Feb 29 2016

Two most dangerous ways to save money

By |February 29th, 2016|Personal Finance Tips|Comments Off on Two most dangerous ways to save money|

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Personal finance danger

For leap day I thought I’d take a break from the stodgy sort of money saving advice I prefer to dispense and point out some of the dumber ideas that I’ve had to save a buck or two.  “Dangerous” might well be a bit of a misnomer here.  You won’t actually be in physical danger, these are just ideas that, unless you exhibit a great deal of discipline will certainly turn around and bite you in the face.  These are hard ways to save money, and really easy ways to waste money.  That being said, if you really want the most dangerous ways to save or make money all you really need to do is cancel your health insurance and start smuggling drugs.  Be careful with all of these.  I fully expect that only one in five of the folks that read this will save money, the rest will probably lose it.  Oh well, here we go.

1) Prepay dumb expenses by buying discounted gift cards

If you know that you generally go to a certain restaurant over the course of the year you can go ahead and buy discounted giftcards to it.  You can go ahead and get these at gift card granny, or Raise.  You can often get 10-25% off at a variety of restaurants.  On top of that you can go through iConsumer or ebates to get to Raise in order to add another couple percentage points to the discount.  The best part about this is that these are giftcards, so they can be used in combination with regular coupons or discounts (unlike a groupon).  My favorite example of this is when I use a Noodles and Company giftcard at 20% off, purchased through the iConsumer portal (3% off), on the citi double cash card (2% off), combined with a buy-one get one coupon (~50% off).  These discounts mean that a meal I can ordinarily buy for about $10 instead costs me about $3.80.  Supposing that I go to this restaurant once every other week, this will save me roughly $160 annually over retail, the giftcards contribute about $26 to that savings.  What could go wrong?

Trouble…

This bit is pretty simple to figure out.  When buying giftcards, its pretty easy to go crazy and purchase giftcards for places you wouldn’t have gone anyway.  When you only save $26 is pretty easy to blow it by buying an extra giftcard to Applebees (though, why I ask you, why?).  The second problem is that its hard for giftcards to feel like real money.  If you’re trying to save money, maybe you’d eat at home.  If you’ve got a giftcard sitting there and you really don’t feel like making food anyway…  The solution here is straightforward, use a budget.

2) 0% APR credit card promotions/Balance Transfers

Many credit cards as a bonus incentive will allow you to put purchases on it without paying interest for an extended period, typically a year.  The strategy here is to spend the same amount of money but instead of paying off the credit card every month, carry a balance.  Since there are no interest charges you can go ahead and stuff the extra money in a CD or high interest checking account. Supposing you spend about $10,000 per year that can be applied to credit cards you can earn 3% interest this will earn you about $150 in the first year, and roughly $300 annually thereafter.  (The first year is a ramp up period, and then I assume that only $10,000 can be maintained on this balance transferring scheme.)  If you want to add a nosebleed level of risk, put half of this into the stock market.  (Here’s a hell of a tale about how doing this ruined someones life.) (Seriously, go read that, then come back and read the rest of this article.

Trouble…

The issue is that it is real easy to screw yourself over here.  If you accidentally miss one minimum payment because you aren’t used to the new credit cards you can lose all of the interest you were planning on making in some kind of credit card fee.  If for some reason you accidentally try to transfer these balances onto a credit card that has a fee for its balance transfers (but no interest) you could lose the whole year’s worth of interest as these fees are typically 3%.  Similarly it shares an issue with the giftcards.  If you are prone to spending money that seems free it is very seductive to go ahead and spend money that you ordinarily wouldn’t knowing that you won’t have to pay it back for a year. The solution here is the same, use a budget.

Budgeting

My tepid suggestion for budgeting is to use mint.com, it has some interface issues. I’ve also heard that you need a budget is quite good.  Either way you should make sure that you like one or the other before you get it all set up as it’s kind of a pain to change once you’ve started to use it.

Feb 24 2016

Who Will Win the Presidential Nomination (Remix)

By |February 24th, 2016|Blog|2 Comments|

No comment.

