AAR49 - Why High Interest Rates Are Good For You

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3:08Good morning, everyone, and welcome back to At Any Rate. My name is Evan DeRay, and we are here to help you make sustainable financial changes without breaking a sweat. And today I'd like to welcome back my most interesting co-worker, Andrew Sather. How are you doing?

3:21Evan:Sick. These awards just keep stacking up. The competition is just easier to win awards when the pool is smaller. Well, I'm still happy for you. It still feels good to have a medal around your neck either way. True. Maybe some people enjoy the pun, or maybe there's going to be a compilation of all the different adjectives at some point. So I can have a massive medal that is so big because there's so many words on there. Yeah, we're not going to put the time to make a bunch of different medals, but one big medal sounds very reasonable to me. I like that, yes. We'll look into that. All right, so today we want to be discussing interest rates and potentially why high interest rates can be good for you.

4:06So I kind of want to just, I want us to outline what the common narrative behind interest rates are. When you hear about it, usually in the finance sphere or in the investing sphere, you definitely immediately hear the idea that high interest rates are bad. The Fed, you know, at all costs basically needs to cut rates because borrowing is expensive. And all that is definitely true. But I think that the impacts that it has on an individual person aren't really covered by those concerns. So those concerns more so affect either wealthier individuals or businesses, which both are important to the economy and feed the economy and blah, blah, blah.

4:43But there are other effects that interest rates directly have on individuals that are felt, again, much more directly than those sort of indirect potential trickle-down effects. If you're a saver and investor, then you can even look back in the last few years have been pretty dang good for savers and investors. it hasn't been too bad for individuals as a whole but Andrew what do you think about the recent historical media coverage or sort of bias towards interest rates do you think that it's been fair or do you think it's been kind of skewed towards borrowers as just being scared from high interest rates

5:22Evan:they really make it sound like the end all be all as if one or two interest rates determine everything and yeah while they do make a big impact on the economy and on the stock market there are bigger forces in play and bigger factors for us individually which we're going to go over to your point so it does feel a little bit deceiving of like you know what the Fed's going to do is going to affect everybody's lives tomorrow and it's like, well, maybe, maybe not. Most likely, no. Especially from a personal finance perspective, as long as you keep your job and everything, the interest rates probably won't affect you much.

6:18I'm excited to hear this contrarian take on interest rates. Where do you want to start on some of the real effects

6:28Evan:on interest rate changes to people individually? So the first kind of focus we'll start on is how high rates can affect your cash, your cash savings that you have, whether that could be in a, it could be physical cold hard cash or it could be in a savings account or high yield savings account, basically money that isn't invested into an asset somewhere. It's not in your house. It's not in stocks. It's not in bonds. It's not tied up anywhere. It's just held in an account somewhere. So the first impact that is near and dear to my heart is that high-old savings accounts are going to see higher rates in general.

7:03If borrowing becomes more expensive, then basically what you're doing when you, quote-unquote, give your money to a high-old savings account is you are loaning that company money. And just like any bank out there, they're going to use your money for their own gain, trying to earn money off of it themselves. They're going to go use your money, so you're basically loaning them money for as long as the money is in the account. and so if lending becomes more expensive, then they're going to give you back a higher interest rate for quote-unquote you lending them your money. So this is awesome for the average person's savings.

7:37I mean, this by itself, first bullet point here, is one of the biggest needle movers, I think, for the average person because high-old savings accounts are so incredibly easy to set up. They're so simple to use. They're so powerful for basically short and medium-term savings. not the best for long term but very very powerful for anything below that and they're just safe guaranteed places to put your money so to kind of give a frame of reference for that say you had 20 grand in savings maybe you're saving up towards a house or a new car or something like that and you have that in kind of a normal savings account somewhere or a really crappy high old savings account and you're seeing like 0.5 % on those returns and that's going to give you about 100 bucks a year cool solid money at least at something and it's probably higher than the average savings account.

