives you a level of protection in some environments, you know, if CDs are paying a lot more than money market accounts, well then we might, it might be be more attractive and you, and you might put more with a bank. But these days, with, with rates where they are, and especially really short rates, you, you know, you can add an extra little level of, of safety if you, uh, if you keep your assets segregated from the bank's assets. So the other thing that we have to worry about there too, especially if you wanna lock stuff up for a long time, is inflation.
Speaker 2 (07:37):
So one of the things that, one of the reasons that interest rates are a lot higher is because inflation is a lot higher and inflation takes away from the buying power of that money. So if you want to find out what you're really making on money, you've gotta subtract inflation from it. So it might be great that you could make 4% on a cd, but if inflation is clicking along at 6%, you're still losing money. Um, I know. So, so we don't wanna overemphasize these kinds of instruments. Everybody needs some short term cash. Everybody needs an emergency fund. Everybody needs to have, you know, a portion of their portfolio that's in really short term, really high safety investments. We don't wanna overemphasize those things because we're still dealing with a lot of inflation. And these, you know, these kinds of, of instruments can't keep up with inflation.
Speaker 2 (08:23):
So we wanna keep it in perspective. So we have lots of clients now moving, you know, bank accounts into money market funds first. You know, partly because if they're looking at a savings account or a checking account, those accounts are still not making hardly any money. And so you can make, if you're making half a percent in a savings account, you can make six times that if you move it to a money market account, a money market mutual fund. So, you know, that's, so we've got a lot of that kind of action going on right now.
Speaker 1 (08:53):
And so using that instead of a account. Yeah. And then can you keep adding to that if Sure. Putting away x amount a month or whatever, you could just keep dropping it into that money market
Speaker 2 (09:03):
Account. Yeah, it's just, it's just a regular old investment account, so you can put money into it, take money out whenever you want to. Is
Speaker 1 (09:09):
There any place else besides the bank where we should be thinking about this?
Speaker 2 (09:13):
And it's mostly that? Well, so besides the bank, so if you take a look at your savings accounts, credit, uh, checking accounts, see what interest they're paying, the other big area that we're seeing where this pops up is when you have an investment portfolio, take a look at, uh, the cash account that's in the investment portfolio, or what they might call a sweep account, which is if you sell something in the portfolio, they've gotta put that money someplace. Usually it's some kind of a money market type investment, some kind of a money market type mutual fund. But what I'm finding is when I'm talking to, to, to a lot of people is that a lot of those are not keeping up pace there. This is a way for the, the brokerage to make a little bit of money back that they may have lost to an interest.
Speaker 2 (09:55):
Rates were really low. So, you know, I'm, I'm talking with clients and they look at their statement, they're like, wait a minute. You know, I thought you said money market rates were a lot higher. And, and I would say, yeah, we said, well, I'm looking at my, this account and my brokerage account, it's only paying a half a percent. Well then you need to, you know, you need to find a money market account to move that money too, so that it can be working. I mean, one of the nice things about, about having cash, cash positions right now, if you're nervous about the market bouncing around and you want to have a little bit higher level of cash right now, one of the nice things is you kind of get paid to sit on the sidelines because that money can be making three, three and a half, three and three quarters, something like that. So you wanna make sure that that money is working for you because there are a lot of people who still have a fair amount of cash hanging around in their investment portfolios.
Speaker 3 (10:43):
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Speaker 1 (12:09):
All right, so what higher interest rates mean to you? 30 minute action item.
Speaker 2 (12:15):
Look at your cash assets. That means your savings accounts, your checking accounts, the cash account in your brokerage accounts, and just check on what the rate is because if it's lower than three, you can probably do better.
Speaker 1 (12:28):
There you have it. Thanks for joining us on 30 Minute Money. Of course, it's at 30minute.money. Steve can be found at focusedwealthadvisors.com. I can be found at rocvox.com and the studio can be found in Bushnell Basin. Come on down and hang out with us. We'll see you next time on 30 Minute Money.