No comment.

Well, with the early states in the presidential nomination behind us I thought that it’d be a good time to check in on who will win the Democratic and Republican nominations.  At this point Donald Trump is ahead in the Republican nomination process and the nominee count for the Democrats is naturally confusing.  Including superdelegates Clinton is distantly ahead.  Excluding superdelegates Sanders and Clinton are tied.  When measuring who’s “winning” the best I’ve been able to tell is that superdelegates count if you’re a Clinton fan, and don’t really matter if you’re a Bernie fan.  Now this is all fine and interesting, but who will actually win the nomination?

Still check Predictit

The best way to get a guess at who will win the presidential nomination is simply to look at the prediction markets.  When someone tells you who they think is going to win, they’re often just telling you who they wish would win.  When someone is willing to put their money where their mouth is, that actually gives you some information.  Better yet, as time goes on, money is transferred from people who are bad at predicting who will win an election to people who are good at predicting who will win an election.  Over time, regular losers stop playing, and regular winners have more of an impact.

What does the prediction market say?Screenshot 2016-02-22 19.48.50

Those of you who read this blog regularly might remember that there was a trick to reading PredictIt’s numbers.  It used to be that the calculation was more complicated, but PredictIt changed their method of accounting in these markets and now the “Sell Yes” price translates fairly directly to a percentage chance of winning.

Hillary Clinton is very probably going to win the democratic presidential nomination.  At this point she has roughly an 85% chance of winning the nomination.  Sanders on the other hand has, roughly, a 15% chance.

The republican nomination is a closer contest.  Currently Trump holds the lead with a 71% chance of winning the nomination.  Marco Rubio is the second most likely candidate to win with 27%.  Ted Cruz brings up the back end with a 4% chance of winning the nomination.  Savvy readers will notice that this doesn’t add up to 100%, what gives?

The complication & the opportunity (Warning: Mathy)

So why don’t the probabilities add up properly in the republican contest?  It used to be that these probabilities were further off.  The sum of the probability of each republican nominee winning the republican nomination used to be roughly 200%. Arbitraguers would bet on each candidate to lose the nomination and lock in a mathematically certain profit. A large gap still remained and the explanation used to be that arbitrageurs demanded a ~10% annual return to tie up their money.  In order to ensure that the trading values could be used as probabilities PredictIt changed the rules.  If you set up a mathematically certain profit, they no longer make you wait to earn it.  All money which you are mathematically certain to receive, you can get right away.  This caused a large decrease in the total probability, which now sums to 110% in the republican nomination contest.  This means that if an arbitrageur bets each of six candidate to lose once, it costs $4.90.  When five of the six lose (as they must) the arbitrageur gets $5, earning a 10 cent profit.  Since this profit is mathematically sound PredictIt simply gives you the $5 up front.  If someone other than the six guys you bet “no” on wins (say, Jeb Bush gets back into the race and wins) then you get the other $1 that you weren’t certain to win.

The catch

PredictIt charges two fees, a 5% withdrawal fee, and a 10% fee on profits.  Since there is a a 10% fee on profits you need to take that out of the amount you were expecting to make.  You’d think, if we go back to our original example, you’d have to give up 1 penny of your 10 cent profit.  Unfortunately there’s another catch.  You win on five contracts of the six when five of the six nominee’s lose.  You lose on the sixth contract when one of the folks you’re betting against actually wins, and you don’t get to count your loss on that contract against your wins in the other contracts.  This means that you have to subtract your winnings ($5) against your costs on the cheapest five contracts ($3.91), the total “profit” that predictIt charges the fee on is actually $1.09, which works out to $0.11.  So when you take your actual 10 cent profit and subtract off their 11 cent fee, turns out you’re actually losing a penny.  Thus we’ve explained the last bit of mathematical impropriety.

