The mortgage market faces a turning point, experts say, asnew fixed mortgage rates have stayed below variable rates for several months and predictions grow that the cash rate has peaked.
National Australia Bank and Westpac last week became the latest banks to reduce some of their fixed rates, with both lenders dropping certain two-year rates, following cuts from the Commonwealth Bank in August.
Chief executive of mortgage broker Finspo, Angus Gilfillan, said new fixed interest rates had crossed a pivotal threshold, dipping below new variable rates for the first time since January 2022.
“The current situation suggests an inflection point, where the market no longer expects interest rate rises to occur in the medium term,” he said.
While the average new variable rate has increased 2.5 percentage points to 5.95 per cent over the past year – exceeding the 1.75 percentage point increase in the Reserve Bank cash rate over the same period – Gilfillan said average new fixed rates increased by a more modest 1.7 percentage points to 5.8 per cent.
Fixed rates, which have traditionally played a small part in Australia’s home loan market, tend to reflect the money market’s view on the future path of the cash rate.
“Fixed rates are historically higher than variable rates when rate hikes are expected on the horizon,” Gilfillan said.
Some economists have called a peak in the Reserve Bank’s cash rate, forecasting a fall as early as March. While some fixed rates have fallen lately, RateCity figures still show the majority of recent fixed-rate changes have been increases.
RateCity research director Sally Tindall said the major banks’ reductions recently could be an early sign some fixed rates are on their way down. At the same time, banks have been trying to rein in some of the more aggressive discounts they are offering on variable-rate loans, and Tindall said none of the big four banks had an advertised variable rate under 6 per cent.
Westpac last week raised one of its advertised variable rates for new customers, and Tindall said this was the 22nd rise to new customer rates from a big four bank since March. She said this trend showed “a strategic move to walk away from the cut-throat competition in the home loan market”.
She said it was unlikely that variable rates among the big four would return below 6 per cent until the Reserve Bank began cutting the cash rate.
As banks raised their variable rates, the number of customers choosing to fix their home loans has risen, albeit from low levels. Gilfillan said the proportion of customers choosing fixed rates had doubled over the past three months to 9.4 per cent in July, although it remains below the peak of 46 per cent in July 2021 when banks were offering ultra-low fixed rates.
Morningstar analyst Nathan Zaia said banks may have lowered their fixed rates recently to attract customers who were coming to the end of their previous fixed-rate contracts.
“The banks are probably looking for a way to lock their customers in, at least for a few years,” he said, as the mortgage rate cliff plays out.
Banks have signalled their intentions to walk away from cut-throat competition in the past few months in an effort to protect their margins, and have been less generous in some of the discounts they are offering customers on variable-rate loans.
“The banks are still offering very competitive pricing, but they’re not competing as hard,” Zaia said.
Once banks have made their repayments to a pandemic-era RBA funding program called the term funding facility (TFF), Zaia said the intensity of competition would probably fade.
“If the cash rate starts falling, they may not pass all the decreases on to borrowers,” he said. “Once they’re past the TFF repayments, banks will have more flexibility and there’s really little incentive for them to compete hard.”
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Millie Muroi is a business reporter at The Sydney Morning Herald covering banks, financial services and markets.Connect via Twitter or email.
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.
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.
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.
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.
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
Index funds and exchange-traded funds
Websites and online businesses
Royalties and intellectual property
Crowdfunding and peer-to-peer lending
Renting out your storage space
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?
Sure, savings accounts can be a good place to stow extra cash and build wealth. You’ll typically earn interest, helping your money grow and boosting your progress towards your financial goals.
However, unlike checking accounts, you usually can’t spend straight from a savings account. What’s more, you may find that there are limitations on the number of withdrawals or transfers you can make from out of your savings account.
If you want to avoid getting entangled with savings account rules and restrictions or triggering fees, here’s advice. Read on to learn the ins and outs of spending money from a savings account.
How Does a Savings Account Differ From a Checking Account?
You might think the main difference between a checking account and a savings account is how you view them–namely, one is for now, and one is for later. But the bank also views these two accounts very differently. Here’s a closer look at how savings accounts work vs. checking accounts.
• Savings accounts typically earn interest while checking accounts which generally earn zero or very little interest.
• Savings accounts may come with cash transfer and withdrawal limits. A federal rule called Regulation D used to limit certain types of transactions from a savings account to no more than six per month.
• In the wake of the coronavirus pandemic, the Federal Reserve lifted this rule to allow people to have easier access to their savings. Many banks, however, still enforce the six-per-month cap on savings account transactions.
• Savings accounts don’t usually come with debit cards that can be used to make purchases with money from that savings account. Only a few banks offer this service.
💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure online banking app.
Can You Write a Check From a Savings Account?
Typically, you can’t write checks from a savings account. Of course, it’s always possible to transfer money from a savings account to a checking account and then write a check from there.
If you want to save money and have the ability to write a check with the money you save, you may want to consider opening up a money market account.
Money market accounts are a type of savings account that often pay a higher interest rate than traditional savings accounts and generally include check-writing and debit card privileges.
However these accounts often come with minimum monthly balances, and falling below the minimum can trigger fees. Like other savings accounts, money market accounts may limit transactions to six per month (which includes writing checks and debit card payments).
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Open a SoFi Checking and Savings Account and start earning up to 4.50% APY on your cash!
How to Spend (and Save) With a Savings Account
To take advantage of the interest you’re earning on your savings, and avoid triggering penalty fees or the closure of your account, you may want to keep these savings account spending tips in mind.
Keeping Track of Your Withdrawals
It can be a good idea to find out what your bank’s policy is regarding monthly transactions from savings. Many institutions are sticking with the standard limit of six “convenient transactions” per month, while some are allowing more, such as nine transactions per month.
Convenient transactions include money transfers you make online, by phone, or through bill pay. Transactions, including ATM withdrawals and those that you make in person at the bank, do not typically count towards the monthly cap.
Paying Bills From Your Checking Account
Scheduling automatic bill payments from your savings account may put you over the savings withdrawal limit. It can be a better idea to have automatic bill payments or recurring transfers come out of your checking account.
Withdrawing Money Only for Large Expenses
If you withdraw money from your savings account for everyday spending, it can reduce the amount of interest you earn, and make it harder to reach your savings goals.
It can be wiser to only touch your savings when it’s necessary to cover an emergency expense or a large purchase (ideally, one you’ve been saving up for).
