Power Up Wealth podcast – Savers Are Finally Being Rewarded – Episode 44 transcript:
Sharla Jessop 0:00
Interest rates have been significantly increasing over the last six months. I’m Sharla Jessop, President of Smedley Financial Services. And today, my guest and colleague, Mikal Aune, will tell us how savers are finally being rewarded.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Mikal, thank you for joining us today.
Mikal Aune 0:48
Glad to be here Sharla.
Sharla Jessop 0:50
Mikal is one of our wealth management consultants and actually Vice President of our wealth management team. And he holds a Certified Financial Planning designation and an MBA. Mikal, what is happening with interest rates, and why are savers finally being rewarded?
Mikal Aune 1:06
Well it’s with the Fed raising interest rates to combat inflation. So inflation is spiked up crazy this last year. Went up to 9%, at one point it has come back down to where it’s around 6%. And to combat that and bring it back down, the Fed has been raising interest rates. Well for the last over a decade since 2008 really, borrowers have really been rewarded. During that time, if you got a mortgage, you can get it at 3%, some of them were under 3%, which is not historical norms. You probably remember what you had. When I first started looking at mortgages, way back in the early 2000s, it was seven and three quarters, and it dropped to seven and a quarter. And we’re like, buy, buy because it’s not going to go lower, and then it kept going lower and lower and lower. Right. And so the Fed was lowering interest rates in order to stimulate the economy and help it to grow, especially from 2008 on. But since that time, you know this last year, we’ve seen inflation spike up and so now they’re raising rates, and the script is really being flipped.
Sharla Jessop 2:06
Why haven’t the banks been paying much interest?
Mikal Aune 2:09
They haven’t been able to earn it on the other side, right? As interest rates have been really low for them. They haven’t been able to pay it out to other customers. So savings accounts have been 0.01%, which is piddly, it’s nothing as you’ve had if you’ve had money in the bank, you see the dividend payments that are like, oh, I made $1 this month, you know, and so they’ve been really low because the banks haven’t been able to make money on the other side. Well, now the interest rates are going up, they’re able to make more money. And so they’re able to pass that on.
Sharla Jessop 2:38
Which is great benefit. Because if most people are like me, and probably you and we look at that bank statement, when we get it, the amount we have in savings, maybe for short-term emergencies, and it earns, you know, barely even worth mentioning.
Mikal Aune 2:52
Exactly, exactly, just cents. It hasn’t paid hardly anything to keep money in the bank. We’ve still told people, hey, you need to have some emergency fund. Money in the bank, you can tap into when you need it. Right. One of my favorite sayings, though, is that those who understand interest, earn it, those who don’t pay it. And so that’s what, over the last decade, it really hasn’t mattered, you know, if I’m paying a mortgage at 3%, that’s not too hard if I get a car loan was somewhere between zero and 3%. So it really wasn’t hard to get a loan, I wasn’t really being punished for getting a loan. And that’s the script that’s being flipped now is that mortgages are now over six and a half closer to 7%. Which, again, that’s historically that’s pretty average. But when they used to be 3%, and when housing prices have gone up, 45% then you really feel the pinch if you’re trying to buy a house right now. Same thing with a car, because I’ve seen car loans that are at the dealerships, they’re they’re charging 11%, you can find cheaper ones that, you know, credit unions or banks that are around 7% for a car loan, but still, that’s a lot more than they used to be.
Sharla Jessop 4:01
And it does take a big bite out of just somebody’s cash flow, when they’re trying to buy a home and the price is higher and the interest rates are higher, they can buy a lot less, you know, they’re not getting the same thing.
Mikal Aune 4:14
Exactly. I have a lot of the older clients that like why do the young kids need to make so much these days, you know, they’re making a lot more than I ever did. And I’m like, well, how much did you buy your house for? And then they’re like, okay, I bought it for $50,000. And you’re like okay, now try buying a $500,000 home and paying 7% interest and your payments over three grand. So they have to be making more money just to afford to live.
Sharla Jessop 4:37
Tell us about the different types of accounts that someone might consider.
Mikal Aune 4:41
Yes.
Sharla Jessop 4:41
If they are a saver.