The money

Fortunately, one of the markets is off by enough that you actually can profit.  In the Presidential election market, buying one “no” for each candidate results in costs of $6.86 and winnings of at least $7.  This means a profit of 14 cents, fees will be at most 11.3 cents.  Thus, you walk away with 2.7 cents.  PredictIt pays you within a few seconds of the transaction settling.  Therefore, the plan here is to sign up with PredictIt, deposit $7 via credit card, and bet “no” on each candidate once.  This should result in you ending up with $7.02.  You repeat this until you decide that you have enough money or you hit the $850 ownership cap on one of the candidates. I figure that you can make about $23 this way. You then cash out your $30, predictIt takes a 5% fee and mails you a check.

Important Disclaimer

I’m fairly certain that if you do this your exposure will be negative, however, you are betting up to $850 on each candidate to lose. Perhaps something important could change.  Perhaps PredictIt decides that it miscalculated the amount of money it gave you when it calculated your guaranteed profit. I don’t know.  I wouldn’t buy more contracts than you could afford to lose if something really strange happens.  My understanding of the math, and of PredictIt’s policy is that you simply walk away with a profit and you have no risk.  But it isn’t enough to guard only against the probability of bad things you’re aware of.  You must also be prepared for risks of which you are unaware.  The fact that some random blogger (that’s me guys) doesn’t know of any risks in this operation, is not the same as saying, there are no risks.  If losing $850 per candidate would freak you out, and cause you to complain to the blogger that suggested the whole thing to you–well just don’t do it.  Keep all your money in FDIC insured banks under the insurance limit.

Important Other Disclaimer

Trump!? If you can vote in a republican primary I strongly suggest you do it. I don’t care if you vote for Mickey Mouse.  Just vote against Trump.

Feb 22 2016

Diversifying your income

By |February 22nd, 2016|Blog|1 Comment|

800px-American_CashThe boom is back.  Unemployment hasn’t been lower in a very long time.  There’s some evidence that wages are starting to tick up as well.  Employee’s are having confidence to leave their jobs.  All of this is good news.  The bad new is that a recession is coming.  I don’t mean this year, I don’t mean next year, but sooner or later its going to be mass layoffs and a stock market crash. (And I mean like a real crash, not the baby pullback we’ve experienced during the last few months).  What should you do?

Don’t sell your stocks

There could be a lot more economic boom between now and the next recession.  The stock market could do any number of crazy things.  It could double before the next recession hits.  This might be the lowest the stock market gets for the rest of your lifetime, it’s probably not the highest it will ever be during the rest of your lifetime.  Our goal is to accumulate assets.  These assets will in turn provide us with more cash.  Don’t sell the assets!

Do diversify your income

If you only have one income stream now is the time to start making new ones.  It’s not as much fun to have to come up with a new way of making money if you just lost your job and you have six weeks to sort it out before you start missing house payments.  The goal, especially for folks in debt, is to be able to make your rent/house payment without racking up more debt or dip into savings.  We’ve talked about some potential ways to make money before.  If you haven’t already started working on something, now is the time.  Whatever you do make sure that you don’t rely to heavily on one client.  Contractors are generally the first to go when the economy hits the fan. Even if the economy doesn’t dip into recession this process works.  If you were an oil worker you probably would have felt more secure over the last year if money was coming in from other sources.

Keep fixed expenses small

Your fixed expenses can make life painful even if you’re able to pull in a small amount of money from side gigs.  Your income is more diversified as your fixed expenses decrease.  If your rent is $500 per month and you pull in $1000 from a couple side jobs, contract work, and dividends then you’re probably adequately diversified against job loss.  If you have the same side income but have a $3,000 house payment then you don’t have any significant diversification.  Add up your fixed expenses like house payments, taxes, health insurance premiums (keep in mind these will be higher if you lose your job), car payments (bad), credit card payments (very bad!).  Then try to make sure that you can earn about twice as much as this from work unrelated to your main source of employment.  I’ve heard the argument from high-earning engineers, that the hourly rate they can get for side work is simply dwarfed by their current job.

What about emergency savings?

