Are Interest Rates Really Too High?

The stock market has been a mess over the last couple of months.  I guess after almost a decade of solid growth, it was time.  Of course, our President has a different thought.  He blames high interest rates.  The President has been pushing the Federal Reserve to lower interest rates.  They haven’t been listening.  Currently the Fed rate stands at 2.25%.  So, are interest rates too high?

Comparing Interest Rates To Recent History

In a quick answer, no.  Interest rates are not that high at all.  Of course, this takes some comparison.

Since the start of the 1990’s, interest rates have been higher than they are now more often than not.

The entire decade of the 1990’s saw interest rates in the 4-6% range.  I remember that, at the time, this was considered pretty low.  The 1970’s and 1980’s had very high rates.  So a drop to 4-6% was actually a relief for many!

In the early 2000’s, interest rates did drop for about 4 years to levels lower than today.  The 1-2% range followed a pretty bad post-Y2K recession, as well as 9/11.  Lower rates were used to provide a boost to a dragging economy.

Following 2004, the economy ‘recovered’ and interest rates were back up around 5% for the next few years.  In 2008, the bottom fell out of the economy, and they were quickly lowered, all the way down to practically zero.  Come to find out, the economy wasn’t as stable as had been purported.

Interest rates stayed at those non-existent levels for seven whole years!  It wasn’t until 2015 that any increases were seen, and even those were small.  It wasn’t until 2017 that more than one increase per year took place.

That’s nearly ten years of extremely low interest rates.

Perspective On Interest Rates

The president is arguing that the rate increases are hurting the economy.  He has asked for them to be lowered.

The Fed has all but ignored him.

From a historical standpoint, interest rates really don’t look too high at all.  But, we also had the lowest interest rates ever for a very long period of time.  Bottom line, we got complacent.

Right now, a 15 year mortgage is around 4.5%.  This probably is considered high for many who financed at or even below 3%.  Again, looking at how long interest rates were low, a great many people got these rates.

However, they were never meant to be a ‘forever’ thing.  But, nearly ten years of practically no interest did start to feel like forever.  It became the new normal.

Why We Need Higher Interest Rates

I studied Economics in my undergraduate.  So, while I’m no expert, I do remember enough to understand that we do need higher interest rates.  We can’t keep them the levels they were at forever.

Eventually, the economy will go into a recession.  The economic cycle makes this a certainty.  Recessions are good for the economy.  We just don’t want them to the scale of the last one!  But, a common tool to minimize the effect of recessions has been to lower interest rates.  This encourages companies to borrow and spend money.  This leads to jobs.  If it all works out, eventually the recession ends.

But in order to do that, we must first raise them.  These rate increases are done when the economy is doing well.  Like it is now. The idea of this is that a strong economy can withstand the increases.

This system has worked well for quite some time.  But, it’s predicated on having the cushion in interest rates to be able to lower them.

interest rates
Interest rates affect spending.

Why We Can’t Keep Interest Rates Low Forever

Think of what would happen if we had 0.25% interest rates and slipped into a recession.  What could we do?  Well, one thing we wouldn’t be able to do is lower interest rates.  This would end up making it harder to pull out of the recession.  The recession would likely last much longer than normal.  Plus, other less effective measures would have to be taken.  Tax cuts or additional spending would help, but would spur higher deficits and more inflation in comparison to interest rate cuts.

Personally, I thought that the Fed waited too long to start raising rates.  I thought they should have started around 2013 or so.  By that point, the real estate market had stabilized.  Unemployment was near pre-recession levels.  I knew full well that the longer the Fed waited, the more ‘normal’ the ultra-low rates would seem.  And, that’s the thing.  They weren’t normal.

The bottom line is that interest rate cuts are a needed tool to fight recessions.  Building that cushion during times of growth will help us down the line when we need an economic boost.

Do you think rates are too high?

Readers, let me know what you think.  Have we gotten too used to low rates that we now expect them?  Do you think the Fed should lower rates or keep on the current path?  Let me know in the comments below.

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Why FIRE Never Would Have Worked In The Past

The latest buzzword in the personal finance community is FIRE.  Many of the most successful blogs now talk about FIRE.  For those that don’t know, FIRE stands for Financial Independence, Retire Early.  The blogging community now has many blogs where people achieve financial freedom at a young age, and can retire well before traditional retirement age.  Many boast of retiring in their 30’s.

This is a pretty cool movement, especially in the age where Millennials are breaking many of the molds created over years past.

I started thinking about it.  I came to the conclusion that FIRE probably wouldn’t have been embraced by generations past.

Here’s my take on what I think generational mindsets are regarding FIRE.

Millennials (born 1980-2000s)

I think that millennials are the heart of the FIRE movement.  Many don’t want the traditional life that they witnessed grown up.  This stands to reason that many millennials are at the heart of the FIRE movement.

