CD rates have been slowly dropping for several weeks, and last week was no different. Bread Savings, MYSB Direct and Rising Bank all lowered the annual percentage yield on some of their CD accounts. But while past weeks have seen rate drops largely limited to long-term CDs, last week’s drops were across a range of common terms, from six-month to five-year CDs.
What does this mean for savers?
If you’ve been considering opening a CD, now is the time to do it. Whatever your savings timeline, rates remain high overall — but they’re slipping. So the longer you wait, the lower your earning potential could be.
Experts recommend comparing rates before opening a CD account to get the best APY possible. Enter your information below to get CNET’s partners’ best rate for your area.
Today’s best CD rates
Here are some of the top CD rates available right now and how much you could earn if you deposited $5,000 today.
CD rate trends — where are APYs heading?
CD rates have steadily increased since March 2022 as the Federal Reserve regularly raised the federal funds rate to combat inflation. This rate affects how much it costs banks to borrow and lend money, so the higher it is, the higher banks raise their CD rates to attract new customers (and their money).
But with inflation finally cooling, the Fed has opted to pause rate hikes at its last two meetings. As a result, banks have begun easing their rates. Here’s where rates stand compared to last week:
Term
CNET Average APY*
Weekly Change**
Average FDIC rate
6 months
4.93%
No change
1.43%
1 year
5.26%
No change
1.85%
3 years
4.35%
No change
1.39%
5 years
4.10%
-0.24%
1.39%
*APYs as of Dec. 4, 2023. Based on the banks we track at CNET. **Percentage increase/decrease from Nov. 27, 2023, to Dec. 4, 2023.
From Nov. 27 to Dec. 4, rates have remained largely unchanged, with only a 0.24% decrease in average five-year CD terms. However, this is looking at overall averages. On a more micro level, several banks have lowered their CD rates recently, and experts expect rates will continue to decline over the next several months.
“Consumer Price Index (CPI) numbers for October showed below-expectation inflation for both headline CPI (3.7% to 3.2%) and core CPI (4.1% to 4.0%),” said Jesse Carlucci, Ph.D., CFP, chief investment officer at Arrow Investment Management. “Together with comments recently from the Federal Reserve chair, Jerome Powell, this has led to the expectation that we have reached the peak of the interest rate cycle.”
Why you should open a CD now
CD rates aren’t likely to drop dramatically in the near future, but even the gradual erosion we’ve seen lately makes a difference in your bottom line. When you open a CD, you lock in the current rate in exchange for agreeing to keep your funds in the account until the term is up. That means your earnings are guaranteed even if rates go down in the future. High-yield savings accounts, by comparison, have variable rates that rise and fall in response to federal funds rate changes.
“[CDs] are a good place to keep short-term savings, like saving for a baby or to buy a home,” said Bola Sokunbi, founder of Clever Girl Finance and CNET Financial Review Board member. “Although CDs might have penalties for early withdrawal, you could look at those penalties as an incentive to leave your savings alone if you don’t really need to touch it.”
In addition, CD accounts with FDIC-insured banks or NCUA-insured credit unions are protected up to $250,000 per person, per institution if the bank fails. This makes them a low-risk way to grow your savings and enjoy peace of mind.
Factors to consider when selecting a CD
APY is an important factor when comparing CD accounts, but it’s not the only one.
“I wouldn’t stress too much about the difference in a few tenths of a percentage,” said Bernadette Joy, a personal finance coach and CNET Financial Review Board member. “But I do think it’s important to make sure the CD is at least earning more than comparable high-yield savings accounts. HYSAs are more liquid, and if you’re going to lock up your money for several months, you should get paid more to do so than an HYSA.”
In addition to comparing APYs, you should also weigh the following when choosing a CD:
How soon you’ll need the funds: Most banks charge a penalty if you withdraw money before the CD matures. This can eat into your interest earnings. So, be sure to choose a term that fits your savings needs.
Minimum deposit: Some CDs require a certain amount to open an account — typically, $500 to $1,000 — while others have no minimum deposit requirement. This can narrow down your choices.
Monthly fees: Fees can erode your balance. Many online banks don’t charge maintenance fees. They have lower overhead costs than banks with physical branches, and they pass these savings down to consumers through higher rates and fewer fees. Still, be sure to read the fine print for any account you’re considering.
Federal deposit insurance: Confirm that any institution you’re considering is an FDIC or NCUA member to ensure your money is protected in the event of a bank failure.
Customer service: Read customer reviews and ratings on sites like Trustpilot to make sure the bank is responsive, professional and easy to work with.
Methodology
CNET reviews CD rates based on the latest APY information from issuer websites. We evaluated CD rates from more than 50 banks, credit unions and financial companies. We evaluate CDs based on APYs, product offerings, accessibility and customer service.
The current banks included in CNET’s weekly CD averages are: Alliant Credit Union, Ally Bank, American Express National Bank, Barclays, Bask Bank, Bread Savings, Capital One, CFG Bank, CIT, Fulbright, Marcus by Goldman Sachs, MYSB Direct, Quontic, Rising Bank, Synchrony, EverBank, Popular Bank, First Internet Bank of Indiana, America First Federal Credit Union, CommunityWide Federal Credit Union, Discover, Bethpage, BMO Alto, Limelight Bank, First National Bank of America, Connexus Credit Union.
Inside: Are you looking for ways to make money quickly and easily? This guide has you covered with tips on how to double your money in 24 hours.
Doubling your money is an aspiration many investors feasibly target, and it’s critical to your future financial stability.
This enticing objective involves transforming a small amount of money and doubling it for tomorrow. You need cash fast, so that is why you are reading this post.
You will quickly learn there are easy ways to double money in 24 hours and others that over time you can be skilled at and easily double your cash.
Given that 58% of borrowers struggle to meet basic monthly expenses and 70% of borrowers are using loan money for rent and other basic expenses. 1
You want to learn how to double your money before you actually need to, so by inevitably secure financial confidence for upcoming expenses.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
How can I double my money quickly?
Doubling your money in less than 24 hours isn’t straightforward, but it is possible if you’re willing to take high risks.
These are popular methods to double your money:
Engagement in day trading. It’s risky but one of the fastest ways to double your investment.
Try your hand at gambling. Remember, the house typically has the upper hand. This is not recommended as you are more likely to lose more money than you prefer.
Consider investing in digital real estate. This is similar to real-life property flipping.
Most importantly, avoid get-rich-quick schemes; they’re mostly scams. So, do your homework before diving in!
20 Easy Ways to Double Money in 24 Hours
As inflation rises and people are struggling with their budgets, the question of how to double money in just 24 hours often comes up.
While it may sound like a lofty goal, there exist strategies that can significantly boost your financial growth in a surprisingly short time.
However, keep in mind these are not risk-free endeavors, and they each require a good understanding and judicious implementation to yield profitable results.
1. Invest in Stocks
If you’re hunting for opportunities to double your money fast – investing in stocks could be your ticket, especially with the current volatility.
Although there’s a risk factor involved, it’s a time-tested strategy for impressive returns. Learn how fast you can make money in stocks.
Honestly, one of the best ways to improve your net worth is learning how to invest in the stock market. Yet, many people shy away from the idea.
By not investing in stocks, you are slowing your pace to financial freedom. So, why not learn how to invest in stocks for beginners?
The choice entirely depends on your risk appetite, investment horizon, and personal preferences. Start by evaluating your risk tolerance. Personally, I can tell you this is one of the ways I double money in 24 hours consistently.
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2. Options Trading
Options trading can double your cash in a mere 24 hours, thanks to its inherent rapid return benefits. However, with the potential for high returns, it also poses significant risks.
Options trading is an advanced strategy for buying stocks with an option contract. Thus, you get the right but not a duty to buy (call options) or sell (put options) a stock at a specific price.
It presents the possibility of doubling, tripling, or quadrupling your money.
This is an avenue to pursue if you want the potential for huge profits, but you must take this investing course to learn the proper way to trade options.
However, you run the high risk of losing the entire investment! So, this is risky for novice investors and you need a brokerage for this type of trading.
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Learn to trade stocks with confidence.
Whether you want to:
Retire in peace without financial anxiety
Pay your bills without taking on a side hustle
Quit your 9-5 and do what you love
Or just make more than your current income….
Making $1,000 every.single.day is NOT a pie-in-the-sky goal.
It’s been done over and over again, and the 30,000 students that Teri has helped to be financially independent and fulfill their financial dreams are my witnesses…
3. Flip Items for Arbitrage
Retail arbitrage, essentially the practice of buying and reselling goods, is a beneficial way of doubling one’s money in a short time. This can be particularly effective by taking advantage of clearance sales in mainstream stores like Walmart and Kohl’s, and then reselling the products on online marketplaces.
Notable items often flipped include apparel, books, electronics, and toys. You can check a full list of popular items to flip.
According to the Flea Market Flippers, you can use a variety of platforms to sell your flipped items.
4. Rent Out Your Property
Renting out unused property or space can be a lucrative form of passive income. This may include a spare room, or underutilized sections like a garage, with various platforms facilitating such financial transactions like Neighbor or VRBO.
Another example is it is financially beneficial to rent out items, like a lawn mower which costs $500 but brings in $15-20 for each rental. Thus, paying for itself in a short amount of time.
Despite the potential risks associated with property investments, including unpredictability in the real estate market and tenant issues, leveraging a good understanding of the local market can make it quite possible to double your investment over time.
5. Become A Side Hustles Expert
Becoming a side hustle expert requires a clear understanding of your goals and the willingness to trade your time for money. You can identify profitable opportunities which can range from ridesharing to teaching English as a second language (ESL) online.
Honestly, this is best to set up BEFORE you are desperate for cash.
Patience is key as nurturing a side hustle often takes time before it becomes an efficient income-generating endeavor.
To help you out, here are specific side hustles based on your stage of life:
6. Rent Out Your Skills
Renting out your skills is a smart quick-fix to double your money within 24 hours. It’s all about capitalizing on what you can do best and offering it to those who need it.
Start by identifying a skill or knowledge you’re proficient in. Are you a wizard in web design? A maven of SEO?
Select the right platform. Websites like Fiverr, Freelancer.com, and TaskRabbit are excellent for freelancers.
Promote your services. Reach out to your networks or use social media to boost your visibility.
