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Feds Meet Without Increasing Interest Rates + How a Rate Hike Can Effect Your Pocket

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The Federal Reserve concluded its two-day policy meeting without increasing interest rates, although it’s expected the central bankers will lift rates before year-end. Thus far, the Fed has raised interest rates three times this year due to economic growth and inflation. The last increase set the target for the benchmark federal funds rate at 2% to 2.25%. But what does an interest rate hike mean for your pockets? According to MotleyFool.com here are 6 Ways a Fed Rate Hike Can Effect Your Wallet:

1. Get ready for higher rates on savings accounts

As the Federal Reserve increases interest rates, banks may feel compelled to pay a higher interest rate on your savings and checking accounts. Many regional and online banks are now paying close to 2% on cash kept in a savings account, while others are paying 3% or more on five-year certificates of deposit. As interest rates rise, the most competitive banks will increase the interest rates they pay to savers every time the Fed acts.

Of course, whether or not your personal bank will increase your interest rate depends on how hungry it is for deposits. One of the best indicators that a bank may choose to increase the rate it pays for deposits is its loan-to-deposit ratio, which divides its loans outstanding by the deposits its customers entrust with the institution. The higher the ratio, the more likely a bank will have to compete for deposits by increasing rates paid to its customers.

2. Your credit card debt will become more costly

While the Federal Reserve increases rates by increasing the federal funds rate, the increases affect other lending benchmarks, such as the prime rate, too. In the last three years, the prime rate has increased by 1.5 percentage points, while the effective federal funds rate increased by about 1.6 percentage points. The relationship between the prime rate and the effective federal funds rate can be a big deal for credit card users, particularly those who carry a balance.

If you look carefully at the terms and conditions of your credit card, you’ll likely find that the rate charged on your balance is calculated by adding a premium on top of the prime rate. Thus if your card charged an APR equal to Prime plus 10.5%, it would currently carry an APR of 15.25%, based on the current prime rate of 4.75%. That’s roughly in line with the last reported national average of 15.3%. Of course, if you pay your balance in full every month, as you should, the rate you pay on your credit card is irrelevant. Credit cards only charge interest when you carry a balance from month to month.

3. Auto buyers should expect higher APRs

One thing you should know about the Federal funds rate is that it is a super short-term (overnight) interest rate. Thus, when the Federal Reserve votes to increase interest rates, it has the greatest impact on short-term loans such as car loans, which are typically paid off over the course of 48 to 72 months.

Data from the Federal Reserve shows that the finance rate on 60-month auto loans has increased from 4.05% in November 2017 to 4.75% in February 2018, driven in part by the Fed’s decision to raise the benchmark rate. The good news, though, is that many auto manufacturers still offer 0% APRs to buyers with excellent credit. Plus, higher rates have a much smaller impact on affordability for short-term loans like car loans than they do to longer-term loans like mortgages. The difference between paying 4% or 5% interest on a five-year, $30,000 auto loan amounts to only $14 a month, which is a rounding error on a payment in excess of $500 per month.

4. Your insurance premiums could fall

It’s smart to shop around for auto or homeowners insurance frequently to get the lowest premiums, advice that is especially true in a rising-rate environment. Because insurance is prepaid, (premiums are paid before coverage kicks in), insurers are able to invest the money and earn a small amount of interest due to the lag in when they receive cash from customers and when they pay out cash for claims.

The insurance industry is extremely competitive, and insurers price insurance policies partly based on how much they can earn investing the premiums they take in from every contract. When rates are high, insurance companies can afford to charge less for the same coverage, since they anticipate making more money by investing the premiums for short periods of time. Of course, you shouldn’t expect that your car insurer will lower your rate just because interest rates are rising. Shop around, and if you find a lower quote, ask your existing insurer to match the premium, or be prepared to change companies altogether.

5. College financing costs rise

Current undergraduate students will see a higher interest rate on government student loans for the 2018 and 2019 school year. In the upcoming year, interest rates will rise to 5.05%, up from 4.45% during the 2017 to 2018 school year. Luckily, Stafford loans for school carry a fixed interest rate, so the rate increase only affects new borrowings, not existing loans.