Generation X (born 1965-1979)

This is probably the dividing line between acceptance of FIRE and skepticism.  Many in our generation have gone through enough recessions that we know things can change.  We’ve seen good times and bad.  The idea of FIRE sounds great, but many may see it as ‘too good to be true’.

Others in our generation still fall in the mindset that each generation should strive to be more successful than that prior.  This has been pretty hard for our generation.  There’s a lot more competition in the job market.  We’re the first generation that saw most of our parents get a pension, but very few of us will.  We have healthcare costs that previous generations did not.  For many in our generation, just trying to keep up with our parents is hard enough. Adding in the goal of early retirement can seem even further out of reach.

Baby Boomers (born 1946-1964)

The baby boomer generation was fueled by consumerism and prosperity.  A lot of wealth was built by boomers.  While making money wasn’t ‘easy’, boomers who worked hard found money flowed in.  For many boomers, making money and achieving wealth was the goal.  The big one.

Simply put, I think many boomers would have asked why they would give up making money when there was money to still be made?

Greatest & Silent Generations (born 1910-1945)

These generations were both impacted by the Great Depression.  Because of this, FIRE would simply not have made any sense to them.  Many here saw what it was like to struggle.  To have nothing.  Many people immigrated and started with nothing.  The idea of retiring early would have been unheard of.  For many in these generations, not having enough money was a giant fear.  Even if they had enough, there was always the fear of what could happen.  Why? Because many here had seen what could happen.

I think many in this generation would have been scornful of FIRE.  To people in this generation, if you were able bodied, you worked.  That’s just the way it was.

The Late 19th Century

In the late 19th century, everything was changing.  Machines were making things easier and creating worldwide growth. Cities and population centers were exploding.  There was so much to do that everybody had to pitch in.  The demands of the world were plentiful, and everybody was expected to pitch in.

I think in this era, anybody who would have attempted FIRE would have been laughed out of whatever town they lived in.

Tribal Days (Going Way Back)

Hundreds of years ago, when we lived in tribes, everybody contributed.  Many tribes expected every person to contribute.  If you couldn’t, many tribes expelled you.  Or worse.  There would have been no FIRE here.  If you had tried to stop working, the tribe would have taken what you have, and sent you away (or thrown you off a bridge).

Kind of makes working seem like a pretty good alternative, no?

FIRE Across The Generations

There’s my take on the generational acceptance of FIRE.  I think that FIRE is a big thing because it truly is a new concept for many.

What do you think of my thoughts? Do you agree on how prior generations would have looked upon FIRE?  What generation are you and what do you think of FIRE?  Let me know in the comments below.



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Do You Believe These Money Myths?

There are a lot of different things you’ll read when it comes to your money.  The personal finance world has lots of people with many opinions.  I’m one of them!  But with so much out there, it can often get confusing.  What do you believe?  What’s true and what’s a suggestion?  I don’t have all the answers.  But there are a few money myths that I’ve seen come up more than a few times.

#1: Always Pay The Higher Interest Loan First

The higher the interest rate means that less of your payment goes to your principal.  This is true.  So, you should always pay the highest interest loan first, right?

Not always.

I think you have some flexibility here.  If you have a loan with a low balance, maybe consider paying that off first.  It will free up some cash flow.  Plus, paying off a loan will give you a ‘win’ on your scorecard.  Those can be very important and might be worth a few bucks in higher interest in the short term.

#2: It’s Too Late To Start Saving

Many people start saving for retirement or their first home right out of the gate.  If you’re one of those people, then congrats.  But if you’re not, don’t worry.

It’s never too late to start saving.  I don’t care how old you are.  Many people who give this answer are just making excuses to continue bad habits.

I don’t care if you have friends that are your age who are already retiring and you haven’t saved a buck.  You should and you can start making a difference.

#3: You Have To Choose Between Paying Off Debt Or Saving Money

I’ve read at least a thousand pieces over the years on this topic.  Which is better if you have extra money?  Paying off debt?  Or saving/investing?

I’ve never understood why people think it has to be either or.  It doesn’t.

If the answer isn’t clear or you don’t have motivation toward one, why choose?  Try a mix of both.  Either one is going to help you in the long run.  And, you might find that one excites you more than the other.  If that happens, then you can make adjustments.

#4: Having An Emergency Fund Is Good Enough

OK, so you saved $1,000 for an emergency fund.  You’re covered, right?  Wrong.

The fact is that even if you’ve built yourself a cushion, there is still work to do.  What if you have an emergency greater than $1,000?  How will you restore your fund if an actual emergency depletes your fund?  What if someone comes to you with an emergency of their own?

Be prepared.  Think ahead.