This is a great way to earn $300 fast if you know what you are doing.
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7. Deliver with DoorDah or GrubHub
Double your income in a day by delivering with platforms like DoorDash or GrubHub. As a courier, you get paid for each delivery – so the more you do, the higher your earnings.
With a smartphone and transportation, you can start making extra cash immediately. Some top delivery options:
Working with DoorDash
Serving with GrubHub
Remember, it’s all about completing as many deliveries as possible. Every order increases your day’s earnings, potentially doubling them if you put in enough hours.
8. Invest in Cryptocurrencies
Invest in cryptocurrencies like Bitcoin, Ethereum, and Bitcoin Cash holds the potential to double your money in 24 hours due to their volatile nature.
To start:
Keep tabs on crypto trends through monitoring websites or apps.
Buy popular or promising cryptocurrency during their low-cost phase.
The trick to doubling your funds is selling at peak prices.
Remember, trends can change rapidly, so only invest what you can afford to lose. For newbies, it’s beneficial to seek advice from a financial advisor knowledgeable in the crypto market.
9. Take Surveys
Looking to double your money in a day? Consider taking paid surveys. However, you will have to take quite a few surveys to make a significant amount of cash.
To boost your earnings:
Seek high paying surveys – Survey Junkie could bring in up to $3 per survey.
Use free time efficiently – complete quick tasks on Swagbucks.
Refer friends – earn 10% of their earnings on Swagbucks.
Remember, more effort equals higher rewards!
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10. Lend Money on Peer-to-peer platforms
Lending money on Peer-to-Peer (P2P) platforms can be a profitable strategy, offering a unique method for individuals to loan and borrow money without traditional financial institution interference.
Users can sign up as lenders on recognized P2P platforms like LendingClub, Prosper, and Upstart, and yield high-interest returns based on their borrower’s creditworthiness.
However, this process also poses risks such as potential defaults, making it important for the lenders to do their research and diversify their loans across multiple recipients.
11. Do Odd Jobs
Engaging in odd jobs is a practical approach to earning additional income. Whether it’s mowing neighbors’ lawns or offering handyman services, these simple tasks can often pay upward to $30 per hour.
Digital platforms, like TaskRabbit, even allow you to list your talents locally, extending your reach for potential earnings.
All in all, odd jobs provide an accessible door to financial gain without requiring a significant starting capital.
12. Selling High Demand Printables
Selling printables online is a viable way to generate income. It’s important to create a follower base or an email list to successfully promote and sell your products.
With strategic pricing and high-quality content, you could potentially double your initial investment in a short span of time.
Here are the digital products that sell on Etsy that are in high demand.
By creating high-demand printables, you can buy low, sell high, and double your money all within 24 hours!
13. Max Out you 401(k) Match
Maxing out your 401(k) match can double your money in no time. While this may not happen in 24 hours, it can happen the next time you get paid and greatly increase your retirement savings.
When you contribute to your 401(k) plan, your employer might match it by 50% or 100%. You will have to check your Human Resources department to see what your company offers.
Contribute the maximum amount your employer is willing to match. This is free money for you. For instance, if you’re making $100,000 and your employer’s match is up to 3.5% of your salary, put in at least $3,500.
Are you one of the 5 people making this costly mistake? 2
14. Sell Courses and Subscriptions
Selling courses and memberships online is a highly profitable low-risk venture that requires just a small initial investment of your time and money. Once the course is developed, it can continue to generate passive income every month.
Tools such as Podia or Teachable allow you to easily sell and manage your courses, while also offering additional benefits such as digital downloads, subscription plans, and an opportunity to begin selling directly to your followers.
15. Work for Employers
In case you haven’t heard, time is money. And you can trade your time for money at any point.
Working for employers often ensures a steady income which can be supplemented by various benefits.
One of the greatest advantages is the employer match on a 401(k) account, which allows employees to double their contributions effortlessly. This means that if an employee contributes 5 percent of their salary to the retirement account, the employer adds another 5 percent.
Expert Tip: Continually upgrade your skill set to increase your value to employers. More demanding or specialized tasks often command higher pay, propelling you towards your double-money goal quicker.
16. Sell Your Goods
Selling goods online provides a dynamic platform for entrepreneurs, allowing them to reach a wider audience. This involves identifying high-demand products, purchasing from a reliable supplier, and selling them on popular e-commerce platforms like Amazon, eBay, and Etsy.
Get involved in flea market flipping. Hunt for undervalued items at yard sales or flea markets and resell online. Facebook Marketplace could be a goldmine.
Unload used or vintage items. These platforms can help you earn huge profits, especially from expensive items. Don’t let seller fees deter you; big profits are still achievable.
Books are an easy sell. Buy used ones from local or online stores and sell them in different areas or on different platforms. Diversifying the categories you offer can potentially boost your profits.
Pricing is set considering the purchase cost, overheads, and the competitive market.
17. Invest in Collectibles
Investing in collectibles presents a thrilling opportunity to generate significant profit in a short span. The key is identifying profitable niches, such as vintage comic books, rare coins, or baseball cards.
The rarity and condition of an item directly influence the price it can command.
The strategy involves buying low, often from garage sales or online platforms like eBay or Etsy, and selling high. However, one must perform diligent research and be aware of market trends, as failure to do so can lead to risks.
18. Get Rid of Your Most Valuable Items
Selling your own possessions is an effective way to declutter your home while also generating a potential cash flow.
This is one way to accumulate over $1,000 in cash earnings.
This may not be what you want to do, but your possessions are worth money and it may be necessary.
19. Save Money and Increase It
You’ve heard it said: a penny saved is a penny earned. This principle isn’t just about saving but also growing your money as an effective way to double your income.
Here’s how:
First, begin with saving. The more you can put away, the better. Remember, your coffee can strategy may not earn interest, so consider a deposit into a savings account.
Next, let’s talk about compound interest. Suppose you invest $1000 at a 5% interest rate. After a year, your money grows to $1050. The next year, you earn interest on this increased amount. Over time, the effect snowballs, significantly augmenting your investment.
Lastly, protection against inflation is key. Always aim for an interest rate higher than the rate of inflation. This means, in real terms, your money is consistently growing.
Done right, these steps can effectively increase your savings rapidly.
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20. Game or Bet on A Sport
While it’s often overlooked, betting on sports or games could be a fast track to doubling your money in less than a day. This risky Vegas plan may be worth the potentially rewarding pursuit.
Beware – while some have been successful, this method is heavily debated due to the significant risk factors. As such you may be better off becoming a referee for youth sports, which is a popular side hustle for men.
Remember, it’s all fun and games until the cash is lost – don’t stake what you can’t afford to lose.
FAQ
Doubling $1,000 quickly calls for some calculated risks and smart choices.
One way is investing in stocks, potentially high-return yet high-risk assets. Another route could be starting a side hustle, like an online course or freelance work, where initial investment is low but returns could be impressive.
This is a hard ask given many people this month. However, doubling $3000 fast can be achieved through smart investments and income diversification.
Using online platforms and flipping high-demand items may yield quick profits. Additionally, utilizing skills for a freelance portfolio or selling an online course can quickly boost initial capital.
Doubling your $5000 swiftly may seem like a daunting task, but with strategic planning, connection establishment, and careful investments, it’s more achievable than you might think.
Here’s how you can try it:
Start by investing in stocks. Rapid-growth stocks or volatile currency pairs can double your money. Invest wisely based on market analyses.
Try real estate flipping. Buy undervalued properties, renovate, then sell.
Entrepreneurship is another avenue. Turn your skills or ideas into a profitable business.
Peer-to-peer lending platforms yield high return rates with the right borrower.
Playing the lottery or gambling could work, but highly risky.
Remember, to double up money quickly, ensure you are knowledgeable in your chosen method and anticipate potential downsides. Do comprehensive research first.
Is Doubling Money in 24 Hours Possible?
Yes, you, dear reader, can indeed double your money in 24 hours! It won’t be a cakewalk though, requiring specific skills, solid strategies, and of course a pinch – maybe a handful – of luck.
You could tap into high-growth potential fields like day trading, selling high-demand goods online, or capitalizing on your skills as a content creator. Remember, this quick win has its fair share of risks too.
Now, make sure to do proper due diligence and check the integrity of whatever way you choose to make more or dive into the gig economy.
Now, learn how to double 10k quickly.
Source
Federal Reserve Bank of St. Louis. “Fast Cash and Payday Loans.” https://research.stlouisfed.org/publications/page1-econ/2019/04/10/fast-cash-and-payday-loans#:~:text=However%2C%207%20of%2010%20borrowers,difficulty%20meeting%20basic%20monthly%20expenses. Accessed November 7, 2023.
Motley Fool. “1 in 5 Americans Are Making a Terrible 401(k) Mistake.” https://www.fool.com/investing/2018/02/09/1-in-5-americans-are-making-a-terrible-401k-mistak.aspx. Accessed November 7, 2023.
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The Federal Reserve is set to meet in just a few weeks on October 31 and November 1, and potential homebuyers may end up pretty spooked when all is said and done. Over the past 18 months, the Fed has made a series of interest rate hikes in an attempt to combat rising inflation. While the Fed does not directly control mortgage rates, when the Fed increases its benchmark rate, there is generally a corresponding increase to rates across the financial sector, including mortgage rates.
Though recent inflation rates have slowed from their peaks in 2022, the year-over-year inflation rate for September 2023 was 3.7%. That’s a far cry from the 2% the Fed is aiming for. This could mean that the Fed will institute another rate hike at the upcoming meeting, but it’s not guaranteed. And, either way, it could have a big impact on those who are looking to buy a home.
Start your hunt for a mortgage online today.
What will happen if the Fed raises rates?
The Fed may choose to raise rates as part of its continued effort to bring the inflation rate down. The rate that is actually being raised here is the federal funds rate — which is the rate that banks charge each other when they lend money to one another.
This will not directly raise the mortgage rates you might get when shopping for a loan to buy a house. Lenders set these rates directly, and a number of factors go into how they determine them. But the Fed’s rates are one of them. Another is the demand on the market for mortgage-backed securities. When there is high demand for these products, lenders are able to offer lower rates to borrowers.