You need to have some emergency savings.  You should make sure that you’re in a situation where you can get your hands on several thousand dollars in case of an emergency.  That being said, if you’re properly diversified fewer things will register as an emergency for you.  According to the Holmes and Rahe stress scale “dismissal from a job” ranks above “death of a close friend”.  Losing your job is going to be stressful, it’ll be a little less stressful if you have enough emergency savings to see you through to your next job.  The trouble is that you don’t, in advance, know the amount of time until your next job.  Instead you get to watch your pile of cash dwindle while you try to replace the job you had.  It’s stressful to try to set up a whole new income stream during this time when you’re trying to replace your career.  If you have separate income coming in the situation is substantially more comfortable as it could continue nearly indefinitely.  No melting through your hard earned savings while you try to take any job that sails by.

 

Feb 19 2016

Mountain of Student Debt

By |February 19th, 2016|Blog|4 Comments|

EmptyPocketsThere is certainly a student debt problem in the US.  Since bankruptcy laws were changed so that students could no longer discharge their debt through ordinary means, borrowing standards have slackened, interest rates have gone down, and tuition has gone up.  Consequently, every couple of months someone publishes an article about how crazy their personal student debt situation is and how reasonable they were in acquiring the student debt.  Here is the recent example: Betrayed by the Dream Factory.  The answer they naturally propose is more regulation on schools, but also simply having someone else pay it.  Doesn’t matter who, either make the bank write it off, have the federal government come in and clean it up.  Part of the problem is that the amount of outstanding student loan debt is about $1.4 trillion.  If the federal government forgave that much debt it would be more than all of the federal discretionary spending, including the all of the military spending, in a year.  You could shut down the government entirely, only keep doing the mandatory spending like social security.  Doing that still wouldn’t save enough money to pay for full student loan forgiveness.  In order to pay for total student loan forgiveness you’d have to take in about twice as much personal income tax as we currently do.  To say the least, the situation has gotten out of hand.

You might instead argue that the banks should have to pony up and just write off the student loans. Unfortunately total equity in american banks is pretty similar to the size of the total student debt.  Something like this would wipe out the banking system entirely.  That would probably not happen in an orderly fashion and bank runs would ultimately result in a much larger federal obligation than the original 1.4 trillion.  It therefore seems unlikely that we’re going to have total student loan forgiveness anytime soon.  So what’s someone with a completely unreasonable amount of student loan debt to do?

Samual Garner

For those of you who haven’t read the article, let’s break this down.  Samual is a Bioethicist that makes $70,000 per year and has $190,000 in student debt.  That’s a lot of money.  It seems unlikely that someone else is going to make those payments for him.  The good news is that this debt can be paid off. This is Thousandaire, our whole shtick is paying off all of our debt and saving up a thousand dollars.  Those of you who want to go further and become financially independent will have to save up far more than $190,000.  Sam (I hope I can call him Sam) is feeling fatigued about his debt, because he started with $200,000 and has hardly made any progress at all.  Sam doesn’t provide a detailed breakdown of his student debt but we’re going to go ahead and try to make a worse case scenario guess:

  • $100,000 private student loans: Interest Rate 8.5%
  • $90,000 federal student loans: Interest Rate 5%

Total interest payments on these loans is $13,000.  Now the rule of thumb I like to claim is that if you live like a student for every year you were a student, you’ll pay off your debt.  This is damned inconvenient to be sure, but better to do it sooner rather than later and end up paying even more.  Basically the argument goes thus, society supported him and his education for 5 years.  To pay us back he’s going to have to live like an ascetic for five years.  Fortunately he has some education in philosophy which should equip him to handle this.  Unfortunately, it looks like he’s got a case of the not-my-faults.   This is bad because, its one thing to live a hard life if you feel like you chose it, it’s another entirely if you feel that it was forced on you.  When the going gets hard it’s much easier to give up if you feel out of control and a victim.  Agency is largely the key to happiness, and by giving that up things will be much harder.

