Interest Rate Scare!

by Fern Alix LaRocca CFP® EA · 0 comments

 

 

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Everyone was expecting an interest rate increase… but it didn’t happen.
Now what?

For Banks:
They can’t raise the rates on those variable rate mortgages and other loans

For consumers:
You continue to get low interest rates

Considering that consumers are saving more and have more in the bank (or credit unions) than ever before. Why save?

You save to get ahead of taxes and inflation, but you also save to have emergency cash when:

  • Your roof starts leaking
  • You get laid off
  • Your car breaks down
  • And any other times when you need cash fast and don’t want to sell an investment to pay for it.

So what’s enough?

For pre-retirees, 2 years cash in the bank to draw from right after retirement reduces their need to get cash from investments and let’s the investments start to grow.

For Self- Employed folks, about 1 year gross income in cash (just in case there is a downturn in business).

For Most of Us- 6 months gross income in cash reserves is good.

But what about those dismal returns?

  • Shop around at places like BankRate to get the highest interest on your savings
  • Ask- that’s right – ask your bank for a higher interest rate-  (after all, you are a good customer).
  • Shop right- get compounding daily and high APR and withdrawal flexibility. Trade off features to get what you want at the maximum rate.

How much should you be getting to get ahead of taxes and inflation?

Read this excellent article by Barbara O’Neill, Extension Specialist in Financial Resource Management,Rutgers Cooperative Extension, to do the simple math which is inflation over 100 minus your tax bracket.

Breaking even with taxes and inflation rates are the starting point from which you invest. Try to get your cash savings close to that break even point.

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