Building Your Savings
A savings account can help you work towards your financial goals, such as creating an emergency fund, making a downpayment on a home, or going on a great vacation. In some cases, you may even want to have different savings accounts for different goals.
To help achieve those goals faster, you may want to set up an automatic transfer from your checking account into your savings account on the same day each month (perhaps after your paycheck gets deposited). It’s perfectly fine to start slowly. Even small monthly deposits will add up over time.
💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.
Maximizing the Interest You Earn
The higher the interest rate, the faster your savings will grow. That’s why it can be worthwhile to do some research into which institutions and which types of savings accounts are paying the highest rates.
Some options you may want to look into include: A high-interest savings account, money market account, certificate of deposit (CD), checking and savings account, or an online savings account.
Savings accounts generally aren’t designed for making frequent transactions. Instead, their main purpose is to provide a safe place to store money for the medium- to long-term. This is one of the key differences between checking and savings accounts.
Savings accounts still allow you to have access to your money, of course. To avoid exceeding transaction limits, you can visit the bank in person or use the ATM to make withdrawals or initiate transfers (since these transactions typically don’t count towards transaction caps).
To make the most out of your savings account, you may also want to look for an account that pays a higher-than-average interest rate.
Open a SoFi Checking and Savings Account
Another savings option you may want to consider is opening a checking and savings account, which can combine the best features of each kind of financial vehicle.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with up to 4.50% APY on SoFi Checking and Savings.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
When it comes to investing, your time horizon refers to the desired amount of time before you reach a financial goal. It’s one of the most important factors in your financial plan because the amount of time you have to reach your goal — whether it’s 3 months or 30 years — influences how much risk you want to take on, and therefore which investments you’ll choose.
In fact, a good way to think about your investing time horizon is like the leg of a table. Four key decisions uphold your investment portfolio, and the first is how much time you have, ideally, to attain a certain goal. The other three cascade from there: your risk tolerance, your investment choices, and your asset allocation.
Recommended: Investment Strategies for Beginners
What Is a Time Horizon?
What is an investment time horizon? In short, it is the expected time available to hold an investment or to achieve a financial goal.
First, an investing time horizon can refer to the amount of time that an investor is planning on holding an investment. For example, an investor may be planning to hold an investment for 10 years. Therefore, the investment horizon is 10 years.
Or, investors can think of a time horizon as a type of deadline: e.g. how long they plan to work toward a goal. For example, one common goal is to save and invest for retirement, which may be decades away.
This investing time horizon will likely be determined by the age of the investor and how much progress they are making towards their retirement goal.
An investment time horizon could also be short, long, or somewhere in the middle. 💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.
Why Is Time Horizon Important?
Most financial goals have a time horizon attached to them implicitly, even if you haven’t spent much time thinking about it. If you’d like to buy a home, you might be thinking 2-3 years — or 10 years. If you’d like to buy a car, you might be thinking six months to a year. It all depends.
What drives the time horizon is the urgency of your goal. If you need a bigger home as soon as possible for your growing family, the goal of saving for a downpayment might be a short-term goal, with a shorter time horizon. If you want to buy a car, but you want to pay all cash, you might need a few years to save that money — so that goal would have a longer time horizon.
Goals like saving for college or retirement typically take years, and those time horizons are longer.
Once you can identify a realistic time horizon for the goal you’re investing toward, you can think about your investment strategy in more detail. Understanding the difference between short- and long-term investments is important, because some strategies will support your goals better than others.
Time Horizon and Risk Tolerance
Deciding on a short or long time horizon can help inform (or influence) your risk tolerance. Your tolerance for risk is, as it sounds, how much investment risk you can tolerate, when risk = the risk of losing money. If you can’t sleep unless you know your portfolio is relatively secure, and you’re on edge when markets are bumpy, you probably have a low risk tolerance.
Investors who have a low risk tolerance are considered risk averse, and they may prefer more conservative investments, like bonds. Low-risk investments like bonds and certificates of deposit (CDs) are less volatile, but they typically also have lower returns than higher-risk investments like stocks.
If you have a shorter time horizon of a year, and you don’t want to risk losing money, you may choose lower-risk investments like short-term bonds or types of CDs.
But if you have a higher risk tolerance, and you want to take on more risk with the hope of seeing higher returns, you might want to invest in stocks, mutual funds, or exchange-traded funds (ETFs).
Now let’s say you have a low risk tolerance, but you have a long time horizon to save for retirement: say 25 or 30 years. With a time horizon of three decades, your portfolio has more time to recover from periods of volatility, so you might feel more comfortable having a higher percentage of stocks in your portfolio, even though that increases your risk to some degree. It also increases your potential for growth over time.
This is often referred to as the risk-reward ratio, or a risk-reward calculation. Since no investment is genuinely risk-free, using a risk-reward ratio helps calculate the potential outcomes of any investment transaction — good or bad.
Recommended: 11 Golden Rules of Investing
Time Horizon, Risk, and Investment Choices
From the above examples, you can see that there is an interaction between the time you have until you achieve your goal, how much risk you’re willing to take on, and therefore what investment choices you might be open to.
Various investment types can exhibit different risk characteristics over different time periods. The stock market can be volatile during short time periods, like a month or a year. But over longer periods, the stock market generally continues to rise.
In fact, long-term investors may want to view risk through a different lens: If you don’t take on enough risk, you might not reach your investing goals. It is also possible to lose money by doing nothing, due to the effects of inflation. When cash just sits in low-interest accounts, it tends to lose purchasing power over time. 💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
Asset Allocation and Time Horizon
The purpose of deciding on the time horizon for your goals, examining your risk tolerance, and selecting different investments is to then land on an asset allocation that makes sense for you.
Asset allocation is the investor’s decision to divide a portfolio among various asset classes. Popular asset classes can include different types of stocks, bonds, as well as cash and cash equivalents (e.g. money market funds).
Asset allocation typically has a large impact on the performance of a portfolio over time. So, once again, an investor’s time horizon and risk tolerance will influence not only the selection of certain securities, but the proportion of higher- and lower-risk investments in a portfolio.
Asset Allocation Formula
For investors saving for retirement, there’s a general rule of thumb for deciding asset allocation. Subtract your age from 110, and that’s how much an investor should allocate to stocks.
If an investor is 30, subtract 30 from 110, which is 80. Thus the investor might consider an allocation of 80% stocks, with the other 20% going to bonds and cash. Of course, this is just a general rule — each investor will likely need to use their discretion and evaluate their overall financial profile and risk tolerance as they make investing decisions.