Pay off $190,000 in five years

Our first test is, is this even theoretically possible.  He makes $70,000, in five years that’s $350,000.  This is more than the under $250,000 he’s going to have to pay back including interest over the next five years.  The remainder is about $20,000.  Fortunately he’s come to the expert of living on less than $20,000 in a high cost of living area.  The plan (obviously) is to pay off the highest interest debt first, hopefully this’ll make things easier.

Taxes

Our hardest cost to control is simply going to be taxes.  The IRS is kind of a pain in the neck about getting what they think they deserve.  First off you’re going to get hit to the tune of 7.65% for payroll taxes (you know, social security and medicare).  This is going to cost $5,355 right off the top. Yikes.  Then we need to calculate income tax. You get a very small deduction for your student debt, $2,500 last I checked.  This means that your modified adjusted gross income is $67,500.  Unfortunately we’re not going to be able to use any fancy tricks to reduce this, because you need all of it right away to reduce your debt.  We’ll then go ahead and take the personal exemption and standard deduction of $10,350 for 2016.  This brings our taxable income to $57150.  My estimate for the income tax bill is therefore $10,060, combine that with the payroll taxes and that gets us: $15,415. That’s deeply depressing, but what are you going to do, right?  This leaves us with $54,585 left.  This leaves us with $4,550 per month to play with.

Healthcare

Now this is going to require some guesswork, but based on the employer survey of health care benefits the cost should be less than $100 per month.  This leaves us with $4,450 per month remaining.

Housing

Alright, Sam.  First things first, you’re living with a roommate for the next five years.  Maybe two roommates.  Why?  That’s how college works, and until you’re out of student debt, you’re living like a student. Washington is expensive, and I’ll assume that this fancy bioethics job is in an expensive area in Washington.  According to expatistan that means that a pretty small apartment is $2,300.  You’re splitting that small apartment until further notice.  The total monthly cost should therefore be $1,150.  This means we have $3,400 per month remaining in our budget.

Food

Maybe you go out for dinner, or eat fast food occasionally.  Not for the next five years.  Living like a student means its back to rice, beans, lentils, fish, and the occasional bit of chicken.  Anything that comes in an individually wrapped container is out.  The goal here is to maximize nutrition and calories per dollar spent.  Meats are out beans are in.  Ice cream is out bananas are in. If you’re willing to cook for yourself you can manage healthy meals on $200 per month.  This leaves us with $3,200.

Utilities

Living like a student definitely means no cable.  You can have internet and a cell phone.  It can’t cost you more than $60 combined per month (at least you get to split it with the roommate).  Figure it out.   Gas, electric, water and trash should come in at less than $120 per month.  I’m going to assume you’re roommate is a pain about this though and it does cost you $120.  After you split it with your roommate that should cost you $60.  This leaves you with $3,080.

Transportation

If you have a car strongly consider selling it.  You’ll be better off with a bike.  If you need a car try to do the bike anyway.  I assume that you don’t have kids.  You can live for five years without a car, unless you’d prefer to live the rest of your life in debt.

If you’re fairly certain that there is no other conceivable solution. (Or if you’re too lazy to bother trying anything else), you can go ahead and keep whatever car you have.  Unless of course you’re making payments on the thing.  Then it gets sold and you buy a $1,000 beater.  Students don’t drive nice cars.  They drive beaters.  That’s how it works.  Gas shouldn’t cost you more than $50 per month and your (liability only) insurance shouldn’t cost you more than $80 per month.  This adds up to $130.  This takes us down to $2,950.

Other stuff

Your new hobbies are at the library and public park.  Hope you like reading and hiking.

But…

Nope.  You’re a starving student, and it’s more important to prevent the starving part than to make sure you’ve got netflix. Plus you’re new work is going to take up a pile of your free time.

More income

I remember fondly being in school while working 10 hours a week.  Fortunately you’ve already worked while getting a master’s degree (no easy feat) so this should be quite simple for you.  You’ll need to work 10 hours a week at an hourly rate of at least $20 after tax (so charge $30/hr before tax).  It could be writing, it could be advocacy or it could be tutoring.  All told this should make you an extra $800 per month.

