Connect with us

The Daily Digm (News)

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

Published

on

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)

Credit Union Loans Getting Riskier + How-To Not Get Risky with Your Student Loans

Published

on

Credit unions have increasingly taken on high-risk loans, which could lead to borrowers or taxpayers getting burned in the event of another financial crisis, reports The Wall Street Journal. The member-owned alternatives to banks are designed to provide lower borrowing costs and higher deposit rates. Yet, credit unions’ assets have grown almost twice as fast as those of banks over the past ten years. High-risk loans from banks contributed significantly to the 2008 financial crisis. This is dangerous because unlike a traditional bank Credit Unions are owned by its members so it is the members who stand to lose the most. But how can you make your Credit Union loans less risky? This is the same question we ask when it’s time to pay off our student loans. Who will be the first? Or How can you pay off your loans faster? Here are six ways:

1. Develop a plan

Develop a plan to pay off your student loan debt before you graduate.

2. Save your money

Each summer throughout your college education, get a job or internship. Save half the money in a high-interest savings account. After a few months, consult a financial advisor to earn the highest possible return on your money. After college, you can use the money saved during all four years to pay down your college debt.

3. Consolidate your loans (But use caution)

Consolidating student loans combines your loans into one payment but may or may not provide you with a lower interest rate. Do extensive research before consolidating your student loans. In addition, you may not be eligible for various student loan forgiveness programs if you consolidate your student loans.

4. Exchange work to reduce debt

Perform volunteer work or work for the following in exchange for reducing student loan debt: teaching in certain locations with low-income students or areas with a shortage of teachers, providing legal and medical services in low-income areas or working for Americorps or the Peace Corps.

5. Get a work-study job

To help pay for the costs of college get a work-study job on campus to help defray the cost of college. Go to your campus employee office to ask about their work-study program. Work-study jobs pay at least the minimum wage for that state.

6. Apply for grants + scholarships

Apply for as many grants and scholarships as possible. Unlike loans, grants and scholarships never have to be paid back. Some grant websites are Zinch.com, Fastweb.com, ScholarshipPoints.com, Cappex.com, and Scholarships.com.

Continue Reading

The Daily Digm (News)

Black Friday Sales Could Hit $7.4b + How to Control Your Cyber Monday Spending

Published

on

You get a deal, you get a deal, you get a deal and you get a deal!!! This year everyone from Amazon, Walmart and Target are offering “holiday deals” ahead of Black Friday so it’s safe to say, Black Friday isn’t even a thing anymore? Right??? Wrong!!!! Looking at early numbers Black Friday is very much alive and well. According to CNBC shoppers spent a record-high $4.2 billion online on Thanksgiving, a 14.5% increase from last year. In addition, their data suggests Black Friday online sales are expected to hit $7.4 billion, with shoppers having already spent $5.4 billion as of 9 p.m. ET, or a 22.3% increase from last year. 

While we know that Black Friday is intended to help us save money on things we wouldn’t purchase anyway, Black Friday has now been fueled by intense FOMOOD (Fear of Missing Out on Deals). The pressure of having to amass dozens of holiday gifts coupled with the frantic message that you’ll never see these deals again often sends shoppers into a tizzy of overspending, eventually culminating in personal debt.

To avoid the deep despair that can haunt your bank account long after Thanksgiving weekend, heed the following tips:

1) Be honest: how much can you afford to spend on Cyber Monday?

Try to answer this question rationally and honestly. Do you live paycheck to paycheck, or have you saved up a little bundle that you can use on deals? Make sure that if you are going shopping on Cyber Monday, you’re not behind on any bills, and you are not using your credit cards to finance your splurging.

2) Think like Santa Claus and make a dang list.

It’s all about planning ahead. If you go into the insanity of Black Friday shopping without a plan to keep you tethered to reality, you’ll get swept up in the excitement of seemingly attractive deals and overspend, resulting in a buyer’s remorse that could ruin the whole holiday season. So make that list — and stick to it.

3) Figure out a hard budget.

It’s easy to go into Cyber Monday, believing you’ll be cool and rational and definitely won’t spend too much. You’re too smart for that, right? The most clever thing you can do is sit down ahead of time and figure out a hard budget — an amount that you’re sure you can spend — and write it down so you won’t forget. Without any limits set ahead of time, you can quickly go broke without even realizing it.

4) Only use cash — and leave all credit and debit cards at home.

This one’s tough, but you’ll be glad for it in the end. Once you’ve figured out your budget, take out that amount in cash so you’ll have solid, visual evidence of exactly how much you have left to spend.