Short-Term Investing Time Horizons
A short-term investing time horizon could be anywhere between zero and three years. Some examples of short-term goals include: saving up for a vacation, emergency funds, holiday gifts, or a down payment on a home.
For the most part, it makes sense to keep money for short-term goals in cash or cash equivalents, because the focus is generally on safety and liquidity — and investors won’t want to risk losing money that they’ll need relatively soon.
This can be especially true when the goal does not allow for any timing flexibility.
For example, say that you’re saving up for a down payment on a house in about six months. Because this is a short-term time frame, and because the objective is to make sure that the money is available for use in six months, it does not make much sense to subject this money to risky assets with high volatility, like stocks and bonds.
Cash can be held in a checking or savings account. This can be done with a traditional retail bank or an online bank account.
Another option to consider is a short-term CD at a bank or local credit union. Investors may be able to earn slightly more interest with a CD. Tread carefully, here: There may be a penalty to access money held in a CD before the maturity date.
For short-term goals that are flexible on timing, it may be possible to invest all or some of that money. For example, imagine an investor with the goal of starting a business in about three years.
Because they are flexible on timing, and willing to take on more risk in order to potentially see bigger gains, they may put some of their business start-up money into stocks or equity mutual funds or ETFs.
Recommended: Investing for Beginners
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Medium-Term Investing Time Horizons
A medium-term investing time horizon could be anywhere between three and 10 years. Examples of medium-term goals include: starting a family or paying for a child’s college education, or potentially a house remodel.
Investing in mid-term goals can actually be more complex than investing for both short and long-term goals.
Likely, an investor will want to consider a balanced approach in a diversified combination of investments. The nearer the goal, the more bonds and cash the investor will likely want to have. The farther out the goal, the more risk that an investor might take.
How much an investor allocates to equities (stocks) will depend on their comfort level with the stock market during a medium investing time frame, and their willingness to be flexible.
Long-Term Investing Time Horizons
A long-term investing time horizon is generally longer than ten years.
Examples of long-term financial goals include: paying for college, retirement, financial independence, creating an endowment, and building intergenerational wealth.
How should long-term money be invested? In general, longer investment time horizons allow for more risk — which may set the stage for higher potential returns. Therefore, it is possible to have the majority of long-term funds invested in the stock market or similarly risky asset classes, if the investor’s personal risk tolerance allows.
The notion of risk is complex during longer periods, however. With money that is saved and invested now to be held for use over the long-term, investors may have to contend with losing purchasing power to inflation, in addition to market volatility.
Inflation is the economic phenomenon of rising prices, which means that over time each dollar can buy less. Historically, the inflation rate has run at 2% to 3%, which means money that’s “earning nothing” is actually losing 3% each year. Therefore, one of the biggest risks for long-term investors may actually be acting too conservatively, too soon.
Example of an Investment Time Horizon
To recap the above, an investor’s time horizon depends on the goal in question. Not all goals have a specific time horizon, but those that do — like retirement or buying a home or paying for college — require careful planning.
In order to reach a specific goal with the needed amount of money, investors must take into consideration how much risk they are willing to take on, given the time allowed, and choose their portfolio investments and asset allocation accordingly.
Investment Time Horizon and Risk Types
Investor’s must contend with different types of risk, depending on the time horizon for their goal.
This is the most common and likely the most well-known type of risk: it’s simply market volatility. The more exposure you have to the equity markets (or any market with greater volatility, e.g. crypto, commodities, high-risk bonds) that puts you at a higher risk for losing money.
While market risk is a factor for most investments to some degree, time horizon obviously impacts how much market risk you’re exposed to.
Inflationary Risk and Investment Time Horizon
As noted above, a big risk factor for longer time horizons is inflation risk: The risk that your money won’t grow enough to keep up with inflation. If an investor has a 20-year time horizon, for example, and invests conservatively during that time, there is a risk that they won’t end up with enough growth.
Interest Rate Risk
Interest-rate risk is the risk that interest rates could rise, affecting the value of the fixed-income part of a portfolio. While interest rate changes can impact many investments, bond values fall as interest rates rise.
Investing With SoFi
Your investment time horizon is effectively a type of financial deadline for any given goal. Some time horizons are more flexible than others — and that’s important to know, because the amount of time you have may influence your risk tolerance and investment choices.
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.
How do you calculate your time horizon?
Your time horizon is simply the amount of time between now (or when you start investing for your goal) and when you hope to reach your goal. For example, if you’re 35 and you’re planning to retire at 65, your time horizon for that goal is 30 years.
If you’re aiming to buy a home once you have $50,000 saved, you need to create a time horizon for when you’ll be able to reach that goal, based on the amount you can save per year, and your expected rate of return for the investments you choose.
What is the ideal investment horizon?
The ideal investment horizon varies from goal to goal. In the course of your life you may find yourself dealing with multiple time horizons for a range of goals. In some cases (e.g. saving for college or the arrival of a new baby), there’s an inflexible time horizon and you may have to adjust the amount you’re saving or the investments you choose. In other cases, like retiring or buying a home, you may be able to take more time to reach your goal.
What is time important in investing?
Time is a critical element in all investing decisions, whether long term or short term. As its most basic, time may allow investors to save more, recover from market volatility, adjust their risk exposure (if needed), and potentially see greater gains.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Financial markets rallied worldwide today as a massive plan to remove bad mortgage debt from the balance sheets of troubled institutions was introduced by Treasury Secretary Henry Paulson.
Last night, Paulson held discussions with Fed Chairman Ben Bernanke and SEC Chairman Chris Cox about taking a “comprehensive approach” to solve the ongoing credit crisis.
After addressing problems on a case-by-case basis over the past few weeks, such as the bailout of Fannie and Freddie and AIG, it became clear that a more systematic plan would be necessary to maintain market stability.
“The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded,” said Paulson in prepared remarks posted on the Treasury website. “These illiquid assets are choking off the flow of credit that is so vitally important to our economy.”
“When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.”
The so-called troubled asset relief program currently being mulled over aims to be the “ultimate taxpayer protection,” though it will involve a “significant investment” from taxpayer dollars.
“I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,” said Paulson.
While the new plan is being worked on over the weekend, Treasury is taking immediate steps to provide relief to the mortgage market.
First, Fannie and Freddie will boost their purchases of mortgage-backed securities, and second, Treasury will expand its MBS purchase program to increase available capital for new home loans.
Additionally, a temporary guaranty program for the U.S. money market mutual fund industry has been established and a ban on short selling is in place on 799 financial companies until October 2.