Mikal Aune 4:42
So this is where savers are really finally being rewarded because like we said interest rates have been so low that you’re earning cents on the dollar, you know, just hardly anything. Well now, savings accounts aren’t paying hardly anything. money markets are paying a lot better. We’ve seen a lot of those at least, you know, one and a half, two. Online money markets are paying like 3%. You have CDs that are paying anywhere from 3, 4 or 5% for CDs that are short-term talking, you know, six months or a year. And so those are really benefiting people now. Just kind of an explanation. So people know the difference, you know, people are like, well, a money market, what is that versus a savings account? Well, for all intents and purposes, money market is just a savings account on steroids. About the only difference is that a savings account, you can have six transactions per month, or a money market, you can, you can only have three transactions per month. So you can’t access it as frequently. But that’s liquid, you can tap into it anytime you want. We like to use that for part of your emergency fund. And if you’re you can get a money market that’s paying 3%. Like that’s great to earn that much money on money that you’re just going to have sitting around in case you need it for an emergency.
Sharla Jessop 5:53
And the interest rates gonna fluctuate on that. So the thing is that you’re not locking in an interest rate. With a money market or savings account is whatever the going rate is, you might be earning 3% this month, but next month, the interest rates might be completely different.
Mikal Aune 6:05
Could be more and it could be less. And it just depends on where interest rates go. And you have to understand that different institutions pay different amounts. Like, as a general rule, credit unions and online banks are paying more interest to individuals. Direct bank that’s brick and mortar, they’re usually not paying that much interest and so I’ve helped people as they’re, they’re looking at their accounts, and we look up their bank, and we’re like, gosh, your bank really isn’t paying hardly anything. You can still keep some money there. But you might want to consider another institution that might help you save a little better. And that’s where you know, a credit union or online bank is a good place to go for like a money market, especially. You talked about how the money market is not locked up. Where you have CDs that are locked up. It’s a certificate of deposit. And that is for a specified time, like six months or a year or three years or five years. The sweet spot for those right now is around 12 months. I’ve seen 12 month CDs that are paying over 5%. And we haven’t seen those kinds of rates since before 2008. So it’s nice to get those rates and get a little bit of interest and be rewarded for saving. Things to keep in mind. And this varies per institution. So you just need to verify with your institution. Usually, if it’s a 12 month CD or less, that you lock up your time, or lock, lock up the money for that timeframe. You only lose like either 60 days or 90 days of interest. So if I said I need to keep some money in a savings account a little bit there more money market, that’s liquid, but I I want to get some interest for the money that I have in the bank. I’m okay taking some of my emergency fund and putting it in a 12 month CD, if I’m only going to lose 60 days of interest. If I left it in there for 10 months, and then I have to break the CD early for some emergency. Well, I lost two months of interest, but I still got eight months at a 5% rate. You know, pretty good. Yeah, that’s great. We just haven’t seen that forever.
Sharla Jessop 8:00
Also laddering CDs. Talk about laddering CDs. Because that’s another way to have money that’s always available or coming due where you don’t have to worry about for your short-term emergency funds.
Mikal Aune 8:09
Yeah, laddering just means you’re using different timeframes. So a lot of people will say I’m gonna get a three month, a six month, a nine-month and a one year. So every three months, I know that some money is coming due. And so again, with your institution, just see what the rates are and see if it makes a lot of sense to ladder it. I’ve seen some places where you get a four-month CD, that’s like three and a half percent. And so that’s great. So I’m fine sticking some money there. I’ve seen other institutions where they’re three months, CD is still paying 1%. And if that’s the case, I’d rather just use a 12-month that I’ve may lose some interest if I break it early, but I’m earning a much higher rate.
Sharla Jessop 8:45
So you know, we’re talking about these interest rates. It looks pretty appealing. People might want to lock up a lot of money. How much money should you keep in a bank?
Mikal Aune 8:52
Anything that you may use in the next year. Right, and especially if you need to say I have big plans, we need to redo the roof or a furnace, things like that, you know, big purchases that you have to do I always keep that money in the bank if it’s going to happen in the next six months to a year. Just because if I invested in the stock market in six months, is it going to be higher? That’s a flip of a coin, I don’t know. It probably is, but there’s no guarantees. In five years, if I invested in the stock market is probably going to be higher. Yeah. Okay. Again, there’s no guarantees on either way. But yes, the longer the time horizon, the more opportunity you have to make money in the market. The shorter the timeframe, I need to keep that money protected. Make sure it’s there when I need it. So as a rule of thumb, we tell people to say well, first we need to create an emergency fund. Okay, the emergency fund is going to be there for things that you may need in the next three to six months. And we usually tell people to keep three to six months of living expenses. So if your living expenses are $5,000 a month, well that’s $15,000 to $30,000 that I should have in the bank that I have access to in case there is an emergency or I lose my job, or things like that. The less stable your job is, the more that you need an emergency fund.
