Saving Rates Are Decreasing
Younger people in the workforce are not saving as much as the baby boomer generation did. We, as young people, millennials, do not have a high enough emphasis on saving for the future. We live more for the right now and we have a huge issue with instant gratification. I am at fault for this myself as right after we moved we already had one TV. It was big enough for our family. I needed to go out and buy an even larger TV for the new house. Now, the kids had one TV and we had another TV. Instead of investing $1,000, which is what I should’ve done, I turned around and bought a flat-screen TV. Even worse, I put it on a Best Buy credit card for 0% for 18 months. I didn’t use my own money, which was probably smart. I put it on a credit card only at 0%. It was the only way I could reason with it and justify spending that kind of money. Priorities Have Changed: Baby Boomers vs. Millennials I don’t feel as bad as I should because there’s cash in the bank to pay for that, but if I get 0% why not use it? Although I still feel incredibly guilty because it is going backward. It’s not helping our family move forward. I wonder what the baby boomer generation would’ve done if they had an opportunity to buy a $1,000 TV. Would they have done it or not? I would like to think that they would’ve passed on the opportunity to get a larger TV and saved the money for retirement. If you read another article that I wrote on RMDs and the pressure that’s going to have on the market, you will see that the RMDs will be drawing down investible assets across the United States over the next 20 years. I am fearful that our younger generation and myself will not be able to backfill the amount of money needed to maintain the market. Spending Habits Can Change: Lessons Are Learned I read a blog on consumption in America called Mr. Money Mustache where he lays out how he only lives on $27,000 a year and rides his bike everywhere. They have one car. It sounds amazing. I need to decrease this spending personally so I don’t make the mistake again of buying a large-screen TV or the next toy that goes down in value. That money would’ve been much better spent going on a vacation with my three kids for three or four days and having quality family time instead of a TV that hangs on the wall. The lesson is starting to be learned. What will you change as it relates to your spending habits and are you saving enough?
What Happens if the 10-year Treasury goes to Zero? The Decline of Interest Rates & The Rise in Bond Prices
Over the last thirty years, the trend of interest rates has been declining. As interest rates decline, the price of bond that consumers can pay goes up. The Inverse Relationship between Bond and Interest Rates I will give you a quick example. If interest rates are 5% and bonds are $100, say the interest rate decreases to 4% or 3%, or 2%, then the price of bonds increases. Let’s say the rate goes down to 4%. The cost would then be $105. If the rate goes to 3%, the bond could be worth $110. If it goes to 2%, it would be $115, and vice versa. So here is the problem that I see with bonds: We are at our lowest rates ever. The 10-year treasury is at 2.20 and is now down to 1.70, at the time of this writing. They have had a 30-year bull market. Where can interest rates go from here if they are already at 2%? I only see three options; Interest rates continue to go down to zero, and if that is the case we are in for a global recession and the cost of your bonds increase is not going to make you happy. This is because everything else will start to collapse. Visit the following article here. Could U.S. 10-Year Yields Turn Negative? It’s an inevitable question: Could U.S. 10-year yields turn negative now that German 10-year yields have fallen below zero for the first time ever? Not to mention Japanese 10-year yields have dipped to record lows of negative 0.17 percent. According to Dennis Davitt, partner at Harvest Volatility Management and a noted options market veteran, it may well happen. “I think you could see negative rates in the U.S. If Germany and other countries in the world go even further negative. It turns into a number line game. So where zero lies on the number line, who knows?” Davitt said Tuesday on CNBC’s “Trading Nation.” He sees rates being driven lower by two factors in addition to overall slow global growth: Stimulative central bank policies and regulations.” Option number two is interest rates can go up, now as I said before when interest rates go up, bond values go down. So if you are holding that $100 bond, and interest rates go from 2% to 3% to 4%, that bond now goes from $100 to $95 to $90 that you are holding. That is not good for our retirees that are trying to live on this income or for consumers trying to buy houses or cars. Option number three is most likely what is going to happen and there are ramifications on this as well but there is no change. We kinda bounce along at the bottom for the next five or six or seven years. Where the 10-year is fluctuating between 1%and 3% so we kinda keep just going up and down and kinda hugging that 2% line. If that’s the case, that doesn’t impact us as consumers directly right now. This is what the fed says into 2017. Fixed Annuity Vs. Bond To summarize I would actually opt for a fixed annuity rather than a bond. Because I know if interest rates rise, my value cannot go down (full disclosure if you buy individual bonds and hold them until they mature they will not go down either, but read this article for bond risks). When buying a fixed annuity I know, regardless of what interest rates do, my rate is locked in for that term of the fixed annuity.