Still, if the Fed does raise interest rates, you can probably bet on mortgage rates going up overall. In 2020 — when the Fed drastically lowered interest rates in response to the COVID-19 pandemic — the average mortgage rate was 3.10%, according to data from The Mortgage Reports. At the end of September 2023, after the run of rate hikes performed by the Fed, the average rate was 7.55%.
While correlation is not direct causation, it stands to reason that another rate hike could very well bring about higher mortgage rates for many potential homeowners.
Get started shopping for a mortgage online right now.
What will happen if the Fed doesn’t change rates?
While it seems very likely that the Fed will raise rates, there is a chance that it may choose not to this time around. The group didn’t raise rates in September and could make that same decision again.
If this happens, you’ll likely see mortgage rates stay about the same for the next few months. Again, though, it’s important to remember that mortgage rates are not directly set by the Fed, so rates could end up going up or down a bit if the Fed makes no move, but will likely stay in the same general range.
What happens if the Fed lowers rates?
First things first — it is highly unlikely that the Fed will lower rates. Until inflation is brought under control, rates will likely stay high.
On the off chance that the Fed does lower rates, though, mortgage rates will likely go down overall, with the caveat that, once again, the Fed does not directly set mortgage rates.
How to find a good mortgage rate
If you’re shopping for a mortgage, there are a number of things you can do to get the best rate possible, no matter what happens with the Fed. Here are a few things to consider:
Improve your credit score
This is the lynchpin of getting a good mortgage rate. If your credit score is high, mortgage lenders think there is a better chance of you paying them back on time and in full, so you will get a much lower rate.
Shop around
There are a lot of mortgage lenders out there. If you do your due diligence and shop around, you’ll find the best deal available. You may even be able to play lenders off each other to get a better deal.
Refinance your loan
If you already have a mortgage, you can consider refinancing when rates are better. If you want to buy a house now even though rates are high, you can refinance in a few years when the economic climate is more favorable to borrowers.
Look for a mortgage online today.
The bottom line
The Federal Reserve will be meeting in a few weeks to make a decision about interest rates. While the Fed doesn’t set mortgage rates directly, there will likely be an impact on borrowers depending on the choice they make. So, it could make sense to lock in a rate now, before the Fed makes any move to the benchmark rate, which would then have an impact on mortgage rates.
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Ben Geier
Ben Geier is a personal finance writer based in Brooklyn, New York.
Hyperinflation occurs when prices for goods and services rise uncontrollably. It is an economic condition that fuels nightmares for consumers and for economists alike.
According to data from Johns Hopkins University professor Steve Hanke, there have been more than 60 documented instances of hyperinflation since the 1700s, and in every instance, economic conditions deteriorated so fast that in all cases, national currencies failed, meaning that they lost nearly all of their purchasing power both domestically and internationally.
That begs a key question: Could hyperinflation come in the United States? And, if so, could hyperinflation take down the U.S. dollar and trigger a recession?
Theoretically, the answer is “possibly.” Realistically, the answer is “not likely.” Let’s take a look at hyperinflation and evaluate the possibility of inflation on steroids taking root in the U.S. economy.
What Is Hyperinflation?
If you’re still not quite clear on what is hyperinflation, economists define the term as when the price of goods and services rises uncontrollably over a specific timeframe, with no short-term economic remedy able to bring those prices back down again.
While figures linked to hyperinflation vary, some economists say hyperinflation occurs when the price of goods and services in a country’s economy rise by 50% over the period of one month.
The causes of hyperinflation typically stem from a skyrocketing boost in a country’s money supply without any accompanying economic growth. That scenario usually occurs when a country’s government essentially prints and spends money in short-term bursts, thus triggering a rise in that country’s money supply.
When a government pursues a high level of short-term economic spending at a rate significantly higher than the country’s gross domestic product (GDP) rate, more money flows through the economy. When that happens, the real value of a nation’s currency declines, the price of goods and services rises, and inflation spikes.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
Is Hyperinflation Coming to the United States?
While U.S. inflation rates and the prices of many goods and services are on the upswing, economists dismiss the notion that U.S. hyperinflation is looming for the country for several reasons. First, it’s important to remember that hyperinflation and inflation aren’t the same thing, and the Federal Reserve would likely raise interest rates if inflation concerns grew.
According to data published in September 2023, the annual U.S. inflation rate was 3.7% for the 12 months that ended in August 2023. That’s a significant drop from June of 2022, when the inflation rate was 9.1%, which was led by certain items such as airline tickets, lumber, and hotel rates. Many economists attributed this to ongoing inventory shortages and supply chain issues and the release of post-pandemic pent-up demand.
Even the largest inflation rate in U.S. history — 23% in June, 1920 — wouldn’t come close to approaching hyperinflation levels of 50% in a month. Still, ongoing inflation is something that the U.S. economy hasn’t seen in more than four decades, and it’s a risk that investors may want to consider when devising their portfolio strategy.
How Can Hyperinflation Affect the United States?
Economists have largely downplayed the chances of a hyperinflation in the USA, but with inflation on the rise, it’s helpful for consumers to get a better grip on hyperinflation, in particular, and on inflation in general.
Hyperinflation Causes:
These are some of the typical causes of hyperinflation:
Falling Dollar Value
Like most major global currencies, the dollar trades on foreign currency exchanges. When a country faces inflationary risks, investors grow skittish, and may bypass that country’s currency in favor of more stable currencies. Even without hyperinflation, a weaker dollar can significantly hurt the U.S. economy.
(Hyperinflation is the extreme opposite of what happens during deflation, in which prices for goods and services decline and the value of a currency rises.)
Fewer Major Purchases
As inflation seeps into an economy, high prices may prompt individuals and businesses to defer or cancel large purchases. Consumers, for example, could hold off buying new homes, new vehicles, or major household appliances. Businesses might postpone big-ticket purchases like heavy machinery, office buildings, and commercial vehicles.
Some investors may hesitate to put money into stocks in a down market. All of those decisions could stall economic growth, as fewer dollars are circulating through the economy.
Monetary Policy
When inflation occurs, banks and financial institutions may not lend money or extend credit to consumers and businesses, as confidence in the overall economy wanes.
The economic fix for skyrocketing inflation typically comes from a country’s central bank. In the United States, that would be the Federal Reserve. When necessary, the Federal Reserve uses monetary policy to slow rising inflation by curbing the U.S. money supply, often by raising interest rates. Higher interest rates give consumers and businesses more incentive to save and less incentive to spend. That, in turn, slows rising inflation.
Recommended: What Is Monetary Policy?
Lower Investment Returns
Inflation eats into real investment returns. As the value of a dollar declines, investors need to earn more than their average return on investment in order to generate the same purchasing power.
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**Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
How to Combat Hyperinflation
Individuals can’t do much to combat hyperinflation on their own. In fact, during hyperinflation, economies and societies can break down or collapse. Fortunately, periods of hyperinflation are rare. And remember, the 3.7% inflation rate as of August 2023 in the U.S. is nowhere near the levels of 50% in a month, which is when many economists believe hyperinflation occurs.
That said, there are things that might help individuals lessen the impact regular or high inflation might have on their investments. These actions include having a balanced and diversified portfolio, and investing in Treasury Inflation-Protected Securities (TIPS), in which the principal amount invested adjusts with inflation.
💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
Real-World Examples of Hyperinflation
Zimbabwe offers a relatively recent example of hyperinflation. Just over a decade ago, Zimbabwe’s inflation rate stood at a staggering 98% daily inflation rate as the country’s economy went into free fall. That means consumer prices doubled on a daily basis.
Today, the Zimbabwe dollar is very weak, as the country continues to struggle with the issues that often lead to hyperinflation, such as an increased money supply, political corruption, and a major decline in economic activity.
Even historically stable country economies have experienced hyperinflation.
In the immediate aftermath of World War I, the Weimer Republic of Germany fell into economic decline due to war reparation debts and significantly reduced economic activity. The German government printed too much money in an effort to handle its economic obligations and to ignite a stagnant economy. The country faced an inflation rate of 323% per month by November, 1923 — that’s an annual inflation rate of three billion percent.
In today’s dollars, the consumer impact of hyperinflation is particularly onerous. For example, a small cup of coffee that normally would cost $3 would cost $22 at a 1,000% inflation rate. Similarly, a rental payment for an apartment in a major U.S. city might normally cost $2,000. With a 1,000% inflation rate, that rent would cost $22,000.
Hyperinflation also exists on the world’s economic stage in 2023. Venezuela, for example, has an estimated inflation rate of about 400%.
The Takeaway
While hyperinflation is certainly an economic condition any country would strive to avoid, there’s no compelling evidence suggesting it’s on the U.S. economic horizon — now or anytime in the near future. Still, the country has been in an inflationary period since 2022, so investors may consider using some inflation-hedging strategies to reduce its impact.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
How does hyperinflation differ from regular inflation?
Inflation is the rate at which prices for goods and services are rising in a given economy. Hyperinflation is considered out-of-control inflation, at levels of about 50% in one month, and it can be a sign that a severe economic crisis is on the horizon.
Has the United States ever experienced hyperinflation in its history?
No. The closest the U.S. has come to hyperinflation is when annual inflation peaked at almost 30% during the Revolutionary War in 1778.
Are there any warning signs or indicators that could suggest the onset of hyperinflation?
Signs that might suggest that hyperinflation could happen include significant price increases of goods and services (such as increases of 50% in one month), the value of a country’s currency plummets, and economic activity slows or stops.
How can individuals protect their assets and finances during periods of hyperinflation?
Hyperinflation is quite rare, especially in countries with a central bank, like the Federal Reserve, that works to control inflation. However, there are things an investor might do to help limit the impact regular inflation might have. This includes having a balanced and diversified portfolio, and investing in Treasury Inflation-Protected Securities (TIPS), in which the principal invested adjusts with inflation.
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Looking to build wealth with the best income-generating assets? As you set out on the path to financial freedom, understanding the different types of income-generating assets can truly change your life. This is because you can invest in assets that will generate you income, earning you more passive income. Today’s article will introduce you to…
Looking to build wealth with the best income-generating assets?
As you set out on the path to financial freedom, understanding the different types of income-generating assets can truly change your life.
This is because you can invest in assets that will generate you income, earning you more passive income.
Today’s article will introduce you to a range of assets that reliably bring in cash, giving you peace of mind and the freedom to live life on your own terms.