This trick won’t work if you also bring along credit and debit cards; however, because the temptation to use them will become overwhelming. Despite your preparation, there will be many tempting deals that may cause you to go temporarily insane, and with access to money at your fingertips, that can be a dangerous blow to your finances. Keeping your cards at home removes the ability to fold to temptations.

5) Don’t be overcome by emotions.

There’s a dizzying, frenetic energy to Cyber Monday, what with all the “once a year” deals demanding that you buy now or forever hold your peace. Combined with the sentimentality of the holidays, when you may be feeling more generous than usual, it becomes a perfect storm of excitement, obligation, and anxiety, causing you to spend beyond your means.

Don’t forget that retailers are actually playing upon these emotions in order to get your business. In fact, the reason why Black Friday is called Black Friday is because this is the day consumers (you) help retailers (them) get in the ‘black,’ which in accountant terms means profitable. See, they aren’t even hiding the fact that they are using you for their gain. And the reason they don’t have to hide it is because they get you to buy by appealing to your emotions. Toughen up and don’t be lured into spending money you don’t have.

Continue Reading

The Daily Digm (News)

Mcdonald’s Settles Its Wage Dispute + How to Settle Between Being an Employee or Entrepreneur

Published

on

McDonald’s has finally decided to end a multi year-long dispute in California over wages by agreeing to pay $26 million to cooks and cashiers who say the fast-food giant didn’t pay them enough for their work. Tens of thousands of workers are behind the class-action lawsuit, which alleges in part that McDonald’s planned shifts so as to avoid paying overtime to its workers and did not allow fair breaks during shifts. McDonald’s denies any wrongdoing.

Issues like this has many people wanting to be their own boss, but what are the pros and cons of entrepreneurship vs. being an employee?

Employee Benefits vs Do It Yourself

As an employee, you get benefits, which include health, dental, vacation, sick leave, and holidays. This allows employees to have some time to create a work-life balance. They can enjoy paid time to work on personal relationships, hobbies, exercise, or just get some rest.

As an entrepreneur, you do not have a guaranteed income, so if you don’t work, you don’t get paid. Many entrepreneurs don’t consider this, so a lot of them find themselves stressed out and overworked. For those who plan early enough, they budget accordingly to afford themselves some rest and relaxation

Guaranteed Income vs. Unlimited Income Potential

Obviously, a huge advantage of employment vs. entrepreneurship is guaranteed income. As an employee, you get a fixed amount of money deposited on a weekly, bi-weekly, or monthly basis into your bank account, which means you get afforded some level of financial security. But in the same breathe as an employee, your income is limited to what you agreed on as your salary or hourly rate, which means you are capped on the amount of money you can make.

As an entrepreneur, you have unlimited income potential, which means there are no ceilings when it comes to your income. If you put in the work and sell the right products or services, you can make a lot of money, but on the flip side, there can be months that you go without a deal or steady income and other months where the faucet is overflowing.

Fixed Working Hours vs. Flexible Working Hours

As an employee, you will agree on a fixed amount of hours and schedule in which you will work. Overtime or any extra hours needed will be worked at the employee’s discretion and can include time and a half pay. Sometimes instead of extra pay, you can agree to get comped time, which means you get extra time off.

As an entrepreneur, you choose your working hours. Many entrepreneurs work 80-hour weeks when they’re first starting out, but eventually, they will get people and resources to allow them to sit back and work as little as possible.

Less Responsibility vs. Everything is On You

As an employee, you are often assigned a particular role and are only responsible for performing the tasks that are directly related to that role when you are working. You don’t really have to worry about how others are performing in other parts of the company because they too have their roles, and you are responsible for you.

As an entrepreneur, you are responsible for everything. You are the janitor, the cook, sales, marketing, promotion, operations and everything else in between.

There are many other differences, but based on what you read so far, which would you choose? There’s no right or wrong answer, and honestly, the decision should be made based on your preference. There are many successful employees who love what they do and thrive, and there are many entrepreneurs who wouldn’t trade their life for the world. Ultimately it’s about your happiness and what makes you feel full. I believe that And is better than Or, so if you get stuck on making a decision, try both.

Continue Reading

Trending

Copyright © 2019 PARADIGM.MONEY, All Rights Reserved. PARADIGM.MONEY is owned/operated by BankMobile, a Division of Customers Bank. The opinions/Views expressed on PARADIGM.MONEY are not considered opinions/Views of BankMobile, a Division of Customers Bank.