Sharla Jessop 10:04
An emergency fund isn’t like the Christmas fund, right?
Mikal Aune 10:07
No.
Sharla Jessop 10:08
Christmas comes around, it feels like an emergency.
Mikal Aune 10:11
It feels like an emergency. But it shouldn’t be.
Sharla Jessop 10:12
That’s a separate. That’s a spending account.
Mikal Aune 10:15
Yeah, the emergency fund, I like to keep it as a totally separate account so that I know that’s there. And I usually have like either a money market or a CD that this is my emergency fund and I can tap into it if I need to. Okay, we still like to have money in a checking account, that’s going to be your normal expenses that recur every single month, then you have your emergency fund set aside, you have savings set aside for anything big you have coming up, maybe it’s a trip, and you need to set aside $5,000 for that. I still keep that like in a money market or CD, depending on when I need it. But once you have that built up you that’s your security. Once you have that security, then you can turn and say okay, well, how long before I need this money? And if you’re looking several years before you need the money, then that’s a great opportunity to invest. I know some people right now are a little scared, like, oh, no, you know, what might happen? Is the market gonna go down? Or is it gonna go up? We don’t know. And so I just don’t want to invest, I’ll just stick it in a CD. And that could be a good place to stick it, especially if your money is going to be conservative anyway. But if it’s long-term money that you have five years on, it’s a great time to say you know what the markets down. It’s always said that the stock market is the only thing when it’s on sale, that people run away from it. Everything else, you’re like, okay, that car is on sale, and it’s still a good car, I’m gonna buy it. Stock market is the same thing. It’s good. And if you buy it in five years, it’s going to be looking a lot better than it is right now.
Sharla Jessop 11:32
That’s interesting how our emotions play into it, and how we think, you know, we’ll drive across town to save $1 on a dress or $10 on a dress.
Mikal Aune 11:39
Or five cents on gas.
Sharla Jessop 11:41
Exactly. And then we talk about the stock market and it’s a totally different perspective for some people. The emotional side is so different, but people need to think about it just like everything else. A good deal is when the markets on sell.
Mikal Aune 11:51
Yes, and a lot of times, it’s hard to take out the emotions, because we’re hardwired to avoid risk. And that just feels like a risk. But when you look at it over time, it’s not so risky.
Sharla Jessop 12:02
I think sometimes people believe that investing in the market is risky, and that there’s a chance they’re going to lose all of their money. And that’s the emotional side that they they come to us with where sometimes, I mean, it’s not diversification, there’s a lot of ways to protect.
Mikal Aune 12:13
There’s a lot of ways to protect and a lot of the management that we do will help protect and you know, I try to keep things in perspective, too, because I have some people that are like, well, I’m gonna invest in real estate, because real estate never goes down and you’re like no. In 2008, the stock market was really rough, and it lost 57%. And that hurt. But you still had 43% and it came back and it grew, you know, the stock market came back by 2013. I had a number of people that had real estate investments that lost 100% of that real estate investment during 2008. So everything has risk. You just have to understand the risk as you step into it.
Sharla Jessop 12:51
Make sure it’s appropriate for what you’re trying to accomplish.
Mikal Aune 12:53
Yeah, exactly. Well, and that’s another point with risk. You know, I’ve had a lot of people recently say, okay, what about the banks? Do we need to worry about the banks, because of what happened with Silicon Valley Bank and a couple others. One, you have to understand what’s happening with Silicon Valley Bank. And the first thing was they made a fundamental error, because they took short-term deposits, and they bought long-term bonds. So then if people request their money back out that long-term bond, because interest rates went up, it’s now worth 10% less, or maybe 20% less at the time, it just depends. And they’re like I can’t sell this long-term bond to cover that short-term loan. So that was their first error. And then the second problem was it just became a real run on the bank where social media expedited it and people were able to hear about it and just transfer things out electronically. But it is just a good old fashioned bank run, because they pulled out $40 billion within four hours. And I heard one Fed regulator, former Fed regulator say that no bank can withstand that. No bank has that much cash on hand. And so if that happens, then yeah, the bank’s gonna fold.
Sharla Jessop 14:02
They have to sell assets. They have no choice but to sell assets when something like that happens at a loss at a loss.
Mikal Aune 14:07
The other problem with the SVB, 95% of their accounts were not covered by FDIC insurance.
Sharla Jessop 14:13
Why is that?