As for the millions of delinquent borrowers, banks receiving assistance may need to endorse judicial loan modifications and allow bankruptcy judges to facilitate refinances on primary residences in return.
A key indicator of excess liquidity in the financial system has been falling since May, a development that holds promise for banks but raises questions for financial stability.
The Federal Reserve’s overnight reverse repurchase agreement, or ON RRP, facility has seen usage decline from nearly $2.3 trillion this spring to less than $1.7 trillion through the end of August, its lowest level since the central bank began raising interest rates in March 2022.
For banks, this was a desired outcome of the Fed’s effort to shrink its balance sheet. As the central bank allows assets — namely Treasuries and mortgage-backed securities — to roll off its books, its liabilities must decline commensurately. The more of that liability reduction that comes from ON RRP borrowing, the less has to come out of reserves, which banks use to settle transactions and meet regulatory obligations.
“What we’ve seen is the decline in the Fed holding has mostly come through on the liability side in terms of a decline in reverse repos, rather than reserves,” Derek Tang, co-founder of Monetary Policy Analytics, said. “This is, of course, welcome news to the Fed, because the Fed wants to make sure that there are enough reserve balances in the banking system to operate smoothly. So that’s good news.”
Yet, as participation in the ON RRP — through which nonbank financial firms buy assets from the Fed with an agreement to sell them back to the central bank at a higher price the next day — shrinks, some in and around the financial sector worry that funds are being redirected to riskier activities.
Darin Tuttle, a California-based investment manager and former Goldman Sachs analyst, said the decline in ON RRP usage has coincided with an uptick in stock market activity. His concern is that as firms seek higher returns, they are inflating asset prices through leveraged investments.
“I tracked the drawdown of the reverse repo from April when it started until about the beginning of August. The same time that $600 billion was pumped back into the markets is when markets really took off and exploded,” Tuttle said. “There’s some similarities there in drawing down the reverse repo and liquidity increasing in the markets to take on excessive risk.”
The Fed established the ON RRP facility in September 2014 ahead of its push to normalize monetary policy after the financial crisis of 2007 and 2008. The Fed intended the program to be a temporary tool for conveying monetary policy changes to the nonbank sector by allowing approved counterparties to get a return on unused funds by keeping them at the central bank overnight. The facility sets a floor for interest rates, with the rate it pays representing the first part of the Fed’s target range for its funds rate, which now sits at 5.25% to 5.5%.
For the first few years of its existence, the facility’s use typically ranged from $100 billion to $200 billion on a given night, according to data maintained by the Federal Reserve Bank of New York, which handle’s the Fed’s open market operations. From 2018 to early 2021, the usage was negligible, often totaling a few billion dollars or less.
In March 2021, ON RRP use began to climb steadily. It eclipsed $2 trillion in June 2022 and remained above that level for the next 12 months. Uptake peaked at $2.55 trillion on December 30 of last year, though that was partially the result of firms seeking to balance their year-end books.
While it is difficult to pinpoint why exactly ON RRP use has skyrocketed, most observers attribute it to a combination of factors arising from the government’s response to the COVID-19 pandemic, including the Fed’s asset purchases as well as government stimulus, which depleted another liability item on the Fed’s balance sheet: the Treasury General Account, or TGA.
Regardless of how it grew so large, few expected the ON RRP to ever reach such heights when it was first rolled out. Michael Redmond, an economist with Medley Advisors who previously worked at Federal Reserve Bank of Kansas City and the Treasury Department, said the situation raises questions about whether the Fed’s engagement with the nonbank sector through the facility ultimately does more harm than good.
“The ON RRP, when it was initially envisioned as a facility, was not expected to be this actively used. The Fed definitely has increased its footprint in the financial system, outside of the usual set of counterparties with it,” Redmond said. “The debate is whether that increases financial instability, because obviously it is nice to have the stabilizing force of the Fed’s balance sheet there, but it also potentially leads to counterproductive pressures on private entities that need to essentially compete with the Fed for reserves.”
Fed officials have maintained that the soaring use of the facility should not be a cause for concern. In a June 2021 press conference, as ON RRP borrowing was nearing $1 trillion, Fed Chair Jerome Powell said the facility was “doing what it’s supposed to do, which is to provide a floor under money market rates and keep the federal funds rate well within its — well, within its range.”
Fed Gov. Christopher Waller, in public remarks, has described the swollen ON RRP as a representation of excess liquidity in the financial system, arguing that counterparties place funds in it because they cannot put them to a higher and better use.
“Everyday firms are handing us over $2 trillion in liquidity they don’t need. They give us reserves, we give them securities. They don’t need the cash,” Waller said during an event hosted by the Council on Foreign Relations in January. “It sounds like you should be able to take $2 trillion out and nobody will miss it, because they’re already trying to give it back and get rid of it.”
But not all were quite so confident that the ON RRP would absorb the Fed’s balance sheet reductions. Tang said there have been concerns about bank reserves becoming scarce ever since the Fed began shrinking its balance sheet last fall, but those fears peaked this past spring, after the debt ceiling was lifted and Treasury was able to replenish its depleted general account.
“If the Treasury is increasing its cash holdings, then other parts of the Fed’s balance sheet, other liabilities have to decline and there was a big worry that reserves could start declining very quickly,” Tang said. “The Treasury was going from $100 billion to $700 billion, so if that $600 billion came out of reserves, we could have been in trouble.”
Instead, the bulk of the liabilities have come out of the ON RRP, a result Tang attributes to money market funds moving their resources away from the facility to instead purchase newly issued Treasury bills.
The question now is whether that trend will continue and for how long. While Fed officials say the ON RRP facility can fall all the way to zero without adverse impacts on the financial sector, it is unclear whether it will actually reach that level without intervention from the Fed, such as a lowering of the program’s offering rate or lowering the counterparty cap below $160 billion.
A New York Fed survey of primary dealers in July found that most expected use of the ON RRP to continue falling over the next year. The median estimate was that the facility would close the year at less than $1.6 trillion and continue falling to $1.1 trillion by the end of next year.
Those same respondents also expect reserves to continue dwindling as well, with the median expectation being less than $2.9 trillion by year end and roughly $2.6 trillion by the end of this year. As of Aug. 31, there were just shy of $3.2 trillion reserves at the Fed.