Rates for federal student loans are set by Congress. The rate is based on how much it costs the government to borrow money for a 10-year term. Thus, when rates on the 10-year U.S. Treasury note increase, so do rates on government student loans. As the Fed has increased short-term interest rates, investors are demanding a higher rate from longer-term U.S. government notes, and federal student loan rates are rising in response.

6. Your mortgage payment may swell

Homeowners who have variable rate mortgages are likely to see their monthly mortgage payments increase with each increase in the Federal funds rate. That’s because variable rate mortgages are typically based on a short-term interest benchmark, such as the Prime rate or LIBOR. Both the Prime rate and LIBOR increase almost 1-for-1 when the Federal Reserve decides to increase interest rates, affecting anyone who has an adjustable-rate mortgage.

Luckily, people who have a fixed-rate mortgage won’t see their interest rates increase, and new homebuyers may just find that higher overnight rates have little impact on long-term 30-year fixed mortgages. Note that while the Federal funds rate increased by about 1.6 percentage points since the fall of 2015, rates on 30-year mortgages have increased only about 0.7 percentage points. That’s because mortgage rates are influenced more by long-term interest rates and the demand for mortgage-backed securities (packages of mortgages that are sold to investors). Fixed mortgage rates are affected indirectly by Fed policy.

Ash Exantus aka Ash Cash is one of the nation’s top personal finance experts. Dubbed as the Financial Motivator, he uses a culturally responsive approach in teaching financial literacy. He is the Head of Financial Education at BankMobile and Editor-in-Chief at Paradigm Money. The views and opinions expressed are those of Ash Cash and not the views of BankMobile and/or its affiliates.

The Daily Digm (News)

Amazon Prime Day Kicks off W/ Competition + How to Kick off the Habit of Paying Full Price

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Ready, set, go! Amazon’s Prime Day starts today and continues through Tuesday, bringing a whole new meaning to retail wars, as Walmart becomes the latest rival to try to get in on the mid-summer online-shopping bonanza. This year marks Amazon’s fifth year of Prime Day, and according to Salesforce’s Rob Garf, the shopping event has prompted “rising shifts” for the entire month of July. Target and eBay have also announced sales of their own. There is definitely competition in these mean retail streets but how do you compete with yourself to save money?

I have a friend who spent time as an intern and then as an assistant buyer at a Fortune 500 specialty brand, and from her experience, she vowed never to pay full price for a pair of jeans again (unless the price is already right of course). Working in the buying department opened her eyes to reality behind retail. For instance, jewelry can be marked up to at least five times its value. As a buyer, you’re the one who actually chooses what looks go into each door. You also have the privilege of watching sales trends and dealing with a lot of retail math. You consider the cost of goods sold, retail price, and yes, the markup.

Markup is when a company produces or purchases a good at one price and then sells the good for a higher price.

Here’s how it works:

Selling price = [(Cost) ÷ (100 – percentage markup)] × 100.

So, a company buys a pair of jeans at wholesale for $60 and needs to sell it at a 60 percent markup. The calculation would be [($60) ÷ (100 – 60)] x 100. This breaks down to ($60 ÷ 40) x 100, resulting in a selling price of $150.

By having a markup on goods, a company is able to earn profits even when goods go on sale. But what does that mean for the consumer? Well, your pricey luxury shoes, shirt, and hand bag aren’t all that expensive. You just paid an absurd amount for it.

This leads me to the premise of this article – start at the sales rack. Being trendy with your finances should come before fashion. See what deals you can get before paying full price. There is nothing more fashionable then extra cash in your money bag.

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The Daily Digm (News)

Another One! U.S. Women’s Soccer Team Wins Again + How to Win in Your Personal Finances

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The U.S. women’s soccer team are the World Cup champions after beating the Netherlands 2-0. It’s the fourth title overall for the Americans, and the first time they have won back-to-back trophies. The team has also launched itself into the gender pay gap debate with its lawsuit against the U.S. Soccer Federation: the women can expect a guaranteed payday of about $250,000 with Sunday’s title, says the New York Times, while the winning team of the men’s World Cup would have received roughly $1.1 million each, per CNBC.

