Financial Focus: Discovering the Movement of Future Interest Rates by Asking Your Great Grandparents!
By Anthony Rivieccio, MBA,PFA
Get ready for an interest rate explosion!
How many of you were over the age of 21 and went into a bank in the 1970’s? Wasn’t a bad experience, huh? You could go to the bank, open a savings account, and get 10% or 15% interest rate on the account. There were even times where someone could get a 20% interest rate.
At that time, Grandma might have told you it was a good place to save money.
While our economy had some problems that caused these high interest rates in the 70’s, the 1980’s showed a correction with a dramatic drop in interest rates for the past 35 years. That has resulted in two decades of children who, frankly, do not know how or want to save and invest. Some went from their 20’s to their 60’s not being able to grow their money.
Walk into a bank today and see what interest rates on savings accounts are. You’ll notice it’s at 1%.
Now at four decades later, if you’re 21 or older, you might be thinking that it is time to change-into your great grandparents!
The Federal Reserve Board, the government agency in charge of short term interest rates, has announced a very good probability that interest rates will go up starting in September of 2015. Chairwoman Janet Yellen, who has a history of believing higher interest rates are good for an economy during an economic boom, has also signaled they will go up from time to time, albeit incremental.
Yellen believes that the economy is booming and higher rates are justified. Many economists have argued, however, that there is not enough of full time employment and wage growth at this time for higher rates to happen.
While higher interest rates sounds appealing, they have both a positive and negative effect on consumer spending, the category that runs the U.S. economy.
On the positive, higher short-term interest rates should allow more people to save and invest for short and long-term goals. However, the negative aspect would be that credit, like debt, mortgages, credit cards, student loans, and the like will become more expensive.
In July of 2014, 248,000 were employed monthly in our economy, according to the government. As of July 2015, that number is 250.000 or up a mere 0.8%. The current employment cost index for both goods and services seems to be hovering around 0.5%. If interest rates do go up, slower consumer spending could actually contract our economy while private industry might be too nervous to spend and finance.
But, wait! Let’s not get ahead of ourselves. Most know all economic transactions take at least 6 to 12 months to settle into the U.S. economy. In the meantime, short-term rates could go up as high as 0.50 to 0.75 basis points very quickly.
This means that future savings accounts at 3-4% are nothing to scream about! However, if you are 40 years of age or younger, you’re probably used to getting 1-1.5%.
So go talk to your great grandparents! Their wisdom will tell you something like this, “Yes, go put your money in the bank. It is better than putting your money in the stock market. Remember the 1929 crash? You can save money for college or for the long-term while having your money insured by the government.”
Heard that before?
Well it took 40 years, but Grandma and Grandpa, who were right in the 70’s, could be right again!
Anthony Rivieccio is the founder & the CEO of The Financial Advisors Group, celebrating their 18th year as a fee only financial planning firm specializing in solving one’s financial problems. Anthony, a recognized financial expert since 1986, has been featured by many national and local media including: Klipingers Personal Finance, The New York Post, News12 The Bronx, Bloomberg News Radio, Bronxnet Channel 67 TV, The Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Bronx News and The Bronx Chronicle.
For financial inquires or assistance, Anthony can be reached at (347) 575-5045 or advisorsgroup@ymail.com.
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