Student Debt

This leaves us with $3,750, paying off your student debt over the next five years (the math assumes we pay the minimum on the low interest debt and focus on the private debt first). About $100 per month is available for incidentals.  Your private student loan debt dies right near the end of year three and you wipe out the federal debt at the end of year five.  You then can face the rest of your life not with:

My situation has finally stabilized, and I should be able to avoid default, though things haven’t improved otherwise. My payments are still crushing, they will be around for decades, and they severely limit my life choices.

But instead with:

I finally feel free, I don’t have to worry about default.  My payments are gone, and my life choices no longer feel limited.  All I had to do was something really hard, one time, for five years.

Yes, I do realize I’m asking something very hard of him, and it’s a lot easier just to ask other people to pay off his debt.  I think it’s most likely that he’ll not do these things, but I figure if he can fantasize about a world where other people finance his dream jobs, I can fantasize about one where people take responsibility for their choices.

Feb 16 2016

Don’t Rebalance that Portfolio

By |February 16th, 2016|Blog|2 Comments|

800px-Model_Balancing

Rebalancing your portfolio is a time honored tradition, that seems to happen at the beginning of the year.  Often you’ve assigned that maybe 20% of your portfolio will be in bonds, 60% in United States stocks and 20% in foreign stock markets.  The percentages aren’t really the point here, but let’s just suppose that, for your portfolio, those were the weights you chose.  Over the course of the year some parts of your portfolio go up, and some parts of your portfolio go down.  This leaves you with a weighting that you may not have originally intended.  For example, if the US stock market crashed but foreign markets did well you might end the year with a weighting that looks more like 25% in bonds, 40% in US stocks and 35% in foreign stocks.  The standard prescription for this situation is to sell a bit of your bonds, and a bunch of your foreign stocks in order to buy more US stocks, so that you return to your original portfolio weighting.

The Benefit

Clearly the goal here is both to return yourself to a weighting you originally thought was wise, (this should dovetail with your investment policy statement) and to force yourself to sell high (the foreign stocks in our previous example) and buy low (the US stocks).  The idea is that, over time, you’ll do better in the market as a whole because you were able to take advantage of times when the various markets were relatively cheap, and were able to maintain some gains in markets that had run up over the last year.  This additionally keeps you from taking more risk than you’d intended.  For example, if you were near retirement and the year was 1997.  In that year the S&P 500 went up 33%!  That could mean that your portfolio was suddenly more like 35% bonds and 65% stocks.  This would mean that, going into your retirement, you have a much riskier portfolio than you had intended.  You solve this by simply selling your excess stocks, and buying bonds.  Suddenly your expected risk is back roughly where you left it.

The Problem

As you might be aware by this point, in my ideal portfolio you never do anything except buy more assets.  Whenever you sell an asset, even an index fund, you trigger capital gains taxes.  Triggering capital gains taxes will create a drag on your returns.  A good example comes from Charlie Munger from the Berkshire Hathaway Annual Meeting 2008:

Another very simple effect I seldom see discussed by either investment managers or anybody else is the effect of taxes.  If you’re going to buy something which compounds for 30 years at 15 percent per annum and you pay one 35 percent tax at the very end, the way that works out is that after taxes, you keep 13.3 percent per annum.  In contrast, if you bought the same investment but had to pay taxes every year of 35 percent out of the 15 percent that you earned then your return would be 15 percent minus 35 percent of 15 percent or only 9.75 percent per year compounded.  So the difference there is over 3.5 percent. And what 3.5 percent does to the numbers over long holding periods like 30 years is truly eye-opening.  If you sit back for long, long stretches in great companies, you can get a huge edge from nothing but the way that income taxes work.

For reference 3.5% is roughly a doubling every 20 years.  So if we never want to sell because we’ll lose out on a few percent, how can we keep our portfolio balanced?