“The Fed’s view is that there are two types of entities with reserves, the banks that have more than enough and they don’t know what to do with, and the ones that are having some problems and need to pay up to attract deposits, which ultimately are reserves,” Redmond said. “When there are fluctuations in reserves, it’s hard to tell how much of that is shedding of excess reserves by banks that are flush with them, and how much is a sign that this is going to be a tougher funding environment for banks.”
Tuttle said a balance-sheet reduction strategy that relies on a shrinking ON RRP is not inherently risky, but he would like to hear more from the Fed about how it sees this playing out in the months ahead.
“We have gotten zero guidance on the drawdown of reverse repo,” he said. “Everything is just happening in the shadows.”
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.
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?
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.
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.
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:
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:
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
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?
* 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.
When you deposit money into a bank account, you expect that money to stay there until you withdraw it. But how can you be certain your money will be safe if the bank runs into trouble? That’s where FDIC insurance comes in.
“FDIC insurance ensures the safety of depositor funds up to a certain amount and promotes stability in the United States banking system,” explains Jason Koontz, an independent consultant with decades of experience in the banking sector.
FDIC-insured accounts, like those offered by FDIC member Discover Bank®, are protected up to $250,000 per depositor, per account ownership category, in the unlikely event of a bank failure. You probably have a lot more questions about FDIC insurance, so let’s dive into some answers.
What is FDIC insurance?
First, let’s start with what FDIC stands for: Federal Deposit Insurance Corporation. Managed by this independent government agency, FDIC insurance is a program designed to protect deposits against the possibility of bank failures.
Banks can apply for FDIC deposit insurance and, assuming they meet the standard for approval, pay premiums to the FDIC for coverage. FDIC protection is backed by the full faith and credit of the United States government and assures that even if a bank fails, depositors won’t lose their protected funds.
Why was FDIC insurance created?
The first deposit insurance programs in the United States were initiated and deployed at the state level. Starting with New York in 1829 until 1917, 14 states implemented plans to protect bank deposits and similar accounts. These programs were intended to protect depositors from bank failures and guarantee communities’ financial stability.
These efforts fell short, however, and by 1933, thousands of banks had closed and the entire U.S. financial system was faltering. Because past efforts to establish some sort of federal deposit insurance program had been unsuccessful, bank customers were left unprotected. Depositors lost $1.3 billion as a result of the thousands of bank failures stemming from the financial crash that led to the Great Depression. Considering inflation, that amount would currently equate to about $27.4 billion, according to the Pew Research Center.1
In response, Congress passed the Banking Act of 1933, and President Franklin D. Roosevelt signed it into law. The act officially established the FDIC to restore confidence in the banking system and prevent further financial collapse. Since then, “no depositor has lost a penny of insured funds as a result of a failure,” according to the agency.
How does FDIC insurance help consumers?
While the FDIC insures banks, individual consumers benefit too.
“FDIC insurance benefits U.S. banking customers (citizens and foreigners) by providing peace of mind and confidence that their deposits are protected up to $250,000 per depositor, [per account category], per insured bank,” Koontz says. “In the event of a bank failure, the FDIC steps in to ensure depositors’ funds are reimbursed promptly, maintaining stability and helping to prevent panic in the banking system.”
Koontz explains that this protection applies to the accounts of individuals, families, and businesses and that it promotes trust and participation in the U.S. banking system. Bank customers don’t need to apply for FDIC insurance; they only need to make sure their bank is FDIC-insured.
You can usually find out if a bank is FDIC-insured by checking its website. Or you can search the FDIC database to find certified institutions in your area.
How does FDIC insurance work?
So, what does the FDIC do when an insured bank fails? Koontz explains that after a bank failure, the FDIC will take over as the custodian and manage the bank to minimize disruption.
“While this can happen on any day of the week, the FDIC often takes over a troubled bank on a Friday near the close of business,” Koontz says. He notes that the FDIC will have been doing plenty of work behind the scenes leading up to this day. “A Friday takeover allows the FDIC the weekend to work on the failed bank,” he continues. “The FDIC has several options for resolving a failed bank, including selling its assets and deposits to another institution, arranging a merger with a healthier bank, or creating a bridge bank to maintain banking operations until a suitable buyer is found.”
Of course, as mentioned above, the FDIC also protects the failed bank’s customers—up to $250,000 per depositor, per insured bank, for each account ownership category—if needed.
It’s also important to note that bank failures are very rare. Most of the time, banks are able to stay solvent. And if they’re FDIC-insured, the agency will examine and monitor them to ensure they comply with consumer protection laws.
How are consumers affected by bank failures?
If a bank fails, customers are at risk of losing unprotected funds. Funds may be unprotected if they’re held in a non-FDIC-insured institution, if they’re held in accounts that do not qualify for protection, or if the funds exceed the $250,000 limit.
In the rare occurrence that an insured bank fails, the impact on customers will depend on the steps the FDIC takes in response.
“If a bank is acquired by another institution, customers’ accounts and services generally continue without interruption, and they become customers of the acquiring bank,” explains Koontz.
In the case of a bridge bank, Koontz adds, customers can typically access their accounts and continue banking operations without significant disruption. “However, in some cases there may be temporary limitations on certain transactions or services until the resolution process is complete.”
How much does the FDIC insure?
The standard FDIC deposit insurance amount is up to $250,000 per depositor, per bank, for each account ownership category. That maximum applies to all the banks you have an account with, as long as the bank is an FDIC member. (Discover Bank is an FDIC member.)
You can use the FDIC’s Electronic Deposit Insurance Estimator, or EDIE, to determine your total coverage across all of your accounts and banks.
Koontz says it’s possible the FDIC may organize an arrangement to reimburse funds beyond the $250,000 guarantee, but you should not expect funds above that number to be protected. There are steps you can take, however, to maximize your FDIC protection.
How can you maximize your FDIC protection?
If you’re looking to deposit more than $250,000—whether as an individual, a family, or a business—then the FDIC insurance limits may be a concern. Fortunately, there are some strategies you can use to increase the protection you receive.
One option is to open multiple accounts with different ownership categories at the same bank. “The FDIC provides separate coverage for different ownership categories, such as individual accounts, joint accounts, retirement accounts, and certain trust accounts,” Koontz explains. “By utilizing these categories effectively, you can increase your overall coverage.”
Another tactic is to open accounts at different banks, Koontz says. While it could be a little more inconvenient to manage accounts at different institutions, he notes that it’s wise to avoid keeping all your eggs in one basket.
“By distributing your deposits among different [insured] banks, you can ensure that each account remains within the coverage limit,” advises Koontz.
