There is a battle, a tug-of-war if you will, in between savers and customers in this nation.
On the saver's side, conditions are horrific. Interest rates on certificates of deposit (CD) have dropped substantially to the point where the average rate for a 1-year CD is 0.55% and simply 1.63% for a new fidelity funding debt consolidation 5-y CD.
Reflect on that for a bit ... your cash locked-up for 5 years making simply 1.63%!
Other cost savings lorries are having a hard time too. For example, a popular fund that contains corporate bonds from Wells Fargo, AT&T, Wal-Mart, and other blue-chip American business has an average maturity of 12 years and presently yields about 3.75%.
That's 3.75% of taxable interest income. Assuming your tax rate is 33%, you're entrusted to a reliable, after-tax yield of 2.5% which, my good friend, is less than the historical inflation average of 3%.
So, while your bond financial investment is much better than money in the bank and protects you to some level against inflation, you still end up with 0.5% lower purchasing power every year.
So savers can't be too pleased about this.
While Borrowers Rejoice
Debtors, on the other hand, are having the time of their lives. Last week, the average 30-year fixed-rate mortgage struck its all-time low of 4.19%. The kicker here is that home mortgage rates must really be more than 0.5% lower - in the 3.8% range - based on their correlation with rate of interest on Treasury bonds.
Nevertheless, rates are not likely to go much lower so here's a pointer: If you are in the marketplace to refinance, waiting is probably not going to assist you much.
Furthermore, clients of mine are borrowing millions at 2.15% to money their business activities.
Seems a Little Unfair
Without taking a moral position, it does seem a bit unfair that savers, who in a sense are the "good guys" building wealth for their future, contributing capital for economic growth and conserving for a rainy day, are being penalized for the actions of reckless borrowers and greedy lenders. Customers got in over their heads, didn't take affordable safety measures, and are now getting loan modifications and reduced rates on the money they owe. Banks experienced massive losses because of bad financing practices and caused this drop in rates to ultra-low levels.
However, this type of discussion doesn't get us anywhere. What has occurred, has happened - reasonable or unjust.
So where do we go from here, and how do we benefit from all this?
What Customers Can Do
Have a look at your financial resources from a borrower's perspective.
First: refinance your home loan NOW if you can because rates probably aren't going to fall much lower.
2nd: shop, shop, buy a much better rate on your charge card. Borrowing expenses are dropping all around so why should you pay the usual high rate on your credit card? Find banks that are hungry to lend you cash such as smaller sized institutions and Credit Unions, and prevent mega-banks that usually have all the cash they require.
Third: secure a company loan if you need the cash. Banks are chilling out and making loans at relatively low rates that are really engaging despite the risk of slower organisation in this weak economy.
Nevertheless, utilize sound judgment and profundity as you take on more financial obligation. Take on "good" financial obligation that funds your house purchase or possessions that value in value. Keep away from taking on "bad" financial obligation for depreciating properties you can ill manage such as a new automobile or boat. If you should handle "bad" debt, make certain it is short term and pay it off very quickly.
What Savers Can Do
Now the difficult part: discovering deals as a saver.
First: look for a longer-term CD that will change higher if rates increase. There is bit even worse than locking your money in a 5-year CD at 1.50% just to see rates rise to 5% 2 years from now.
2nd: think about purchasing business bonds with maturities of 5 years or less. These bonds still yield more than CDs, but make sure you understand what you are purchasing - if the corporation goes bankrupt, you could lose a good piece of your "safe" financial investment.
Third: consider purchasing high dividend-paying blue-chip stocks. Warren Buffet recently said that stocks are more affordable than bonds today, and he's right. There are lots of solid companies out there whose dividend yields are above 3%. For instance, Altria currently has a dividend yield of 6% and a strong history of consistent dividend payouts.
So ... it depends on you to be a winner or loser in the cost savings and borrowing video game. All you need to do is understand the facts, decide to act, get on the phone or in your vehicle, and begin getting your affairs in order.