From traditional investments like stocks and bonds to more creative options like peer-to-peer lending or real estate, income-generating assets give you the power to diversify your portfolio and build wealth over time.
Related content:
What are income generating assets?
Before we begin, I want to talk about the basics on income-generating assets, in case you are new to the subject or if you want a background first.
Income-generating assets are investments that, as the name suggests, generate income for you. These are assets that provide you with a steady cash flow, allowing you to earn passive income and build your wealth over time.
Examples include rental real estate and dividend-paying stocks (we will go over 17 different types of income-generating assets below in more detail).
There are several benefits of the best income-generating assets such as:
Passive income: You earn money without actively working, and this can provide financial freedom and the ability to focus on other things in life. You can earn money in your sleep, while on vacation, making dinner, and more.
Diversification: You can diversify your investments so that all of your income is not coming from just one source.
Wealth building: Earning income and generating a steady cash flow can help you build your wealth over time.
Note: Please keep in mind that there is no one-size-fits-all approach when investing in any of these income-producing assets. Everyone is different and while one asset may work great for someone, it may not be the right asset for you. I recommend doing as much research as you can if you are interested in one of the asset investments I talk about below.
Types Of Income Generating Assets
There are many types of income-generating assets. Some may be more traditional such as dividend-paying stocks, and others may be more alternative income-generating assets, such as selling stock photos, and even renting out your driveway.
Today, I will talk about 17 different types of income-generating assets, but this is not a full list of the best income-producing assets. There are many, many more!
The different types of income-generating assets that I will talk about today include:
1. Dividend-paying stocks
One of the best assets to invest in are dividend-paying stocks.
Dividends are simply a payment in cash or stock that public companies distribute to their shareholders.
The amount of a dividend is determined by a company’s board of directors, and they are given as a way to reward those who have stock in their company. Both private and public companies pay dividends, but not all companies pay dividends.
How do dividends work? If you own shares of a dividend-paying stock, then a dividend is paid per share of that stock. So, if you have 10 shares in Company ABC, and they pay $5 in cash dividends each year, then you will get $50 in dividends that year. While dividends can be paid on a monthly, quarterly, or yearly basis, they are most commonly paid out quarterly — so, four times a year. In this example, the $5 in cash dividends the company pays each year will most likely be distributed as $1.25 per quarter for each share of stock.
The most common type of dividends are cash dividends. Shareholders may choose to get this deposited right into their brokerage account. Stock dividends are another common type of dividend. In this case, shareholders get extra shares of stock instead of cash.
Both cash dividends and stock dividends are great income-generating assets that will earn more money for you.
As a shareholder, you can earn income when companies distribute profits to their shareholders. Look for stocks with a history of consistent dividend payouts and a high dividend yield. Keep in mind that dividend stocks are still subject to market fluctuations, and just because a company has paid a dividend in the past does not mean that they always will in the future.
Related content:
2. High-yield savings accounts and CDs
High-yield savings accounts and CDs are a great way to grow your savings, but most people have their money in accounts with low rates. Unfortunately, that means many of you are losing out on some easy money.
Savings accounts at brick-and-mortar banks are known for having really low interest rates. That’s because they have a much higher overhead — paying for the building, paying the tellers to help you in person at the bank, etc.
High-yield savings accounts offer an easy option for earning interest on your cash. Online banks often offer higher interest rates than traditional banks. As of the writing of this blog post, you can easily find high-yield savings accounts that can earn you above 4.00%.
Certificates of Deposit (CDs), another form of income-generating assets, are FDIC insured and provide a guaranteed interest rate over a specific term. Remember that access to your money is limited during the term of the CD. You will agree upon the term before putting your money in the CD. The terms typically vary in length from around 3 months to 5 years.
Money market accounts are also offered by banks and often with a higher yield than other types of savings accounts.
3. Real estate
Real estate is one of the most common income-generating assets that people think of.
Investing in rental properties is a popular way to generate steady cash flow. You can earn rental income from tenants, and properties typically appreciate in value over time.
Location and property management are important factors that can impact your return on investment.
By investing in real estate, you may be investing in residential properties, commercial real estate, short-term rentals, REITs, and more.
Recommended reading: How This Woman In Her 30s Owns 7 Rental Homes
4. Real estate investment trusts (REITs)
An REIT is a company that owns and manages income-producing real estate. They then sell shares to investors like stock.
By investing in REITs, you can make money in the real estate market without actually owning real estate.
So, if you don’t want to be a landlord, then this may be something for you to look into. This makes it much more passive than actually owning real estate and having to manage it.
You can even diversify your income stream with REITs by investing in different property types, such as residential homes, commercial office space, industrial, and retail store properties.
5. Bonds
Bonds are fixed-income investments that are issued by governments and companies. If you own a bond, you receive interest payments from borrowers on a regular basis.
An easy way to explain this is: When you buy a bond, you are giving someone a loan and they are agreeing to pay you back with interest.
Bonds with higher credit ratings are generally a safer investment but may offer lower interest rates.
6. Mutual funds
Mutual funds gather funds from investors to invest in stocks, bonds, or other securities. Basically, the funds are pooled together and there’s a fund manager who chooses the best investments.
Income-generating assets like this have multiple types of mutual funds available for multiple types of investors. Some of these fund types include bond funds, stock funds, balanced funds, and index funds.
Mutual funds typically have higher fees because they have fund managers who are actively trying to beat the market.
With a mutual fund, you get diversification because the fund manager mixes the assets in it.
7. Index funds and exchange-traded funds (ETFs)
ETFs and index funds are popular options for those who are looking to diversify their portfolio of income-generating assets.
This is because index funds and ETFs track a specific market index and invest in a wide range of stocks or other assets, instead of picking and choosing stocks in an attempt to beat the market. This is what makes them different from mutual funds.
They often have lower fees and higher diversification compared to actively managed funds.
8. Annuities
Annuities are long-term investments offered by insurance companies that give you a guaranteed income stream to build wealth. In exchange for a lump-sum payment or periodic contributions (such as monthly or annually), you’ll receive steady payments in the future.
The way it works is you pay premiums into the annuity for a set amount of time. Later, you stop paying premiums, and the annuity starts sending regular payments to you. Some are even set up to pay you back with a lump sum.
Annuities can be fixed or variable. A fixed annuity offers a guaranteed payment amount — which means a predictable income for you. As for a variable annuity, the payment amount does vary, depending on how the market is doing.
9. Websites and blogs
Starting a website can generate income through the money-making assets of advertising, affiliate marketing, or the sale of products and services.
Since I started Making Sense of Cents, I have earned over $5,000,000 from my blog through affiliate marketing, sponsored partnerships, display advertising, and online courses. These income-generating assets make sense for building wealth.
Blogging allows me to travel as much as I want, have a flexible schedule — and I earn a great income doing it.
Now, it’s not entirely passive, but I do earn semi-passive income from my blog.
You can learn how to start a blog in my How To Start a Blog FREE Course.
Here’s a quick outline of what you will learn:
Day 1: Why you should start a blog
Day 2: How to decide what to write about (your blog niche!)
Day 3: How to create your blog (in this lesson, you will learn how to start a blog on WordPress)
Day 4: The different ways to make money with your blog
Day 5: My advice for making passive income with your blog
Day 6: How to get pageviews
Day 7: Other blogging tips to help you see success
Recommended reading: The 25 Most-Asked Blogging Questions To Get You Started Today
10. Royalties and intellectual property
Intellectual property, such as patents, copyrights, and trademarks, can generate income through licensing fees or royalties. This particular option is good for creative professionals, such as authors, musicians, and inventors, who are looking for income-generating assets.
Royalties are a way to earn income from your creative work or intellectual property. By granting others permission to use or distribute your intellectual property, you can receive ongoing payments known as royalties.
Whether you’re a musician, author, inventor, or artist, royalties offer a passive income stream as your creations continue to generate revenue over time.
Royalties can be paid out periodically or as a lump sum on these passive income assets, depending on your agreement with the licensee.
11. Stock photos
If you have a talent for photography, you can monetize your skills by selling stock photos on platforms such as Shutterstock or Adobe Stock. The more high-quality images you upload, the more potential passive income you can generate.
With stock photography, you simply upload photos that you have taken to a platform such as DepositPhotos, turning your pictures into income-generating assets. Then, you will receive a commission whenever someone buys one of your stock photos.
Stock photos are used for all sorts of reasons by websites, companies, blogs, and more. Businesses need stock photos because they are not usually in the business of taking photos of everything that they need. Instead, they can use stock photos to make their content, website, or business more visually appealing.
Some examples of stock photography include pictures of:
Travel, vacations, landmarks, outdoor adventures
Family members, such as parents, children, family gatherings
Food and drink
Cars, boats, RVs
Businesses, pictures of people in meetings, in an office.
Sports, professional events
Animals, such as household pets or wildlife
The photo possibilities are almost endless for this type of income-generating asset.
Recommended reading: 18 Ways You Can Get Paid To Take Pictures
12. Crowdfunding and peer-to-peer lending
Crowdfunding platforms enable you to invest in real estate deals with a smaller amount of money than buying real estate up front, giving you a passive income through rental income or even a property increasing in value.
Peer-to-peer lending platforms allow you to lend money directly to borrowers. Typically you can earn higher returns than traditional savings accounts, though there’s always the risk of a borrower not paying you back.
Both of these types of assets — crowdfunding and peer-to-peer lending — use technology to connect investors with those looking for funding.
13. Renting out storage space
If you own unused land or unused space in your home, renting it out for storage can be a simple way to generate passive income.
You can offer storage solutions for vehicles or boats. If you have a smaller space, then offer it to store personal belongings. You can rent out your driveway, closet, basement, attic, and more. You can even rent out a shelf.
A website where you can list your storage space is Neighbor. You can earn $100 to $400+ each month on this platform. This depends on the demand in your area and the type of income-generating assets you are renting out. And, you can choose who, what, and when — who to rent to, what things are stored, and when it will happen.
You can learn more at Neighbor Review: Make Money Renting Your Storage Space.
14. Short-term rentals
Short-term rentals can be a lucrative income-generating asset if you own properties in popular tourist destinations or business hubs.
Websites like Airbnb provide a platform to rent out your property to travelers for short periods, potentially generating higher returns than traditional long-term leases.