It’s also possible to increase your coverage by opening a revocable trust account and designating multiple beneficiaries. A revocable trust is an account that pays out to beneficiaries upon the death of the account holder. Consider consulting a tax advisor to discuss your specific situation.
As of April 1, 2024, the FDIC will insure covered trusts up to $250,000 for each of up to five beneficiaries. That means a trust could be insured up to $1,250,000 for a single account holder. The covered amount for a joint trust, meanwhile, could be up to $2,500,000 for five beneficiaries.
Are you staying informed?
FDIC rules have changed multiple times since the program’s creation nearly a century ago. Koontz advises that you remain aware of any developments to be certain your deposits remain protected.
“It’s important to stay updated on any changes to FDIC coverage limits or regulations,” Koontz says. “Periodically review your deposit accounts and assess whether any adjustments are needed.” Again, that could include opening several different account types within one FDIC-insured institution or spreading out your accounts across several different FDIC-secured banks.
Call it a sunny day fund—online savings with no monthly fees
Discover Bank, Member FDIC
Feeling confident about FDIC insurance?
Koontz’s insights into what the FDIC does and how it can assist you as a bank customer should help you gain confidence about opening an FDIC-insured bank account. That could include an online savings account, a cashback debit account, a certificate of deposit (CD), a money market account, an IRA savings account, or an IRA CD.
While FDIC rules apply to every insured account, everyone’s financial situation will differ. “It is always important to talk to your banker, financial advisor, or even the FDIC directly for more personal guidance,” explains Koontz.
The FDIC is there for your benefit. When you appreciate how it works, you can build up your financial foundation with peace of mind. Ready to get started? Open an FDIC-insured online savings account today.
1 “Most U.S. bank failures have come in a few big waves.” Pew Research Center, Washington, D.C. (April 11, 2023) https://www.pewresearch.org/short-reads/2023/04/11/most-u-s-bank-failures-have-come-in-a-few-big-waves/
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
Business cash management accounts are a hybrid business checking, savings and investment account. This combination lets business owners earn above-average interest while maintaining easy access to their funds.
These accounts typically leverage sweep networks, which distribute your funds across a number of Federal Deposit Insurance Corp. members. This allows you to maximize FDIC insurance coverage without juggling multiple business banks.
Cash management accounts can be a good solution if your business has a lot of idle cash to invest — think startups with seed funding or companies with large operating budgets. But if your margins are thinner, a high-yield business checking or savings account will likely meet your needs.
Business cash management accounts
Brex’s business account has no monthly fees or minimum opening deposit. You can open up to eight accounts under one employer identification number, allowing you to have separate operating accounts for different business functions, like payroll and accounts payable.
Account holders can designate a portion of their balance to be invested in a business money market account that earns 4.92% annual percentage yield (APY), as of this writing. Funds deposited in a Brex business account are held across a network of FDIC-insured banks, providing up to $6 million in coverage.
You cannot deposit or withdraw cash from a Brex business account. Instead, you can add or move funds via check, ACH or wire transfer. Read our full review.
Mercury’s free business checking and savings accounts are eligible for up to $5 million in FDIC coverage through its partner banks, which participate in sweep networks to maximize coverage. These accounts do not earn interest, but eligible businesses can apply for a Mercury Treasury account to unlock the higher yields characteristic of a cash management account.
Mercury Treasury accounts tap into low-risk investments, like Treasury bills and money market accounts, and earn up to 5.43% APY as of this writing. Investments made through your Treasury account are insured by the Securities Investor Protection Corp. (SIPC) for up to $500,000 — not the $5 million in FDIC insurance.
You need at least $500,000 in your Mercury Checking and savings accounts to open a Mercury Treasury account. Monthly fees for Mercury Treasury start at 0.05% of your deposits across all Mercury accounts. Read our full review.
Arc’s cash management account is comprised of three accounts: Operating, Reserve and Treasury. There’s no monthly fee for operating and reserve accounts; treasury accounts have a monthly fee that starts at 0.02% of your account’s value annually.
Arc’s reserve account earns up to 4.00% APY and its treasury account boasts an APY of up to 5.26%, as of this writing. The actual yield on Arc Treasury accounts will depend on how you divvy up funds between money market and Treasury bills.
Money held in Arc Treasury accounts is FDIC insured up to $5 million through sweep networks and partner banks. Operating and Reserve accounts are FDIC insured up to the standard $250,000 per depositor, per account.
Rho offers business checking and treasury accounts, as well as corporate cards and accounts payable services, for incorporated businesses with at least $1 million in annual revenue or equity capital.
Treasury accounts earn up to 5.06% APY, as of this writing, and offer up to $75 million in FDIC insurance via a partner network. Checking accounts do not earn interest and are FDIC-insured up to $250,000. Rho accounts do not include ATM access, so you can’t withdraw cash, but there are no fees for ACH or wire transfers.
All Rho account holders are paired with a dedicated support specialist, plus general customer support (via phone or live chat) from 8 a.m. to 9 p.m. ET, seven days a week.
What is a business cash management account?
Business cash management accounts are a combination of multiple business bank accounts offered by one financial institution, allowing you to easily manage and move funds between accounts. Most business cash management accounts include the following:
Operating account: Used for day-to-day operating expenses, this account functions similar to a business checking account. Some cash management accounts allow for multiple operating accounts, so you may have one for payroll and another for vendor payments, for instance.
Reserve account: This is essentially a savings account, and it may or may not earn interest, depending on the financial institution. At Mercury, for example, savings accounts do not earn interest, but Mercury Treasury accounts earn up to 5.43% APY. Arc’s reserve accounts do earn interest — up to 4.00% APY — but Arc’s Treasury account earns up to 5.27% APY, as of this writing.
Treasury account: Most business cash management accounts let you allocate funds in your treasury account across high-yield savings, business money market accounts and treasury bills. Money in treasury accounts can earn 5% APY or more, depending on the account and where you allot your money.
Personal cash management accounts are usually offered by brokerages. However, business cash accounts are typically available through fintech companies like Brex and Arc, which offer business banking services through an FDIC-insured bank or investment broker. And most leverage sweep networks to offer FDIC insurance well beyond the standard limit ($250,000 per depositor, per account type).
Benefits of a business cash management account
Potentially high APY. The best business cash management accounts advertise rates of 5.00% APY or higher. But what you actually earn depends on the account you choose and how you allocate your funds.
Streamlined money management. Business cash management accounts may consist of multiple accounts, with funds spread across varying investments. But you can easily view and manage everything from one dashboard.
