Low rates and High Fees

percentage sign

At  first look it is quite depressing bank interest rates on savings    How can you get your money to grow if by the rule of 72’s it will take 72 years for your money to double  at such low rates.

under 1%.

 

Typical  current savings  rates from Schools First  Credit Union  ( amount used under $20,000) might look like this.

cartoon man with psychiatrist

Earnings on Savings  0.10 to 0.15 APY (if you don’t know what APY  means check  PowerPoints  or google) On $1000 that’s only $1 to $1.50 a year

Earnings on Checking 0.05%

Even the best rate promotional share certificate has an APR of 0.90 % for 12 months.

Unfortunately these low rates often drive consumers to make  potentially risky  decisions with their money.

         Consumers don’t save because the rates are too low.  The risk they never increase their net worth because they are not savings.  And non saving becomes a habit rather than the habit of saving.

        Consumers take out long term CD’s to get a higher rate  – It’s a trade off,  if interest rates go up they  now have a lower  a interest rate than  the market rate.

 risk intersecting profit and loss

 Consumers choose to invest in a get rich quick alternative – gold,  stocks held to flip for profits, bit coins etc .  They risk loss of principle.  Although they could gain as well.  Can you afford to lose your initial investment?

Forgetting about other investments and only concentrating on “cash” investments  are there any benefits of these low rates?  Do consumers have alternatives …. The answer to both is yes.  

                            How do low rates benefit you?

car on a calculator

The answer is because the cost of borrowing is lower as well.  Car loan’s show as low as 1.59% interest for 5 years with good  credit.  You may not be earning much on my savings but correspondingly your cost of money is very low. 

House made of paper money

The APR (cost of money ) on a 30 year on a 30 year fixed home loan can be under 4% ( maybe even less if your shop around).  So  even if you aren’t making much on savings   when you are borrowing  money you might be borrowing a lot  say $240,000 for a home loan you lock in a low interest rate for 30 years. A great deal  .

The purpose of commenting on the above is getting you to focus on the spread between savings and borrowing.   The greater the spread the more your opportunity.

Examples (please be careful with these there are many factors to consider and these may not be right for you  they are here just to get you to think about your  options)

·        Let’s say you have 9  years to go on your student loan  with an interest rate of 6.5 %.  If you pay extra on your student loan instead of saving money  it is the same as earning 6.5% on your  money for until the student loan is paid off. 

·        Now look at your credit card interest rate. Is it 18% ?  maybe your better off putting that extra $10 per week you are now saving towards reducing your credit   card balance.  It’s the same as earning 18% a year on an investment,  a great rate.  Now this doesn’t work if you just run the balance back up but if you now have discipline  … then !!! 

 Food for thought.  

DO YOU HAVE MONEY TO BURN?

hands taking money form man's pocket

no fees

 Before you say  NO! let me ask the question a different way.   Do you pay fees  to your bank or credit card  company ?

ATM outside of network fees

                                        Account fees

                                                        Late payment fees

                                                                                           Overdrawn fees.

These little and larger fees add up  get rid of them.   Why pay for something that’s only good for banks?  

I just hate fees with a passion.   But its your money,   maybe you do have money to burn.

Until next week 

Prof K