#5: Following Someone Else’s Budget Is Your Ticket To Success

A budget that works for someone else may not work for you.  Everybody has different circumstances and different needs.

Also, many people are at different stages of how they can handle a budget.  Someone who’s never used a budget should start simple. If they tried to use the budget template of someone that’s had one for twenty years, it probably won’t work.

Budgets come in all shapes and sizes.  There is no one size fits all.

#6: Focus On Cutting Spending To Save Money

This isn’t bad advice.  It’s actually really good advice.  However, it may not always be the best advice.

After all, the advice here only focuses on one side of the equation.  Spending.  This is great, but there’s also opportunity that comes by making more money.

Consider that we all have limited time in our lives in which we can focus on saving money.  If your time allows you to cut $1,000 per month in expenses, that’s great.  But what if you focused that time on earning more money instead?  If you could earn $2,000 per month with the same effort, then focusing on cutting expenses could actually be costing you $1,000 per month.

#7: The Stock Market Is Always Going To Go Up

It may seem like this is true given that it pretty much has for the last ten years.  But it doesn’t.  And it won’t.  Don’t believe people on CNBC that tell you that ‘this time it’s different’.  And that the market can go up forever.

It’s not and it won’t.

Everybody needs to keep an eye on the market and recognize that it’s not a one way only road.  The experts that tell you that it can only go up probably have a plan in place.  And when the market starts going down, they’ll have executed their plan before they go back on the air and talk about the downturn.  Trust me on this.

The fact is, they don’t care about your money.  They care about theirs.  Don’t get the two confused.

Readers, what advice have you heard that may need some corrections or clarifications?  What do you think about the items I mentioned?  Please let me know your thoughts in the comments below.  Thanks for reading.

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Am I The Only Person A Bit Worried About The Economy?

The economy has been on a pretty good path for the last 8 years or so with slow but steadily improving job numbers, reduced unemployment, and a rising stock  market.  Many have argued that the slow growth is ‘bad’ but I argued a few years ago that slow growth actually provides a more stable foundation and a softer landing when things do start to turn.

I’m starting to wonder if that turn is starting to happen.  Moreover, I’m wondering if we’ve been used to things moving up for so long that people might be missing or ignoring the signs.

I’m not in outright panic mode but here are a few little things I’ve noticed that add up to a little bit of worry (Disclaimer: You should make absolutely no investment decisions based off of this article, which is 100% opinion).

Why I’m Worried About The Economy

  1. The market is in a trading range. The stock market has bounced up and down between around 1,800 and 2,100 for well over a year now.  Anybody that is ‘buy and hold’ is likely seeing little or no profits, with the only people making money are the ones that have learned to trade in this range.
  2. Job growth really seems to be slowing down. For most of the last eight years, we’ve seen month after month of new job creation.  For a long time, people wished it were growing faster, but now seem fairly settled in.  However, the numbers seem to be slowing down, with only 38,000 new jobs created last month, a pale comparison to the hundreds of thousands per month that were created on average even just a couple of years ago.
  3. Job growth numbers are being revised down.  When the job creation numbers are announced, they’re estimates.  The actual numbers come in a few weeks after, and revisions occur as more data becomes available.  In each of the last couple of months, the announced numbers ended up being revised down.  This doesn’t seem a good pattern to me.
  4. A top reason given for equity recovery is kind of BS (and kind of frightening). The first few weeks of 2016 saw a pretty steep correction in the markets, around 10% or thereabouts.  The recovery was swift, and mb-2015-06-chartlast week, the market largely seemed to even shake off the Brexit news.  This all seems well and good, but when I read a lot of articles, blog posts, or comments to the above, one main reason given for the growth in US equities is that people are selling equities in other areas of the world and moving them here.  That’s not a great endorsement.
  5. Another reason is even more scary. We’re in an extended period of ultra-low interest rates.  Debt has been financed on the cheap.  This has left cash on the sidelines that nobody really knows what to do with, so they buy stocks.  This almost seems to me like money is being invested simply because nobody knows what else to do with it.  Again, not exactly a reason high on my list when plotting out catalysts for growth.
  6. WARN Notices are on the rise.  Here in Michigan, when mass layoffs take place, the company must file advance notice with the State.  This info appears on their website specific to this information.  Last year, for the first six months of the year, there were 20 notices filed.  This year over the same period, there have been 32.

No Doomsday Predictions Here

I’m not sounding the alarm and not panicking.  I do think there are signs that the growth, as slow as it’s been, may be flat lining at best.  So far the markets have been shrugging off every bit of negative data that comes out.  Still, I don’t trust markets as any sort of leading indicators these days, not with a majority of shares traded each day being done by computers.

Readers, what do you think about the state of the economy right now? Where do you think it’s headed next?

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.