8:24But if you had that account, if you had that money in an account giving you say four and a half percent, which is very realistic, especially if interest rates start rising, then you could be seeing 900 bucks a year and 900 bucks a year starts to turn into, I would say sort of a tangible amount of money, even every month, you know, getting an extra 75 to 80 bucks a month is a pretty noticeable amount of money to get for literally no change in effort or risk whatsoever. So high-yield savings accounts are the first thing I want to bring up, and then also past that. CDs and treasury bills are paying well and with higher interest rates are going to continue paying well.

9:03I won't discuss them too deeply because they're hovering around the same four and a half percent as far as I can see, and so whatever rate increase we see with high-yield savings accounts will probably be about mirrored with bills and CDs as well. So I also want to clarify that high rates aren't going to be good for everybody or good for every situation. I mean, interest rates play a part in the economy. And so whatever move they make is going to hurt some people or hurt some situations and decisions and help others. But I would definitely argue that for the average Joe who just has money that they have set aside or want to set aside and they want that money to grow at a reasonable rate and especially if they don't want to take on a ton of risk you know that they see stocks as gambling or blah blah blah and they just don't want to kind of throw their money into someplace they don't understand then for that average person these higher interest rates can be very very good very very powerful and become sort of their best money growing tool and while still fitting into their their risk management that they want to hit Andrew how do you see fluctuating interest rates affecting your your cash savings yeah higher is better in this case right so it is it is cool to to be able to see to your point uh a higher return

10:20Evan:with no other you didn't have to do anything for it um it is it is one of those things where you see it go down and you're like okay that that that's unfortunate but maybe the economy will do better now and then the economy doesn't seem to change and you're like great now i just make less interest so yeah that's kind of the whole game here for me is every situation has pros and cons of course and that applies to interest rates too and i just think way too much of the conversation is focused around the cons of this move um and so yeah our goal here with this episode is just to expose some of the pros that you can focus on and basically take advantage of um and play that little bit of a game of long-term fluctuations in something like interest rates, if you want that to impact the decisions you make, the financial decisions you make, then understanding the stuff in this episode can help you kind of ride that wave a little bit better.

11:21Not try to time things, never try to time things, but kind of ride that slow wave a little bit better. So,

11:28Evan:what about the argument that, well, now it's more expensive to borrow because interest rates are higher? Yeah, borrowing is definitely, I would say the borrowing is one of those things that, obviously, I just want to say up front, it is negatively impacted by a higher interest rate. It's going to be more painful to borrow, really, is how I would kind of sum it up. but when we hear about borrowing I think again we we in the media or whatever tend to look at it from the lens of a business or wealthy individuals who are basically living off of borrowing I mean that's that's how they make their incredible gains that's how they grow companies very very quickly and powerfully is basically they're leveraging somebody else's money and so again when interest rates go up it's harder for those businesses to grow basically but if we try to focus on the average person as much as possible.

12:20The first thing I would say is that the average American upfront carries seven grand in credit card debt, and that's just credit card debt. That's not any other personal loans or average mortgage or average car loan or anything like that. That is just realistically short-term spending debt is what credit card debt's going to be. So seven grand on the average individual person, I would argue that being a little bit more afraid of debt, and I mean a little bit, just marginally more, is good social pressure in general that's definitely not trying to see debt as the devil i also don't want to swing nearly that far that's kind of something that we've we've spoken against in the past and that's something that i would continue to speak against now is just seeing oh if you're in debt then that should be like the soul you know your life's focus is to get that debt number to zero over everything else and i would disagree with that but i would also say that for a lot of people out there who who maybe struggle with that self-control of not slipping into debt because it can be a very very slippery slope, then seeing debt as even more painful than usual can be a good thing for those people.

13:25Basically, just trying to push people to be wary of debt, not to see it as ruining their lives, but to hear about debt as a negative thing and be more wary of it can be a decent thing. Not to mention that, of course, those higher interest rates are going to affect the average mortgage rate, they're going to affect the average car rate or car loan. So all those rates are going to go up and anytime somebody looks into going into debt for something like that or taking a load for something like that, it's on average going to be a little bit more painful. And the last thing I'll say is that regarding debt, paying off something like higher interest debt can become a focus.