Furnished Finder is another website for short-term rentals. This is a way to connect with travel nurses in need of short-term housing.
Keep in mind that rental income can be affected by local regulations, potential vacancies, or seasonal fluctuations.
15. Car rentals
Car rental platforms like Turo allow you to rent out your car when you’re not using it. Assets that generate cash flow include your own wheels, and that means no significant initial investment besides the cost of the car you already own.
Be mindful of risks such as wear and tear, insurance, and potential damage caused by renters.
It’s an affordable alternative to traditional rental car companies for customers, and it’s a good way to make money if you’re already working from home and don’t need your car, or are a two-car household.
Turo is one of a few different places to rent out your car, turning your vehicle into one of your income-generating assets. Your car is covered by Turo with up to a $1 million insurance policy. You can also pick the dates for when your car is available and set your rates.
Turo says you can earn an average of $706 per month by listing your car on their site.
16. RV rentals
Similarly to car rentals, RV rentals can provide additional income by renting out your recreational vehicle when you’re not using it. Your RV could easily become one of your income-generating assets.
You may be able to earn $100 to $300 a day, or even more, by renting out your RV on RVShare.
If you have an RV that is just sitting there and not being used, then you may be able to earn an income with it by renting it out to others who are interested in RVing. Cash flow-generating assets like RVs are a win-win for both you and the renter who wants to experience life in a recreational vehicle.
You can learn more at How To Make Extra Money By Renting Out Your RV.
17. Vending machines
With a vending machine business, you can generate income by selling a variety of products, from food to fishing supplies, beauty products to baby items, and more.
You may be able to earn $1,000+ a month by running a vending machine business. That’s enough reason to take a closer look at income-producing assets like this.
You can learn more at How To Start A Vending Machine Business – How I Make $7,000 Monthly.
Questions about income generating assets
Here are common questions that you may have about income-generating assets:
How do I start passive income from nothing?
Starting passive income from nothing requires creativity and resourcefulness. You can begin by identifying skills you possess or interests that can be turned into income-generating opportunities.
What are the assets that generate income?
The assets I talked about above include:
Dividend-paying stocks and stock market investing
High-yield savings accounts and CDs
Real estate
Bonds
Mutual funds
Index funds and exchange-traded funds
Annuities
Websites and online businesses
Royalties and intellectual property
Stock photos
Crowdfunding and peer-to-peer lending
Renting out your storage space
Car rentals
RV rentals
Vending machines
How do I start buying income generating assets?
There are traditional investments or more creative options. Do as much research as you can before deciding which option fits you best.
What are good assets to buy?
After deciding if you want to purchase traditional investments or more creative options, choose an asset that you can afford and best fits your lifestyle.
What are the best assets to buy for beginners?
For beginners seeking income-generating assets, you may want to look into:
Dividend-paying stocks for your investment portfolio
Crowdfunded real estate investing: Platforms like Fundrise allow smaller investments with lower risk exposure.
ETFs and index funds: They provide diversification and passive income through dividends.
What is income generating real estate?
Income-generating real estate refers to properties that produce regular rental income, such as apartments, commercial properties, or short-term vacation rentals.
How do I start passive income in real estate?
There are a few ways that you can earn passive income from real estate, including:
Buying a property, such as an apartment building or duplex, and renting it out to tenants
Using real estate crowdfunding platforms
Investing in REITs
How to make passive income with real estate without owning property?
You don’t need to actually own property in order to make money with real estate. Instead, you can earn passive income from real estate by investing in REITs and using real estate crowdfunding platforms.
This is an option for those who want to be diversified with their income-generating assets but don’t want to spend all of their money or time on a single piece of real estate.
How to make $1,000 a day in passive income?
Making $1,000 a day in passive income with assets that produce income will not be easy. If it were easy, then everyone would be doing it, after all.
Making $1,000 a day in passive income may require a large amount of money up front, diversifying into different assets mentioned above, and lots of patience from you because it will take time to make that kind of money.
You may want to start off by focusing on building multiple income streams and reinvesting your profits as you earn them.
What to think about before investing in income producing assets?
There are many different things to think about when it comes to income-generating assets. You want to find the best assets to invest your money in that will also be the best fit for you.
Remember, as I said at the beginning of this article, not everything will be applicable to everyone. Everyone is different! You may prefer to create a stock photo portfolio and hate real estate, whereas someone else may really enjoy being a real estate investor — or it may even be the other way around.
Here are some of my tips if you are interested in income-generating assets:
Do your research and talk to experts —I recommend researching as much as you can on the asset you are interested in. And, if you still have questions, don’t be afraid to talk to an expert.
Diversify — One of the important parts of building a successful income-generating portfolio is finding ways to be diversified.
Think about the risks —When making money, there’s usually some sort of risk. I recommend evaluating the risks and seeing what you are comfortable with.
What are the best books on income generating assets?
Some highly recommended books on income-generating assets include:
The Simple Path to Wealth by JL Collins
The Millionaire Real Estate Investor by Gary Keller
The Little Book of Common Sense Investing by John C. Bogle
Income Generating Assets — Summary
I hope you enjoyed this article on the best income-generating assets. As you learned, there are many different types of assets that you can invest in so that you can earn an income.
The best income-producing assets, if they’re right for you, can truly change your life.
With these assets, you can build wealth through a reliable passive income, giving you peace of mind and freedom to live life on your own terms.
Are you looking to build income-generating assets? What are your favorite ways?
I’m sure I don’t need to remind anyone that our country is deep in a cost-of-living crisis.
Those with mortgages are struggling. Collectively we’re all having to tighten our belts.
And in the lead up to election day, our politicians are scrambling to come up with policies to support everyday Kiwis who are being stretched to their absolute financial limit.
And yet amidst all of this, New Zealand banks are thriving – bringing in record profits.
Banks margins have grown massively since the cost-of-living crisis began, by just over 15%. And every other week it seems, they’re pushing home loan interest rates still higher and higher.
People have rightly questioned how the banks can justify these ongoing increases, when wholesale interest rates have remained stable since the Official Cash Rate was raised to 5.50% on 24 May.
It’s why there’s a market study into competition in personal banking underway.
Taking a step back for a moment – let’s look at the facts…
Eighty per cent of New Zealand banks’ revenue is generated via what’s known as their interest margin.
That’s the difference between the interest they pay households and businesses on their savings, (or on what they borrow from the wholesale markets, including the Reserve Bank); and the interest they charge when they lend money out to homeowners and businesses.
The below graph tracks the banks’ interest margin over the last 32 years:
You’ll note that after trending downwards for decades, over the last two years – just as New Zealand’s cost-of-living crisis has emerged – that interest margin has grown rapidly.
Collectively, the banks have managed to expand their interest margin from 2.04% to 2.38%, which has equated to a roughly 17% lift in their overall profit margin on their lending. In just two years!
And on the $660 billion of interest-earning loans the banks collectively manage, it’s a whopping $2.24 billion of extra revenue they’re bringing in every year.
Or $43 million every week $6 million every day $0.25 million every hour $4,269 every minute Or $71 each and every second
So, what’s the driver behind what the banks are doing with home loan rates?
It’s actually not a what, but a who.
His name is Matt Comyn – and he’s the Chief Executive of the Commonwealth Bank of Australia, which owns ASB here in New Zealand.
In mid-August, he came out bemoaning the “unsustainable” returns the banks are having to put up with on loans within New Zealand’s housing market. Here’s the exact quote:
“The mortgage market in New Zealand is even more challenged [than Australia], where pricing conduct is difficult to reconcile. We’ve pulled back on volume growth in New Zealand given the unsustainable returns.”
Really? Cast your mind back to that graph we looked at earlier. The interest margins the banks are earning hardly look unsustainable to me.
Prior to joining Squirrel, I spent 30 years in banking, including four as Chief Executive of The Co-operative Bank, so I know a thing or two about how the banking system works.
When the banks set interest rates for deposits and loans, they’re not thinking about those rates in isolation – they’re thinking about what it means for their interest margin overall. That’s just Banking 101.
What happening here is a practice called price signalling
It’s extremely common in oligopolies, like the banking sector, where there are a few large players and extremely high barriers to entry.
Comyn’s comments were targeted at the major bank CEOs in Australia, and therefore indirectly at the four big Aussie-owned banks here in New Zealand.
The signal he was sending? “Our prices need to be higher”.
Then it just takes one competitor to lead the charge – in this case, it was ASB – so everyone else can follow suit.
And that’s exactly what’s happened in the weeks since.
Here’s how it’s played out with the popular one-year fixed home loan interest rate:
Using the wholesale one-year rate as the benchmark, the margin has lifted from about 1.0% after the last Official Cash Rate change on 24 May, to 1.5% now, on average across the big banks.
And we can also calculate the bank’s individual margins… At one end of the spectrum, we’ve got ASB earning 1.72%, and at the other we’ve got Kiwibank earning 1.26%.
I’d welcome a move by our Australian-owned banks to take a leaf out of Kiwibank’s book – and give New Zealanders a bit of a break.
Our banks have a social responsibility to do what’s right by New Zealanders – and right now, everyday homeowners are suffering, to bank shareholders’ benefit. At Squirrel, we see it day in and day out.
The average mortgage interest rate Kiwis are paying on our home loans has risen from 2.8% in 2021, to 5.3% now – on a $500,000 mortgage, that means $12,500 more in interest payments each year.
And with mortgage rates as they are now, that average still has further to climb to over 7%, and that would mean a further $8,500 in interest payments each year.
All without factoring in any further moves by the banks to expand their interest margin.
My challenge to our four big Aussie-owned banks is this: put your home loan rates back down.
A rate of 6.99% for the one-year fixed home loan term would be a good start. It’s time for our big banks to do right by Kiwis.
*David Cunningham is CEO of Squirrel, a mortgage broker that also offers peer-to-peer lending and savings and investment products and services.
Whoa, have you seen what just happened to interest rates!?
Suddenly, after at least fourteen years of our financial world being mostly the same, somebody flipped over the table and now things are quite different.
Interest rates, which have been gliding along at close to zero since before the Dawn of Mustachianism in 2011, have suddenly shot back up to 20-year highs.
–
Which brings up a few questions about whether we need to worry, or do anything about this new development.