No transaction limits. Brick-and-mortar business banks typically limit how many transactions you can process each month. And most business savings accounts only allow six transfers or withdrawals per month. But business cash accounts have no such limits. Account holders can move money in and out of accounts as needed, though some withdrawals may be delayed — more on that below.
Increased FDIC coverage. Deposit accounts are typically insured by the FDIC for up to $250,000 per depositor, per account. But business cash management accounts often partner with a network of banks to spread funds across multiple institutions. These “sweep” networks allow you to unlock greater FDIC insurance coverage while only dealing with one financial institution.
That extended FDIC coverage may not apply to all of the funds in your cash management account, though. With Arc, for example, funds allocated to the Treasury account are FDIC insured up to $5 million, but money held in your operating or reserve accounts is subject to the standard FDIC coverage limit.
Drawbacks of a business cash management account
Substantial cash flow needed. While some business cash management accounts don’t have a minimum balance requirement, you do need a large operating budget and a chunk of idle cash to reap the benefits of this type of account. Companies with smaller cash reserves can achieve similar benefits with separate business checking and high-yield business savings accounts.
Limited access to cash. Cash management accounts are generous with free ACH and wire transfers, but cash is less accessible. Most business cash accounts don’t allow cash deposits, and some, like Brex, do not allow you to withdraw money at an ATM.
Lack of banking diversity. While business cash management accounts do leverage a network of banks to extend FDIC insurance coverage, you’re still dealing with a singular entity — typically a financial technology company. Should the fintech or its banking partner fail, your funds, while insured, may be unavailable for a time. Using separate accounts across multiple business banks can help minimize the disruption to your operations should any one of those banks collapse.
During the initial wave of the banking crisis in March, I published “Truist: Immense Unrealized Bond Losses Threaten Core Equity Stability.” At the time, Trust Financial Corp. (NYSE:TFC) had suffered the most significant drawdown among the top-ten US banks. Roughly five months ago, I was among the few analysts with a definitively bearish outlook on the bank, while many had viewed it as a dip-buying opportunity. My perspective was that although TFC’s “bank run” risk was low, the vast extent of its off-balance sheet losses left it with little safety for a potential rise in loan losses. Further, I expected that growing net interest margin pressures would substantially lower the bank’s income over the coming year, potentially compounding its risks.
Since then, TFC has declined by an additional ~11% in value and recently retraced back near its May bottom, associated with the failure of the Federal Republic. I believe the most recent wave of downside in at-risk banks is a notable signal that the market continues to underestimate systemic US financial system risks. Of course, following TFC’s most recent bearish pattern, I expect many investors to increase their position, viewing the company as significantly discounted. Accordingly, I believe it is an excellent time to take a closer look at the firm to estimate better its discount potential or the probability of Truist facing much more significant strains.
Estimating Truist’s Price-to-NAV
On the surface, TFC appears to have considerable discount potential. The stock’s TTM “P/E” is 6.3X compared to a sector median of 8.7X. Its forward “P/E” of 7.7X is also below the banking sector’s median of 9.3X. TFC’s dividend yield is currently at 7.2%, nearly twice as much as the sector median of 3.7%. Finally, its price-to-book is 0.66X, considerably lower than the sector median of 1.05X. Based on these more surface-level valuation metrics, TFC appears to be around trading around a 25% to 35% discount to the banking sector as a whole. Of course, we must consider whether or not this apparent discount is pricing for the bank’s elevated risk compared to others.
Importantly, Truist is one of the most impacted banks by the increase in long-term securities interest rates, giving the bank huge unrealized securities losses. Based on its most recent balance sheet (pg. 12), we can see that Truist has about $56B in held-to-maturity “HTM” agency mortgage-backed-securities “MBS” at amortized cost, worth ~$46B at fair value, giving Truist a $10B loss that is not accounted for in its book value. That figure has remained virtually unchanged since its Q4 2022 earnings report through Q2 2023; however, it will rise with mortgage rates since higher rates lower the fair value of MBS assets. Truist’s Q2 report also notes that all of its HTM MBS securities are at due over ten years, meaning they’re likely ~20-30 year mortgage assets that carry the most significant duration risk (or negative valuation impact from higher mortgage rates).
Significantly, the long-term Treasury and mortgage rates have risen in recent weeks as the yield curve begins to steepen without the short-term rate outlook declining. See below:
From the late 2021 lows through the end of June, the long-term mortgage rate rose by around 4%, lowering Truist’s MBS HTM assets fair value by ~$10B, while its available-for-sale securities lost ~$11.9B in value (predominantly due to MBS assets as well). Accordingly, we can estimate that the duration of its securities portfolio (almost entirely agency MBS) is roughly $5.5B in estimated losses per 1% increase in mortgage rates. Since the end of June, mortgage rates have risen by approximately 35 bps, giving TFC an estimated Q3 securities loss of ~$1.9B. Around $1B should show up on TFC’s balance sheet and income, while ~$900M will remain unrealized based on its current AFS vs. HTM portioning.
For me, we must value TFC accounting for both. Total unrealized losses and estimated losses based on the most recent changes in long-term interest rates. That said, should mortgage rates reverse lower, Truist should not have that $1.9B estimated securities loss in Q3; however, should mortgage rates continue to rise, the bank should post an even more considerable securities loss. At the end of Q2, Truist had a tangible book value of $22.9B. After accounting for unrealized losses, that figure would be around $12.9B. After considering the losses associated with the recent mortgage rate spike, its “liquidation value” is likely closer to $11B. Of course, Truist has a massive ~$34B total intangibles position due to goodwill created in its acquisition spree over the past decade. Although relevant, I believe investors should be careful in accounting for goodwill due to the general decline of the financial sector in recent years.
While much focus has been placed on unrealized securities losses, the risk associated with those losses is vague. Truist can borrow money from the Federal Reserve at par against those assets, partially lowering the associated liquidity risk. However, the Fed’s financing program is at a much higher discount rate (compared to deposit rates) and only lasts one year, so it is not a permanent solution. Further, the unrealized securities losses are on held-to-maturity assets, meaning it will recoup the losses should the assets be held to maturity. Of course, that means it may take 20-30 years, and Truist may need that money before then.