Mikal Aune 14:14
So FDIC insurance was instituted after the Great Depression. And it was to protect the banks because there were so many banks that went under during the Great Depression. And they said, okay, we’re going to guarantee deposits. Now that current rate is up to $250,000. So if you have $250,000 or less in an institution, per registration type, that’s like, if I have an account, you have an account, we each have $250,000, right? So as a married couple, like you could set it up so that you each have accounts in your name and you’re covered to $500,000. For example, if you’re below that limit, even if the bank goes under FDIC steps in and they make you whole. Well in SVBs case, 95% of their deposits were above that limit, and so they were not covered. The government still stepped in and said all right, we’re using FDIC to cover and make those depositors whole, which is a discussion for another day, whether they should have done that or not. But in doing that they prevented people from creating other bank runs. If they didn’t bail out SVB, then we might have had dozens of banks that failed instead of two or three.
Sharla Jessop 15:20
And I think it’s important to know, they didn’t bail out the bank. They bailed out the depositors.
Mikal Aune 15:25
Yes.
Sharla Jessop 15:25
So the bank itself and the investors in the bank, they were still at risk.
Mikal Aune 15:29
Yes, exactly. So yes, the banks still folded, but the depositors were made whole, and that prevented other bank runs. Okay. So you have to then look at your own bank that you have. So we have a couple of local banks. And I would say in some ways, it’s good that SVB got bailed out, because we have a number of our local tech companies, too, that they would have been wouldn’t have been able to make payroll. And so even the state of Utah was involved in like, okay, how do we help these people out in this crisis as SVB is going under? So it was a big deal. And it was a good thing that they bailed them out. And as a question of, okay, should they have? And how much should they have bailed out SVB? But you look at your local institution say, Okay, what’s the risk for this institution that they may go under? Okay. And so a lot of the credit unions 90 95% of their deposits are under the $250,000 limit. Credit unions are covered by NCUA, which is just the same thing as the FDIC for banks. Okay, you have the Federal Depository Insurance Commission and the National Credit Union Administration, but the same thing, they cover you up to $250,000 per registration type. So at the credit union, if you have less than that, you’re still covered. At the bank, if you have less than that you’re still covered. And so most of the banks and credit unions, because you’re covered, you don’t need to have a bank run, people aren’t afraid that they’re going to lose their money, because they’re already covered.
Sharla Jessop 16:56
They feel pretty confident that their bank is secure. You know, the interest rates are enticing right now. It’s looking good. It’s hard to turn your head on those high rates.
Mikal Aune 17:05
We’re glad to see them. Like we haven’t seen these rates since 2008. So it’s like, finally savers are getting rewarded. And if you’re a borrower, you just have to be wise and not just go into crazy debt.
Sharla Jessop 17:15
How long do you think we’ll see these rates?
Mikal Aune 17:17
That’s hard to say. Are they going to stick at this rate? You know, we’ve already seen some rates that popped up high, and they’ve come down a little bit already. And so maybe we’ve already seen the peak. If the Fed keeps raising rates, maybe they keep going up. But it is still an open market. It’s not like the Fed raises rates. And these go up automatically, because there’s still competition out there. And so they may go up and they may go down and the Fed, their intent is to raise interest rates to kill inflation so that inflation comes down and inflation comes down, and then they can lower rates again. Their intent is to make sure that the rates come down. And so it’s possible that in a year from now, if you get a one year CD, you won’t be able to renew for the same rate that you’re in right now.
Sharla Jessop 17:59
I think a telling sign is that if you look at anything beyond 24 months, you’ll notice that the interest rate you can receive on a CD for a longer period of time drops significantly, for every period of time. And I’m sure that is tied to the fact that the banks don’t believe that they can maintain that high level of interest, or guarantee it for a longer period of time.
Mikal Aune 18:17
Exactly. They don’t want to promise to pay a 5% interest rate for five years because they think rates are going to come down. And so they’re only going to pay a three or 4% interest for five years. So yes, there’s, in some ways, it’s like, do I want to lock my money up for longer and get a four and a half percent rate for two years just so I can get a guarantee longer because rates may come down? That’s one tactic and it may work good. Nobody knows exactly where rates are going to be in a year from now. That’s, that’s really hard to tell.
Sharla Jessop 18:44
Well Mikal, I think we’ve covered a topic that’s really on everyone’s mind right now as we’re seeing interest rates change. Thank you so much for enlightening us.
Mikal Aune 18:53
Ya, I’m glad to be here. And thank you, Sharla.
Shane Thomas 19:00
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