What about in your personal finances? How do you win? The short-term sacrifice of becoming financially focused early on has long term benefits that are totally worth it also. Here are just a few:

Financial Freedom. The definition of financial freedom varies depending on the person, but it boils down to being able to cover life’s necessities, including food, clothing, and housing expenses. Buckling down in your twenties and thirties to focus on laying a financial foundation leads to financial freedom. And the sooner you get there, the better off you’ll be.

Stress Free Living. Most stress is self-imposed and generally centered around money. Some relationships crumble due to tension perceived by finances. The highest liability we encounter is housing. The second and third largest consist of health care and food. While food and medicine are ongoing obligations, owning a home can eliminate a chunk of financial responsibility, freeing up more money to save and invest. Start early when it comes to homeownership. You may miss a few parties, but the peace that comes with owning the home you rest in will be made up for it.

Generational Wealth. Chances are you’re considering starting a family. What better way to honor those you love with an abundant financial future? Each generation should be able to start a notch above the last. Investing five years of your young adulthood can make a 10-year difference in the lives of your unborn children. This sacrifice isn’t only for you but for those to come after you.

More Time. We are not so much looking for more stuff but for more time to enjoy the stuff we already have and the people we can share that stuff with. The reason most look to retirement is to enjoy what they have worked so hard for. The moment you decide to be financially responsible is the moment you begin to enjoy the journey, both the highs and lows of creating wealth. By all means, don’t save the party until the end. Celebrate while you build but remember to never lose focus of the building. 

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Nike AIMS to Get on the Right Side of History + How to Be on the Right Side of Your Legacy

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Nike has pulled a U.S.A-themed sneaker from its range after receiving objections from Colin Kaepernick, The Wall Street Journal reports, citing anonymous sources. The former NFL player reportedly told the company that the early American flag featured on the Air Max 1 USA, created in celebration of July 4, was offensive due to its connection to slavery. Nike also recently stopped selling some products in China after a designer’s support for Hong Kong protests sparked backlash, and reportedly cancelled a sneaker in May following objections.

The flag in particular is the Betsy Ross flag which Wikipedia states: The Betsy Ross flag is an early design of the flag of the United States, attributed to Betsy Ross, using the common motifs of the alternating red-and-white striped field with five-pointed stars in a blue canton. Grace Rogers Cooper noted that the first documented usage of this flag was in 1792.[1] The flag features 13 stars to represent the original 13 colonies with the stars arranged in a circle. The 13 Colonies has a deep connection to Slavery which is where the objection is coming from.

It is good to see that someone is using their influence in the right way, but also this tells you how influence can affect the bottom line. This move is helping Nike create or clean up its legacy.

We are now in graduation season, and for many students, graduating college is an enormous feat that starts the beginning of their legacy. But after you are now free to do as you wish, how do you continue to add to that legacy? Yes, you are going to start a billion dollar business or work as an exec for a fortune 500 company but beyond your title and accolades, what else can you bring to the table? The truth of the matter is that what you do with your money is more important than how much you have. It is said that a good man (or woman) leaves an inheritance for his (or her) children’s children. And even if we don’t have children, leaving an inheritance of wealth on earth for the benefit of others is the truest form of what we call being rich. If one is truly wealthy, he or she freely gives. Making your riches count is found in your legacy. So, while we may not fully understand what our legacy will be when all is said and done, we can aim to leave the following:

Knowledge & Wisdom.

Maya Angelou told Oprah Winfrey that no one truly knows their legacy because they can influence different people differently. No matter your level of education, you have the ability to give a word of wisdom because the wise are those who have experienced life and learn lessons along the way. Never underestimate your ability to encourage another person.

Kindness.

Ellen DeGeneres is synonymous with kindness. At the end of each show, she can be heard saying Be Kind to One Another. The impact that she has had on students, families, young stars, and animals is surely a legacy. Something as simple as kindness, an ability we all have access to because it resides in us, goes a very long way. It literally changes lives.

Money & Assets.

Robert Kiyosaki said money isn’t everything, but it does affect almost everything in our lives that is important. Leaving beyond money and financial assets to your children and their children can put your loved ones ahead 10, 20, and even 50 years. While you are building wealth, keep future generations in mind. Most of our early adulthood is spent paying school loans, discovering our purpose, and laying a financial foundation. Imagine what life would be like if your parents set up twice as much as they did for you financially. You’d most likely be at least five years ahead of where you are.

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