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Proprietary Data Insights Top Bank Stock Searches This Month
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One Reason To Love High Interest Rates
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Here at The Juice, we pride ourselves on advancing the conversation. Not only identifying problems, but suggesting solutions appropriate for all different types of people and investors. To do this, we write around several themes (you can get a solid sense of these themes in our archives) with installments in each area building on one another. For example … We often lament high interest rates. And there’s good reason to do so, particularly within the context of the housing market. As we illustrated last week in Everything You Need To Know About The Housing Crisis Right Now: Let’s say you manage to get a $1.3 million listing down to, say, $1.1 million (good luck!). As we write this, with the interest rate on a 30-year mortgage at 7.07%, you’ll be left with a monthly payment of $9,350, including taxes and insurance, after a 10% down payment of $110,000. As we write this, the rate on the 30-year is pretty much the same as last week. It’s at 6.97% with, apparently, only one cut to the Federal Funds Rate expected in 2024. So don’t expect things to get any better on that front anytime soon. And, when and if they do, absolutely expect housing prices to shoot up again as an influx of buyers finally step off of the sidelines. We’ll update the housing side of the interest rate equation next week. For now, the bright side of high interest rates, as articulated recently by a Juice subscriber in Not Everybody Hates High Interest Rates: Retired folks like myself need a high proportion of our investments in liquid investments like CD’s. For some time now, rates on CD’s for most periods have been above 5%. Many seniors have no mortgage or debt so the high interest rates have little adverse implications. So, us seniors enjoy collecting more than 5% interest on CD’s that are fully insured (assuming you spread your investments with different banks). Bingo. The other day The Juice received an offer from Wells Fargo in our email. A 4.75% APY on a 7-month CD. It’s pretty funny when you look at how the big banks structure interest rates on CDs (certificates of deposit). Wells Fargo is representative of the names that populate today’s Trackstar top five. They offer special rates on CDs. At four or seven months, you can snag 4.75% with Wells. Extend it out to 11 months and your rate drops to 4.25%. Standard rates get lower as you go. At Wells, they drop from a paltry 2.5% at three and six months down to a meager 1.5% if you turn over your cash for one year. Obviously, the big banks are setting rates on CDs with the Fed in mind. With a CD, that’s what you’re effectively doing. Turning your cash over to the bank. You agree to lock your money up for a period of time in exchange for a little interest. If you need access to your money prior to maturity, you’re typically on the hook for, for example, three months’ interest on early withdrawals from a six-month CD or 12 months’ interest on a five-year CD. But who’s going to lock their cash up for five freaking years in a CD with a lame interest rate? You can do better going short-term and, particularly, staying away from the biggest banks with the largest brick and mortar footprints. Do your business online and you’ll not only get better CD rates, but high-yield savings accounts that often pay interest north of 5%. At the very least, you’ll easily secure 5% or a little less. And one key difference between CDs and high-yield savings accounts is something that ties into another theme we carried on last week in There’s A Big Problem With The 401(k) Plan: One of The Juice’s general concerns is that if you have to stretch to do something financially, it probably isn’t a great idea. Whether that’s buying a house or saving for retirement, what’s the point of crunching your budget to the point where you have to backtrack? If you have to turn to credit cards to make ends meet? If, as we outlined in that aforementioned Juice, you have to take a hardship or otherwise early withdrawal from a retirement plan to cover expenses. Some people are simply better off in taxable accounts where they get their hands on their money with no or relatively fewer tax consequences. We don’t talk about these people enough. And, by a similar token, some people are better off in a high-yield savings account than a CD, particularly when rates are super competitive between the two options. The Juice laughed at Wells Fargo’s offer. Of course, on the upside, if rates dive meaningfully in the next few months, with a CD you’re locked into the original offer. A 4.75% interest rate on a CD stays at 4.75% for the duration. However, we don’t see rates plummeting even a little. And, if they do, we expect the big banks to go first and the wholly online and primarily online names to remain competitive. Because that’s their competitive advantage. One that will become even more apparent and important when rates start to fall. It’s in the best interest of names such as SoFi, Robinhood, Wealthfront and Betterment, as well as the bigger, more traditional banks with significant online presences, to keep savings rates high and make their money elsewhere. We’ll see how things end up shaking out, but we tend to think that a high-yield savings account remains the place to be, especially if you think you might need access to your money in the near term.
The Bottom Line: Of course, with the cash you’re not investing in the stock market where, if you play your cards right, you can generate superior returns. This said, there’s nothing wrong with keeping some money in cash, especially when you can earn 5%. With basically no risk, that’s nothing to sneeze at. In the next few Juices, we’ll discuss other investment and saving options for people who prefer more immediate access to their money as well as those who want the benefits that can come from restricting access. We’ll also cover more dividend and alternative investing thoughts and ideas. |
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