Is the stock market (index funds, of course) still the right place for my money?
What if I want to buy a house?
What about my current house – should I hang onto it forever because of the solid-gold 3% mortgage I have locked in for the next 30 years?
Will interest rates keep going up?
And will they ever go back down?
These questions are on everybody’s mind these days, and I’ve been ruminating on them myself. But while I’ve seen a lot of play-by-play stories about each little interest rate increase in the financial newspapers, none of them seem to get into the important part, which is,
“Yeah, interest rates are way up, butwhat should I do about it?”
So let’s talk about strategy.
Why Is This Happening, and What Got Us Here?
Interest rates are like a giant gas pedal that revs the engine of our economy, with the polished black dress shoe of Federal Reserve Chairman Jerome Powell pressed upon it.
For most of the past two decades, Jerome’s team and their predecessors have kept the pedal to the metal, firing a highly combustible stream of easy money into the system in the form of near-zero rates. This made mortgages more affordable, so everyone stretched to buy houses, which drove demand for new construction.
It also had a similar effect on business investment: borrowed money and venture capital was cheap, so lots of entrepreneurs borrowed lots of money and started new companies. These companies then rented offices and built factories and hired employees – who circled back to buy more houses, cars, fridges, iPhones, and all the other luxurious amenities of modern life.
This was a great party and it led to lots of good things, because we had two decades of prosperity, growth, raising our children, inventing new things and all the other good things that happen in a successful rich country economy.
Until it went too far and we ended up with too much money chasing too few goods – especially houses. That led to a trend of unacceptably fast Inflation, which we already covered in a recent article.
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So eventually, Jay-P noticed this and eased his foot back off of the Easy Money Gas Pedal. And of course when interest rates get jacked up, almost everything else in the economy slows down.
And that’s what is happening right now: mortgages are suddenly way more expensive, so people are putting off their plans to buy houses. Companies find that borrowing money is costly, so they are scaling back their plans to build new factories, and cutting back on their hiring. Facebook laid off 10,000 people and Amazon shed 27,000.
We even had a miniature banking crisis where some significant mid-sized banks folded and gave the financial world fears that a much bigger set of dominoes would fall.
All of these things sound kinda bad, and if you make the mistake of checking the news, you’ll see there is a big dumb battle raging as usual on every media outlet. Leftists, Right-wingers, and anarchists all have a different take on it:
It’s the President’s fault for printing all that money and running up the debt! We should have Fiscal Discipline!
No, it’s the opposite! The Fed is ruining the economy with all these rate rises, we need to drop them back down because our poor middle class is suffering!
What are you two sheeple talking about? The whole system is a bunch of corrupt cronies and we shouldn’t even have a central bank. All hail the true world currency of Bitcoin!!!
The one thing all sides seem to agree on is that we are “experiencing hard economic times” and that “the country is headed in the wrong way”.
Which, ironically, is completely wrong as well – our unemployment rate has dropped to 50-year lows and the economy is at the absolute best it has ever been, a surprise to even the most grounded economists.
The reality? We’re just putting the lid back onto the ice cream carton until the economy can digest all the sugar it just wolfed down. This is normal, it happens every decade or two and it’s no big deal.
Okay, but should I take my money out of the stock market because it’s going to crash?
This answer never changes, so you’ll see it every time we talk about stock investing: Holy Shit NO!!!
The stock market always goes up in the long run, although with plenty of unpredictable bumps along the way. Since you can’t predict those bumps until after they happen, there is no point in trying to dance in and out of it.
But since we do have the benefit of hindsight, there are a few things that have changed slightly: From its peak at the beginning of 2022 until right now (August 2023 as I write this), the overall US market is down about 10%. Or to view it another way, it is roughly flat since June 2021, so we’ve seen two years with no gains aside from total dividends of about 3%.
Since the future is always the same, unknowable thing, this means I am about 10% more excited about buying my monthly slice of index funds today than it was at the peak.
Should I start putting money into savings accounts instead because they are paying 4.5%?
This is a slightly trickier question, because in theory we should invest in a logical, unbiased way into the thing with the highest expected return over time.
When interest rates were under 1%, this was an easy decision: stocks will always return far more than 1% over time – consider the fact that the annual dividend payments alone are 1.5%!
But there has to be some interest rate at which you’d be willing to stop buying stocks and prefer to just stash it into the stable, rewarding environment of a money market fund or long-term bonds or something else similar. Right now, if a reputable bank offered me, say, 12% I would probably just start loading up.
But remember that the stock market is also currently running a 10% off sale. When the market eventually reawakens and starts setting new highs (which it will someday), any shares I buy right now will be worth 10% more. And then will continue going up from there. Which quickly becomes an even bigger number than 12%.
In other words, the cheaper the stocks get, the more excited we should be about buying them rather than chasing high interest rates.
As you can see, there is no easy answer here, but I have taken a middle ground:
I’m holding onto all the stocks I already own, of course
BUT since I currently have an outstanding margin loan balance for a house I helped to buy with several friends (yes this is #3 in the last few years!), I am paying over 6% on that balance. So I am directing all new income towards paying down that balance for now, just for peace of mind and because 6% is a reasonable guaranteed return.
Technically, I know I would probably make a bit more if I let the balance just stay outstanding, kept putting more money into index funds, and paid the interest forever, but this feels like a nice compromise to me
What if I want to Buy a House?
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For most of us, the biggest thing that interest rates affect is our decisions around buying and selling houses. Financing a home with a mortgage is suddenly way more expensive, any potential rental house investments are suddenly far less profitable, and keeping our old house with a locked-in 3% mortgage is suddenly far more tempting.
Consider these shocking changes just over the past two years as typical rates have gone from about 3% to 7.5%.
Assuming a buyer comes up with the average 10% down payment:
The monthly mortgage payment on a $400k house has gone from about $1500 at the beginning of 2022 last year to roughly $2500 today. Even scarier, the interest portion of that monthly bill has more than doubled, from $900 to $2250!
For a home buyer with a monthly mortgage budget of $2000, their old maximum house price was about $500,000. With today’s interest rates however, that figure has dropped to about $325,000
Similarly, as a landlord in 2022 you might have been willing to pay $500k for a duplex which brought in $4000 per month of gross rent. Today, you’d need to get that same property for $325,000 to have a similar net cash flow (or try to rent each unit for a $500 more per month) because the interest cost is so much higher.
And finally, if you’re already living in a $400k house with a 3% mortgage locked in, you are effectively being subsidized to the tune of $1000 per month by that good fortune. In other words, you now have a $12,000 per year disincentive to ever sell that house if you’ll need to borrow money to buy a new one. And you have a potential goldmine rental property, because your carrying costs remain low while rents keep going up.
This all sounds kind of bleak, but unfortunately it’s the way things are supposed to work – the tough medicine of higher interest rates is supposed to make the following things happen:
House buyers will end up placing lower bids which fit within their budgets.
Landlords will have to be more discerning about which properties to buy up as rentals, lowering their own bids as well.
Meanwhile, the current still-sky-high prices of housing should continue to entice more builders to create new homes and redevelop and upgrade old buildings and underused land, because high prices mean good profits. Then they’ll have to compete for a thinner supply of home buyers.
The net effect of all this is that prices should stop going up, and ideally fall back down in many areas.
When Will House Prices Go Back Down?
This is a tricky one because the real “value” of a house depends entirely on supply and demand. The right price is whatever you can sell it for. However, there are a few fundamentals which influence this price over the long run because they determine the supply of housing.
The actual cost of building a house (materials plus labor), which tends to just stay pretty flat – it might not even keep up with inflation.
The value of the underlying land, which should also follow inflation on average, although with hot and cold spots depending on which cities are popular at the time.
The amount of bullshit which residents and their city councils impose upon house builders, preventing them from producing the new housing that people want to buy.
The first item (construction cost) is pretty interesting because it is subject to the magic of technological progress. Just as TVs and computers get cheaper over time, house components get cheaper too as things like computerized manufacturing and global trade make us more efficient. I remember paying $600 for a fancy-at-the-time undermount sink and $400 for a faucet for my first kitchen remodel in the year 2001. Today, you can get a nicer sink on Amazon for about $250 and the faucet is a flat hundred. Similarly, nailguns and cordless tools and easy-to-install PEX plumbing make the process of building faster and easier than ever.
On the other hand, the last item (bullshit restrictions) has been very inflationary in recent times. I’ve noticed that every year another layer of red tape and complicated codes and onerous zoning and approval processes gets layered into the local book of rules, and as a result I just gave up on building new houses because it wasn’t worth the hassle. Other builders with more patience will continue to plow through the murk, but they will have less competition, fewer permits will be granted, and thus the shortage of housing will continue to grow, which raises prices on average.
Thankfully, every city is different and some have chosen to make it easier to build new houses rather than more difficult. Even better, places like Tempe Arizona are allowing good housing to be built around people rather than cars, which is even more affordable to construct.
But overall, since overall US house prices adjusted for inflation are just about at an all-time high, I think there’s a chance that they might ease back down another 25% (to 2020 levels). But who knows: my guess could prove totally wrong, or the “fall” could just come in the form of flat prices for a decade that don’t keep up with inflation, meaning that they just feel 25% cheaper relative to our higher future salaries.
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When Will Interest Rates Go Back Down?
The funny part about our current “high” interest rates is that they are not actually high at all. They’re right around average.So they might not go down at all for a long time.
Remember that graph at the beginning of this article? I deliberately cropped it to show only the years since 2009 – the long recent period of low interest rates. But if you zoom out to cover the last seventy years instead, you can see that we’re still in a very normal range.
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But a better answer is this one: Interest rates will go down whenever Jerome Powell or one of his successors determines that our economy is slowing down too much and needs another hit from the gas pedal. In other words, whenever we start to slip into a genuine recession.
In order to do that however, we need to see low inflation, growing unemployment, and other signs of an economy that’s not too hot. And right now, those things keep not showing up in the weekly economic data.
You can get one reasonable prediction of the future of interest rates by looking at something called the US Treasury Yield Curve. It typically looks like this:
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What the graph is telling you is that as a lender you get a bigger reward in exchange for locking up your money for a longer time period. And way back in 2018, the people who make these loans expected that interest rates would average about 3.0 percent over the next 30 years.