14:04Say you have a variable interest rate on some loan and that interest rate starts to rise, then that could kind of put pressure on you to prioritize paying it off. Again, I don't think it's ever worth debt being the sole focus of your finances, but if going into debt is something that you struggle with and now you're seeing rates rise higher, then maybe kind of take that as an external factor, an external push for you to prioritize paying that off instead of kind of just leaving it because it's maybe something that you don't want to deal with whatsoever. Is that something you kind of agree with or jive with?

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17:05Evan:I reveal that stock pick in a deep dive research report in A Generational Moment, Reigniting Human Connections Through a Tangible Network of Intangible Assets, which you can access at einvestingforbeginners.com slash reignite. Yeah, for sure. I mean, some of us do need a wake-up call. and nothing will wake you up like a little extra pain, right? Yeah, that'll work. Yeah. Next topic here is that fixed income can become much more worth it as interest rates rise. So this kind of feeds into the high-old savings account discussion as well. So high-old savings accounts are one of those fixed income places that you can put your money.

17:46But honestly, even more than high-old savings accounts, something like bonds can become a much bigger focus for you. So say you have money that you know you're not going to want for quite a while. Maybe you're getting close to retirement and you want to continue growing your money, but you're afraid of having too much of your savings allocated into stocks. That's going to be riskier. It's going to fluctuate a lot more or it's going to fluctuate at all in the short and medium term. And if you're in any of those camps, then bond rates are going to be rising as well. And as usual, bond rates are also a good chunk higher than high-old savings accounts.

18:23The average bond rate right now is about 5%. It's about 0.5 % higher than a high-old savings account. So it's not a massive jump, but you can always take advantage of that slightly higher rate. You can do CD laddering where basically you put your money into a bunch of different CDs that will mature at different points in the future. And then that way, one year, three year, five years into the future, you're always going to have some money that you get access to, but you're always growing something for a longer amount of time for a higher interest rate. And so these are some really powerful places for the average individual to be able to put your money and have a low risk, guaranteed return.

19:00And that's just going to get higher and easier for you. Is this enough, you would think, for you to prioritize something like fixed income returns over adding to stocks? Or are you still somebody that wants to chase that high long-term return?

19:17Evan:Yeah, I think again, it comes back to where are you in your journey and how soon do you need the money? So for me, not needing the money for 20 plus years, it makes a lot more sense to just have it all in the stock market. because like you said, it's the businesses that are out there creating all this value. And they create more value than a bond because a bond is just interest that, sure, you can reinvest it, but it's not compounding at the same rate as a business who's able to snowball their advantages and then really hit that higher growth rate. So definitely closer to retirement. The higher yields make fixed income more attractive.

20:02Evan:And I would argue that we're in an interesting time, and I'm not an expert on bonds or far from, but I have done a few rabbit holes into interest rates. And from what I'm seeing, that spread you're talking about between here's what you can get in a high-yield savings account, here's what you can get in bonds, that spread's very small right now. You mentioned 0.5%, which they call like 50 basis points. from a historical point of view, that's a very small spread. And so over time, we might see that spread widen, you would think. I mean, the world doesn't seem to work on anything that makes sense anymore.

20:43Evan:But if history eventually returns to something that's a little more normal, then that spread will be higher. And so the numbers we will be talking about will be even more impactful and will make fixed income look even more attractive than high-yield savings accounts. It's a really weird thing where bond prices and rates are inversely proportional. Like a seesaw, rates go down, bond prices go up, and vice versa. So there's these weird things that happen with the price of ETFs that hold bonds. And then if you're buying a bond individually, there's just the prices are weird but long story short I think looking more attractive in the future is something that if we return to historical norms that we will see and so even if the road to get there might be painful for bond investors because again the seesaw if the rates go higher it will still be an attractive a more attractive proposition in the future and so we'll see interest rates if I was able to predict interest rates or anybody else was able to predict interest rates they would have a 2 billion dollar account on Kalshi or Polymarket but I have not seen anybody post one of those by betting on interest rates so as far as it goes we just have to wait and see but interest rates are definitely fascinating and the history of it is even more fascinating it actually goes back hundreds and hundreds of years so um it is very normal for it to go up and down yeah yeah that's fascinating and another um another upside i would say for bonds especially if they can can go much higher than this at any point in the near future is that you can lock yourself into that rate which is huge because while high yield savings accounts they kind of move pretty slowly.