The Solution

Fortunately, as long as we’re young and have a relatively low net worth.  As long as your income is larger than your portfolio you can pretty well rebalance without selling.  If your portfolio is out of your desired balance you can simply tilt your new contributions to try to catch the balance up to what you originally intended.  For example, if after the pullback in the market we’ve had, you’ve found that the percentage of your portfolio invested in stocks has fallen maybe 10% lower than your target.  To make up for this you could simply throw your entire contribution at stocks until the gap was righted, or even better you could continue making your regular contribution and split it up as usual, but also make extra contributions to catch your stocks back up to where they ought to be.  These plans are feasible if you’ve got a $60,000 portfolio, and now your target is off by $6,000.  If you have a $600,000 portfolio this all requires some more thought.  You’ll have to try to determine if losing out on some of your return over the long haul is worth reducing your risk by keeping your portfolio on target.  My suspicion is that you’ll find it worthwhile.

Feb 4 2016

The Fed Hiked Rates, What Should I Do?

By |February 4th, 2016|Blog|Comments Off on The Fed Hiked Rates, What Should I Do?|

You can add a tiny tick at the end now.

You can add a tiny tick at the end now.

So in December the Fed hiked rates 0.25%.  Now you want to know how this should effect your investing strategy.  The short answer is that it shouldn’t.  If you do anything differently because of the rate hike, you are over-reacting.  The Fed rate hike, however, might have some impact on you.  Let’s really quickly go over what a rate hike is and what it does and doesn’t impact.

What is the Fed “hiking”

When the media reports that the Fed is hiking rates, they generally mean the Fed Funds Rate.  This is the interest rate that banks charge each other to loan money overnight.  In turn the overnight rate directly impacts the prime rate, which is the lowest rate at which money can be borrowed commercially.  After all, why lend commercially if you could instead simply lend at the overnight rate.  This has gone from 0% to 0.25%.  In other words you get a quarter annually by lending $100 at the overnight rate, go nuts.

What this directly impacts

Since the prime rate is effected anything set based on the prime rate gets boosted by a tiny bit.  This includes credit card interest rates and auto loan interest rate.   Now, our goal as Thousandaire’s is to not pay credit card interest and auto loan interest.  If you are paying these interest costs this hike is tiny anyway, costing about an extra $2.50 per thousand dollars of debt per year.  In principle, this will probably also impact rates offered by short term CD’s and savings accounts.  Again this isn’t much, and its starting to look like the Fed might not continue to raise rates [link article on fed rate raising slowdown].  If the rate raise makes you feel that you really need to pay off that credit card or that car, I think that’s great.  If it stokes you to buy a three month CD, fantastic.  You probably don’t need to worry about it though.

What this does not directly impact

Every day I drive to work I hear some radio commercial about how you need to refinance because the fed is raising rates.  This is a load being shoveled by guys who sell mortgages.  Mortgages are long term rates, the fed has a very difficult time controlling long term rates.  There is some evidence that they were able to push down mortgage rates during QE and “operation twist”.   The fed might be able to push up long term rates by selling mortgages and other long term instruments.   If inflation expectations stay low and GDP growth stays low long term rates will probably stay low despite a couple small increases in short term rates.  Additionally, given negative interest rates abroad, there is a lot of capital in Europe and Japan looking for somewhere safe to invest money.  If rates stay negative internationally, I’d bet that mortgage interest rates will stay low.  You’ll notice that rates have even dropped over the last month or so. Current 30 year mortgage rate is 3.88% as of February 3rd.mortgage-interest-rates-august-2013-jan-2016

What not to do

In principle increases in the federal funds rate should reduce the value of stocks.  The value of a particular stock is the value of all of the future cash flows of the companies discounted to the present at an appropriate interest rate.  This means that increases in interest rates reduce the value of stocks in principle.  Unfortunately, this is well known, and as soon as rates seem likely to go up the stock market accounts for that information.  Even though “rising rates are bad for stocks” you do not sell your stock holdings.   You can’t control interest rates.  You can’t predict their behavior better than the market (even federal reserve economists have substantial trouble doing this).  You can control transaction fees and taxes.  Selling generates both. The goal of stock ownership is to treat your ownership interest as an interest in a business and simply sit on it for as long as possible.

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