Receive regular updates via email

Will we see negative interest rates in the US?

Interest rates in Europe on a variety of debt instruments actually reached negative levels this year, a bizarre economic environment with a lasting impact on the Eurozone’s economy. Essentially this means that investors in debt instruments are receiving less than their original investment over time.

The reason is simple: to encourage spending and ward off deflationary concerns. It’s a case of basic supply and demand – investors seeking a safe haven for their money invest in bonds. As demand grows, interest rates drop. Ideally, the rate would bottom out at zero, but with a heavy demand for safety, debt rates turned negative instead. Adding to the demand is the potential for currency appreciation. Even if the debt instrument returns a negative yield, the inherent currency could appreciate relative to the euro creating a gain overall for the investor.

The state of the US economy and bond yields

One of the biggest concerns for US investors is whether the atmosphere of negative yields will spill over into the domestic economy. The results for the first quarter in 2015 were disappointing, but inclement winter weather was partially blamed for the lackluster data. Economists believe the rest of the year should show a robust and growth oriented economy.

Yields on US debt instruments are still near all time lows, but the Federal Reserve has made several statements this year that indicate a rate hike is very likely to happen. While the European Central Bank (ECB) is prepared to begin a quantitative easing program intended to stimulate growth, the Fed officially ended its program late in 2014. It’s very unlikely that the US will actually see negative interest rates. Evidence suggests that US interest rates may currently be as low as they’re going to be before heading back up again later this year.

One major impact that negative rates would have in the US that makes it even more unlikely is the fact that consumers would essentially be paying banks just to hold their money. It’s a situation that the Fed wouldn’t let happen as consumers would simply hoard cash at home rather than make deposits. If that were to occur, it could create a liquidity crisis and halt lending activity.

As the US economy continues to gain strength, interest rates will rise as the demand for investment increases. For the US, negative yields won’t be a concern.

Are you a saver or a spender?

Figuring out if you are a saver or a spender seems to be a simple proposition. Simply put, if you spend more than your make, then there is no chance that you can be a real saver, since your liabilities will be greater than your assets.

If you have a BBT checking account with a balance that makes you feel good when you look at it, but at the same time you have a credit card bill that is higher than the bank balance, then your are fooling no one but yourself.

Rather than staring at a bank balance, one should think about saving in a more general way. Think of savings as an attitude or a habit that makes it more likely that you have positive financial things happening in your life. Having a savings habit doesn’t guarantee that positive financial outcomes will happen, but it makes it more likely that they are happening in your life.

In the following simple example, imaging that the following money habits or money situations are true:

  • Having a savings account with a high interest rate is better than having one with a low interest rate (note that banks typically give higher rates for accounts with higher balances).
  • Paying off a car loan is not as attractive as owning a car free and clear.
  • Paying off a card in full at the end of a month is better than carrying a balance.
  • Spending less than you make every month is better than having some months where you run out of money or have to dip into your savings.
  • Believing that savings is easy is better than thinking that savings is hard.
  • Saving for a special project or for your health or education is better than not doing so.

Reading about good examples stimulates your mind in one way, and looking at pictures stimulates a different part of you mind. You can check out at the infographic below and the words above and between the two you should be about to figure out what good money habits would work for you.

Savers Vs Spenders Infographic by Newcastle Permanent Building Society

Car title loan basic facts

The massive changes in the economy in the last five years has had a number of effects on average consumers. One of the biggest is the drop in home ownership because of tight consumer credit or because of home foreclosures. Another effect is that homes in many parts of the country dropped in value so much that for many consumers, they owe more than the house is worth, and have no equity in their home.

For many in the US, their home was the most valuable financial asset they had, and in many cases, the only significant one. In fact, the 2012 Statistical abstract of the United States stated that in 2007, just before the start of the most recent US recession, the average net worth of families that owned their home was about $230,000, but for renters, it was about $5,000. Since then, the situation has become worse for everyone, especially for those who don’t own their home.

Because of lower rates of home ownership and the decline in home values, home equity loans are no longer an option for many consumers. For those who don’t own their home, often the only asset they have is their automobile. The consumer financial services industry understands this, and has increasingly provided an additional option for consumer, a loan on the value of their automobile. Also called a car title loan, this is a loan where in exchange for the title to your car (and the right to repossess that car), you can get a short-term loan.

The biggest drawback of these loans is the huge interest rates you may have to pay. While a home equity line of credit may have less than a 10% interest rate, and a credit card upwards of 25%, many car title loans may have effective interest rates of 300% or more.

If you are in a position where you need money and have no other options, then go get a auto title loan chicago or from some other local vendor. But if you do, be aware that it could cost you more than you expect.