22:49They shift maybe like 0.2 % at a time on average. They do shift. And so if interest rates go down, for example, then high-old savings accounts will drop by up to a percent in what return you're earning. And that can change at any point. I don't remember whether they legally have to notify you or not. I don't believe they do, but don't quote me on that. But regardless, they can move rates at any point that they want or need to. and what that means is while high-old savings accounts are pretty dang stable and you can pretty dang well predict what money you're going to have in the near future they're not 100 % accurate because rates can fluctuate for the better or for worse for you but something like a bond especially if you're going to be able to get a noticeably higher rate and you're like we want to buy a house in five years so maybe it's not quite long enough to know that the stock market is going to give me a positive return by then there's a potential it'll still be down or level or something then And you can put your money into a bond and just lock in that rate and be absolutely certain what that money is going to mature into at X date.

23:51And that can make financial planning very, very easy. And not to mention even more attractive, like you said, if the rates go up even further. I mean, for me personally, if I was able to get, you know, six and a half, seven, seven and a half percent off of a bond, that's creeping pretty dang close to something like an expected market return. and that would make it potentially very, very attractive to kind of set, you know, some of those short to medium term maturity dates and just lock in that rate instead of having to worry about it anywhere else, as long as I didn't need to access it any sooner than that.

24:24Evan:Yeah, that's a great point. Like, makes that financial planning actually more of a plan when you can rely on that for sure. Yeah, and sort of the financial approximation, basically. All right, one last piece that I want to touch on here before I kind of give Andrew the quick floor here is discussing a home buying pause. Like, let's say interest rates just rise like crazy, and people are pushed away from being able to buy homes because now the interest rates on those mortgages are up a lot more. Of course, this has the downside of making it harder for people to purchase a home. But I would say that that's sort of like a seesaw.

25:00If interest rates are going to go down, then in general, prices are going to go up and vice versa. So it's never going to be the easiest, most perfect time to buy a home necessarily. But especially in our current real estate market, high interest rates can be very, very helpful to slow buying, lower demand, and lower prices. Because currently we are at a point where prices are high, not just in historical terms, which I don't know if we'll ever return to not being high in the historical terms. But in recent history, prices are very, very high currently. And I know that I felt that personally when we purchased our home.

25:38I would say that we got our home for a good price. I don't regret our home purchase or anything like that. but I know that if we were in a different market at this point in time, at the same point in time, and interest rates were higher, then we definitely could have gotten a noticeably lower base price on the house. So a slower real estate market like this can be a great opportunity for savers. So if you're somebody that was looking to get a home sort of in the medium term, hopefully not the near-near term, but in the medium term, or you're somebody who's looking to move potentially in the near-term, medium term, then this solar market can be a great opportunity to like we talked about put your money into some of the places that we've touched on and have that money earn significantly more money than it would have previously and then once the rates have sort of had their chance to impact the prices on homes then you get to jump on that that better situation um so the the kind of recent i would say low interest rates the higher prices that you've had to pay for the recent lower interest rates aren't necessarily all they've cracked up to be.

26:43Again, I don't regret our decision whatsoever, but everything has pros and cons, and this shift could be better for a lot of people. But Andrew, I kind of want you to touch on and discuss how the stock market usually is or also how it has been in general recently impacted by interest rates.

27:02Evan:Well, how much time do you have? I'll try not to make this drag too long, But when you look at how people value cash flows, how much they put an emphasis on cash in my hand right now. And if you look at all the textbooks that people who are analysts and they're pricing these stocks for a living every single day, a major input in how much is this stock worth comes from the interest rate. And so in general, when interest rates are super, super low, cash flow today is kind of trash. Cash is trash. We just want as much upside in the future. And we saw that. 2021, I don't know if it was a perfect kind of correlation between interest rates bouncing and the stock market just going on a tear.