Today, we have a very strange opposite yield curve:
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If you want to lend money for a year or less, you’ll be rewarded with a juicy 5.4 percent interest rate. But for two years, the rate drops to 4.92%. And then ten-year bond pays only 4.05 percent.
This situation is weird, and it’s called an inverted yield curve. And what it means is that the buyers of bonds currently believe that interest rates will almost certainly drop in the future – starting a little over a year from now.
And if you recall our earlier discussion about why interest rates drop, this means that investors are forecasting an economic slowdown in the fairly near future. And their intuition in this department has been pretty good: an inverted yield curve like this has only happened 11 times in the past 75 years, and in ten of those cases it accurately predicted a recession.
So the short answer is: nobody really knows, but we’ll probably see interest rates start to drop within 18-24 months, and the event may be accompanied by some sort of recession as well.
The Ultimate Interest Rate Strategy Hack
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I like to read and write about all this stuff because I’m still a finance nerd at heart. But when it comes down to it, interest rates don’t really affect long-retired people like many of us MMM readers, because we are mostly done with borrowing. I like the simplicity of owning just one house and one car, mortgage-free.
With the current overheated housing market here in Colorado, I’m not tempted to even look at other properties, but someday that may change. And the great thing about having actual savings rather than just a high income that lets you qualify for a loan, is that you can be ready to pounce on a good deal on short notice.
Maybe the entire housing market will go on sale as we saw in the early 2010s, or perhaps just one perfect property in the mountains will come up at the right time. The point is that when you have enough cash to buy the thing you want, the interest rates that other people are charging don’t matter. It’s a nice position of strength instead of stress. And you can still decide to take out a mortgage if you do find the rates are worthwhile for your own goals.
So to tie a bow on this whole lesson: keep your lifestyle lean and happy and don’t lose too much sweat over today’s interest rates or house prices. They will probably both come down over time, but those things aren’t in your control. Much more important are your own choices about earning, saving, healthy living and where you choose to live.
With these big sails of your life properly in place and pulling you ahead, the smaller issues of interest rates and whatever else they write about in the financial news will gradually shrink down to become just ripples on the surface of the lake.
In the comments:what have you been thinking about interest rates recently? Have they changed your decisions, increased, or perhaps even decreased your stress levels around money and housing?
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* Photo credit: Mr. Money Mustache, and Rustoleum Ultra Cover semi gloss black spraypaint. I originally polled some local friends to see if anyone owned dress shoes and a suit so I could get this picture, with no luck. So I painted up my old semi-dressy shoes and found some clean-ish black socks and pants and vacuumed out my car a bit before taking this picture. I’m kinda proud of the results and it saved me from hiring Jerome Powell himself for the shoot.
Banks serve two main purposes. They provide loans to consumers who need a helping hand, and they provide a place to store cash, also known as a deposit.
The two actions aren’t independent of each other, and are actually very much interconnected.
For example, banks lend money out a certain rate and pay customers a certain return if they keep their money at the bank.
The two rates rely on one another to ensure the bank makes money. The short version of the story is that the bank must pay depositors less than what it charges to lend.
That’s why we see mortgage rates on the 30-year fixed around 4%, and savings accounts paying closer to 1% APY. This spread allows banks to make money and continue lending to consumers.
Low Mortgage Rates Are Bad News for Those Who Don’t Have a Mortgage
While everyone has been banging on about low mortgage rates for years now, many fail to mention that savers (and really anyone without a mortgage) are getting the short end of the stick.
As noted, when interest rates on loans move lower, as they have over the past several years, savings rates must drop as well, seeing that the two tend to move in tandem.
Before the financial crisis, it was actually quite common to see savings rates in the 3-4% APY range, which certainly wasn’t bad from a saver’s point of view.
Banks were offering great savings rates because they needed more money in the coffers to lend out to consumers, who were especially hungry for loans.
Remember, banks were going haywire making new loans during the housing boom, so they also had to attract depositors to ensure they had collateral.
Interestingly, the gap between savings and mortgage rates wasn’t all that wide back then, with the 30-year fixed ranging between 5-6%, compared to around 4% today.
Meanwhile, savings accounts were commonly in the 3% or higher range if you went with a bank that offered a more aggressive return.
Today, the gap between one-month CD rates (0.06%) and the 30-year fixed (4.5%ish) is the highest it has been since mid-2011, according to MoneyRates.com, which releases the so-called “Consumer’s Lost Interest Percentage (CLIP) Index.”
The company noted that the gap widened to 4.43% in September, up three basis points from August. It has increased by a staggering 1.15% so far this year thanks to rising mortgage rates and savings rates that “haven’t budged.”
The average gap between CD rates and 30-year fixed mortgage rates since 1971 has been 2.83%, meaning today’s gap is 1.6% above the norm.
So What Do You Do with Your Money?
With the gap so wide, it’s clear that those with the bulk of their assets in low-paying savings accounts are losing out.
At the same time, mortgage rates are at near-record lows, so one has to scratch their head a little.
Do you pay down the mortgage early, which has an ultra-low rate that will probably never be lower? Or do you throw your money into a savings account that is paying next to nothing?
Or, do you say to heck with savings accounts and try your luck in the stock market, which also happens to be sky-high currently?
It’s certainly not an easy decision, and it’s clearly not good news for renters and those who have already paid off their mortgages.
But perhaps the best option is to tackle other high-APR debt, such as credit cards, which tend to have interest rates in the teens and higher.
If the only debt you have is mortgage debt, there are plenty of ways to pay down your mortgage a little quicker, including going with a shorter-term mortgage, such as the 15-year fixed. That will reduce the gap as well, seeing that rates on 15-year loans are lower than those on 30-year mortgages.
But you might regret locking that money up a few years down the line if both savings and mortgage rates go up, especially if inflation rears its ugly head.
This article originally appeared on Spark Rental and has been republished here with permission.
The views and opinions expressed in this article are those of the author only and are not endorsed by Credit.com.
What Is the Purpose of Bonds in Your Portfolio?
Bonds have historically served as a counterweight to stocks, as investors approach retirement.
For all their advantages, stocks come with one enormous disadvantage: volatility. When you first retire, you face something called sequence risk: the risk of a stock market crash early in your retirement, before your stock portfolio has compounded enough to withstand a deep drop.
Here’s how bonds protect you from sequence risk, and the role they play in your retirement portfolio.
1. Low Risk
Bonds are interest-only debts. When you buy a bond, the issuer (the borrower) agrees to pay you interest at a set rate for a certain period of time. At the end of that period, the bond matures and you get your principal investment back.
Bonds come with two risks. First, and most relevantly to retirees, the bond issuer could default. That rarely happens, at least outside of the junk bond market. The other risk is that interest rates rise, so the value of your existing bonds goes down on the secondary market. But this risk doesn’t really apply to retirees simply looking for ongoing interest income rather than looking to trade bonds.
The low risk of bond default counterbalances the real risk of stock market corrections and crashes. Retirees can lean on their bond income if the stock market crashes, and (hopefully) avoid selling while stock prices are low.
2. Low Correlation with Stocks
Bonds provide diversification for investors. Bond returns have a low correlation with stock returns: they rarely crash at the same time as stock markets. In fact, bond prices normally rise when stocks crash, as investors flee stocks for the safety of bonds.
Once again, this protects retirees from the risk of a stock market crash.
3. Stable Income
Retirees need passive income to live on, in the absence of a paycheck. Interest payments from bonds can provide that steady income.
The same can’t be said for stocks. Not all stocks pay dividends, and even those that do can change their dividend payment at any time. They could lower or eliminate their dividend entirely, leaving retirees without income. The retiree could sell their stocks to generate income of course, but that reduces their net worth.
Can Real Estate Fill the Role of Bonds in Your Portfolio?
The short answer: yes, if you know what you’re doing. Which, of course, not everyone does.
Real estate investments can earn you ongoing income, with low risk and low correlation to the stock market. So they can serve the same purpose as bonds in your retirement portfolio, at a higher return. In fact, one study reviewing all asset classes for the last 145 years found that rental properties offered higher returns than stocks, with far lower risk.
Still, some types of real estate investments require work on your part. You could invest in publicly-traded REITs, bought and sold on stock exchanges and just as passive as stocks, but they tend to share a high correlation with stock markets. That gives them little diversification value.
But there are many types of real estate investments, each with their own pros and cons. Real estate will never be completely risk-free like Treasury bonds, but it can offer strong returns at low risk, especially if you diversify.
Ways to Invest in Real Estate as a Bond Alternative
The permanent environment of low interest rates in the 21st century have made bonds unappealing and real estate far more appealing. Investors can use leverage to buy real estate with other people’s money, at low interest.
Or not–many of the real estate investing options below don’t involve leverage at all.
Consider the following ways to invest in real estate as options to replace bonds in your investment portfolio.
1. Crowdfunded Private REITs
Publicly-traded REITs come with several downsides, beyond high correlation with stock markets. They’re volatile, with prices bouncing up and down similarly to stocks. But they’re also required by the SEC to distribute at least 90% of their profits each to shareholders, in the form of dividends. That gives them high dividend yields, but it also makes it hard for REITs to invest money in new properties to grow their share price.
Private, crowdfunded REITs such as Fundrise, Streitwise, and Diversyfund don’t have the same restriction. They can grow the value of their fund share prices by reinvesting profits into new properties.
Even so, many do still offer high dividend yields that rival or even beat public REITs. Fundrise pays dividend yields in the 4-7% range, while Streitwise pays dividends in the 8-9% range.
Crowdfunded REITs represent one of the easiest and most passive ways to invest in real estate. No mailings or labor to find good deals on properties, no tenant screening or rent collection hassles, just buy shares and sit back.
2. Crowdfunded Investment Property Loans
Hard money lenders issue short-term loans to investors who fix and flip properties, or refinance them after renovating them (the BRRRR method). But where do hard money lenders get their funds to lend?
From you, in some cases. For example, GroundFloor lends short-term investment property loans for buying and renovating, and they raise the money from retail investors.
You get to pick and choose which loans you want to fund, and you can lend as little as $10 per loan. Which means anyone with $10 in their pocket can invest in real estate, at least indirectly through property-secured loans.
If the borrower defaults, the lender forecloses, and you get your money back that way. Since hard money lenders fund at a relatively low LTV, that provides strong protection against default. Read: relatively low risk.
Related Read: Thinking of Getting into Retail Investing? Here Are 7 Things to Consider
3. Rental Properties
You can also buy rental properties, of course.
Direct real estate investing comes with plenty of advantages. You can leverage other people’s money by using an investment property loan to fund 75-80% of the cost. Investors get spectacular tax benefits, from rental property tax deductions to property depreciation. And rental income in retirement doesn’t expire or diminish — quite the opposite. Rental cash flow rises over time, as rents rise and provide a hedge against inflation.
Is rental income good for retirement? Absolutely, but it does come with a few caveats. As noted above, buying and managing rental properties takes work. Even if you hire a property manager, you still have to manage the manager.
Rental income is predictable as a long-term average, so you can forecast returns with a rental income calculator. But net rental cash flow each month varies wildly, as you experience vacancies, turnover, or repairs. That means retirees need to budget accordingly with an emergency fund, and not depend on a steady paycheck from every property, every month.
4. House Hacking
Want free housing? Explore options for house hacking, or finding ways for other people to cover your housing expenses.
The traditional model involved multifamily house hacking: typically buying a duplex or triplex, moving into one unit, and renting out the neighboring unit(s). The rents from your neighbors cover your mortgage payment and ideally your maintenance costs as well.
But that’s not the only way to house hack. You can also bring in housemates, or rent rooms or units on Airbnb, or rent out storage space on Neighbor.com.
By eliminating–or at least greatly reducing–your housing payment, you don’t require nearly as much passive income from your investments to live on in retirement.
5. Private Notes
A “note” is the legal document that you sign when you borrow money. For example, when you took out your last mortgage, the most important document you signed was the promissory note.
You can lend money privately to other real estate investors, having them sign a private note. You set the terms of the loan, including the interest rate, any fees, loan term, and any other factors.
Beware, however, that lending money to other investors largely comes down to trust. Unless you file a lien against their property, you have little recourse if they default on you. Only lend money to experienced investors you know well and trust implicitly to pay you back.
Get it right, and you can earn high returns completely passively.
6. Land Notes
There’s a lot to love about land investing.
To begin with, land offers low risk and high returns. It also doesn’t necessarily require much cash to invest. Best of all, you don’t have to hassle with contractors or tenants, which means low stress and far fewer complications. No repairs or renovations, no chasing tenants for rent collection, no property damage by uncaring renters.
For all that, land investing requires you to approach it like a business. You can eventually automate that business to run in the background with only an hour or so required each week from you, but it takes time and labor to get to that point. Many retirees (and employees for that matter) don’t want to launch a side hustle.
7. Real Estate Syndications
Syndications offer another way to invest in real estate for high potential returns. But unlike land investing or rental properties, syndications are largely passive investments.
They work like this: an experienced real estate investor goes out and finds a (hopefully) great deal that costs more than they can afford to buy on their own. So they bring in outside investors to partner with them on the deal, on exchange for a deal-finder fee or bonus.
The outside investors become partial owners of the property and share in its cash flow and profits upon sale. But we surrender most management decisions to the syndicator, the person who found and continues to oversee the deal.
We get to invest fractionally in a large real estate project, such as an apartment building, that we would never be able to buy individually. And an experienced real estate investor does all the work for us.
Of course, no investment is perfect. To begin with, most syndication deals only allow accredited investors to participate. The SEC makes the regulation too onerous to allow retail investors to partner on these deals. Along similar lines, syndications typically require a high minimum investment, often in the $50,000-$100,000 range.
And like any managed investment, you place your trust in the manager–in this case, the syndicator. You need to do your due diligence on both the property and the syndicator if you want peace of mind in your investments.
Whether you got a new job and are looking for somewhere to stash your paycheck, or are just looking for a new bank that better meets your needs, you may have spent some time considering where to open up a bank account.
While there are many private banking options to choose from, not all of them effectively meet customers’ needs. Many Americans are interested in consumer-friendly banks that are accessible and have low or no fees, while others look for banks that have local roots or more ethical behavior than bigger nationwide banks. Still, other Americans are unbanked, meaning that they don’t have access to any checking or savings accounts with a bank or credit union.
What’s Ahead:
What is public banking?
Representatives Rashida Tlaib and Alexandria Ocasio-Cortez have recently introduced legislation that could provide a promising alternative to traditional banks.
The Public Banking Act would establish a grant program that would allow for the formation of state and locally administered banks. While this act wouldn’t establish new public banks in and of itself, it would make it easier for public banks to form and to become insured by the FDIC.
These public banks would operate as nonprofits, and wouldn’t charge any monthly maintenance fees or require minimum deposits. That would make them accessible to citizens who find themselves shut out of the current banking system.
Since they wouldn’t be as focused on turning a profit as traditional banks, public banks could also provide lower interest rates for small businesses and public infrastructure projects, investing in local communities and cutting out Wall Street middlemen.
How does public banking work?
Public banking would function as a public service, like post offices or fire departments. In fact, in many countries, public banking is often directly tied to the postal system. The United States even had its own postal banking system from 1911 to 1966.
Today, there is one public bank operating in the United States, the Bank of North Dakota.
Unlike privately owned banks, public banks aren’t beholden to shareholders or required to turn a profit at the expense of ordinary consumers. Instead, these banks are able to charge lower fees and lend money at lower rates to local consumers and businesses.
Public banks can receive deposits from local and state governments in the form of tax revenue and other government income, and can also partner with existing local banks to fund a variety of projects.
How public banking could affect your finances
For many people, banking with a public bank would be pretty similar to banking with a traditional for-profit bank. Some of the potential benefits of public banking could include providing access to banking for more Americans, investing in local and community projects, and effectively delivering relief funds and government payments.
Helping unbanked and underbanked Americans
As of 2019, approximately 7.1 million American households were unbanked, meaning that no member of the household had a checking or savings account with a bank or credit union. For many Americans, high minimum deposit requirements prevent them from opening an account, while others cite excessive fees and a lack of trust in private financial institutions as reasons why they do not have a bank account. When money is tight, these Americans often rely on alternative services, like payday loans or pawn shops, with high fees and punishing interest rates.
Public banks would charge no monthly maintenance fees and have low or no minimum deposit requirements, making them accessible to many Americans who currently fall through the cracks of the private banking system. Public banking would also provide an alternative for Americans who have bank accounts but are currently dissatisfied with their bank or unable to qualify for other financial products.
Investing in local communities
Because public banks would not be compelled to pursue sky-high profits, they could offer loans at low interest rates to fund local businesses and public infrastructure. These could include projects like affordable housing and renewable energy. Some public banks, like the Bank of North Dakota, also offer low-interest loans to students and other specific groups.
Public banks would cut out the middleman and keep funds local, instead of profiting national banks, executives, and shareholders.
Effectively distribute relief funds
During the pandemic, millions of Americans were eligible for relief funds and stimulus checks to help them weather the turbulent economic times. While some Americans were able to receive funds directly to their bank account through direct deposit, others were mailed paper checks they had to cash, often accompanied by high check-cashing fees. Still, other Americans waited weeks or months for their funds to arrive, during a time when money was tight.
Public banks would be one way to easily and effectively distribute funds to Americans, without relying on private institutions. They would expand access for Americans without bank accounts and would prevent predatory services from taking a chunk out of much-needed relief funds.
Better for the environment
Another way public banks would operate differently than private banks is in their effect on the environment. The Public Banking Act would prohibit public banks from investing in fossil fuel projects, and would instead provide public banks with the capability to issue low-interest loans for environmentally-friendly projects.
This puts public banks in stark contrast to private banking behemoths, who have invested over 2.7 trillion dollars in fossil fuels since 2016, according to a report from the Rainforest Action Network.
A public alternative to big banks
Public banks wouldn’t replace big banks; instead, they’d provide an alternative for consumers dissatisfied with the status quo. This would give Americans the ability to choose between for-profit banks and local, community-driven public banks.
In some cases, public banks could even partner with existing local banks to more effectively distribute funds. Public banking wouldn’t solve all of the financial industry’s problems, but it could provide a more ethical alternative to the current options.
Drawbacks of public banking
While public banks attempt to solve many of the problems of the current banking system, they’re not entirely without flaws. Some potential drawbacks to public banks include potential lack of oversight and insufficient funds, as well as the inherent risk that all banks, public or private, face when it comes to lending money that may not be paid back.
Alternatives to public banking
For now, public banks still aren’t an option for the vast majority of Americans. However, there are some banking options that beat the competition when it comes to consumer-friendly policies, low fees, and ethical behavior.
Credit unions
Credit unions share some similarities to public banks in that they aren’t beholden to shareholders and executives, and often have local roots and programs that benefit the community. Like public banks, credit unions are not for profit, but instead of being owned and operated by local or state governments, credit unions are cooperative institutions owned by members.
Credit unions also often feature lower fees and rates than for-profit banks. Some federal credit unions even offer Payday Alternative Loans, which allow cash-strapped consumers to borrow money at lower rates than predatory payday loans.
Low-fee banks
In recent years, consumer-friendly, low-fee banks have proliferated as an alternative to big banks with exorbitant rates and fees. Many of these banks primarily operate as online banks, with simple websites and mobile apps designed to make navigating the banking process easier for consumers.
Ethical banks
Many big banks make harmful investments in areas like fossil fuels and for-profit prisons. While these investments are good for a bank’s bottom line, informed consumers may be interested in more ethical alternatives.
Companies like Aspiration, Amalgamated Bank, and Beneficial State Bank are B Corp certified, which means that they meet high standards for social and environmental performance, transparency, and accountability.
Some banks, like Sunrise Banks and First Green Bank, are members of the Global Alliance for Banking Values, which is a network of banks around the world that are committed to community investments and driving positive change.
Still, other banks are designated as Community Development Financial Institutions, or CDFI. These banks are dedicated to providing banking access for low-income and marginalized individuals and communities. Banks like City First Bank of DC, Southern Bancorp, and VCC Bank are all CDFIs.
Summary
While the Public Banking Act is still only a bill, it represents a promising alternative to traditional banking for millions of Americans. This piece of legislation would also complement other related policy proposals, such as postal banking and the Green New Deal. In the meantime, there are still a variety of banking options with low fees and ethical investment practices for consumers who qualify.