Further, Truist has a substantial residential mortgage portfolio at a $56B cost value at the end of Q2 (data on pg. 48). Those loans had an annualized yield of 3.58% in 2022 and 3.77% in 2023; since the yield did not rise proportionally to mortgage rates, we know the vast majority of those loans are likely fixed-rate long-term. Since they’re not securities positions, Truist need not publish their changes in fair value; however, should Truist look to sell its residential mortgages, they would almost certainly sell at a similar total discount to its MBS assets, considering its yield level is akin to that of long-term fixed-rate mortgages before 2022. I believe the unrealized loss on those loans is likely around $10B.
The rest of Truist’s loan portfolio, worth $326B at cost, is predominantly commercial and industrial ($166B), “other” consumer ($28B), indirect auto ($26.5B), and CRE loans ($22.7B). Excluding residential mortgages, all of its loan portfolio segments have yields ranging from 6-8% (excluding credit cards at 11.5%), with those segments’ total yields rising by around 3-4% from June 2022 to 2023. Accordingly, it is virtually certain that most of its non-mortgage loans are either short-term or fixed-rate since their yields rose with Treasuries, meaning they do not likely face unrealized losses based on the increase in rates.
Overall, I believe that if Truist were to liquidate its assets, its net equity value for common stockholders would be roughly zero, technically $1B. That figure is based on its current tangible book value, subtracting known unrealized losses on securities (~$10B), estimated recent Q3 realized and unrealized losses (~$1.9B), and estimated unrealized mortgage residential loan losses (~$10B). While the bank does have some MSR assets, worth ~$3B, that are positively correlated to rates, I do not believe that segment will offset unrealized losses in any significant manner. Together, those figures equal its tangible book value and would lower the total book value to about $34B. However, in my view, intangibles are not appropriate to account for today because virtually all banks have lost value since its 2019 merger, making its goodwill an essentially meaningless figure.
From a NAV standpoint, TFC is not trading at a discount and is most likely trading at a significant premium. Further, based on these data, Truist is, in my view, seriously undercapitalized. Although TFC posts a CET1 ratio of 9.6%, which is also relatively low, its common tangible equity would be essentially zero if its loans and securities were all accounted for at fair value. To me, that is important because most of its losses are on ultra-long-term assets so it may need that lost solvency sometime before those assets’ maturity. Further, even its 9.6% CET1 ratio is close to its new regulatory minimum of 7.4%, so a slight increase in loan losses or a realization of its estimated ~$22B in unrealized losses would quickly push it below the regulatory minimum.
Truist Earnings Outlook Poor As Costs Rise
To me, Truist is not a value opportunity because it is not discounted to its tangible NAV value. Even its market capitalization is around 65% above its tangible book value, which does not account for its substantial unrealized losses. However, many investors are likely not particularly concerned with its solvency, as that could not be a significant issue if there are no increases in loan losses, declines in deposits, or sharp NIM compression. If Truist can maintain solid operating cash flows, that could compensate for its poor solvency profile.
Of course, TFC cannot continue to try to expand its EPS by increasing its leverage since it is objectively overleveraged, nearly failing its recent stress test. On that note, poor stress test results are essential, but “passing” is somewhat inconsequential, considering most of the recently failed banks would have passed with flying colors, as the test does not account for the substantial negative impacts of unrealized losses on fixed-income assets. That is likely because, when “stress testing” was designed, it was uncommon for long-term rates to spike with inflation as it had, and banks had much lower securities positions compared to loans. Thus, it is quite notable that TFC nearly failed a test that does not account for its substantial unrealized losses.
Looking forward, I believe it is very likely that Truist will face a notable decline in its net interest income over the coming year or more. Fundamentally, this is due to the decrease in Truist’s deposits, total bank deposits, and the money supply. As the Federal Reserve allows its assets to mature, money is effectively removed from the economy; thus, total commercial bank deposits are trending lower. Truist’s deposits are trending lower in line with total commercial banks. I expect Truist’s deposits to continue to slide as long as the Federal Reserve does not return to QE. As Truist competes for a smaller pool of deposits, its deposit costs should rise faster than its loan yields. Today, we’re starting to see the spread between prime loans and the 3-month CD contract, indicating that bank NIMs are declining. See below:
Truist’s core net interest margin has slid from 3.17% in Q4 2022 to 3.1% in Q1 2023 to 2.85% in Q2. Truist’s deposits (10-Q pg. 48) have generally fallen faster than its larger peers, so it needs to increase deposit costs more quickly. Over the past year, its total interest-bearing deposit rate rose from 14 bps to 2.19%, with the most significant rise in CDs to 3.73%.
Notably, Truist has increased its CD rate to the 4.5% to 5% range to try to attract depositors. However, the bank continues not to pay any yield on the bulk of its savings account products, causing a sharp increase in customers switching toward the many banks which pay closer to 5% today. Over the past year, the bank saw around $10B in outflows for interest-bearing deposits and about $25B from non-interest-bearing deposits, making up for those losses with new long-term debt and CDs. Problematically, that means Truist is rapidly losing more-secure liabilities to more fickle ones like CDs and the money market. While this effort may slow the inevitable decline of its NIMs, it will also increase Truist’s solvency risk because it’s becoming more dependent on less secure liquidity sources as people move money between CDs more frequently than opening and closing savings accounts at different banks.
Truist also faces increased expected loan losses due to a rise in late payments last quarter. That trend is correlated to the increase in consumer defaults and the sharp decline in manufacturing economic strength. See below:
Consumer defaults remain normal, but I believe they will rise as consumer savings levels continue to fall and should accelerate lower with student loan repayments. The low PMI figure shows many companies face negative business activity trends, increasing future loan loss risks on Truist’s vast commercial and industrial loan book. Of course, Truist also has a notable CRE loan portfolio, which faces critical risks associated with that sector’s colossal decline this year.
The Bottom Line
Overall, I believe Truist has become even more undercapitalized since I covered it last. I also think Truist faces an increased risk of recession-related loan losses and has a more sharp NIM outlook. Even more significant increases in mortgage rates recently exacerbated strains on its capitalization, while its low savings rates should cause continued deposit outflows. Further, its increased CD rates should create growing negative net interest income pressure.
If there was no recessionary potential, as indicated by the manufacturing PMI, then TFC may manage to get through this period without severe strains; however, its EPS should still decline significantly due to rising deposit costs. That said, if Truist’s loan losses continue to grow due to increasing consumer and business headwinds, its low tangible capitalization leaves it at high risk of significant downsides. If its loan losses grow or its deposits decline, it will need to realize more losses on its assets, quickly pushing its CET1 ratio below its new regulatory minimum. Personally, I strongly expect TFC’s CET1 ratio will fall below the 7.5% level over the next year and could fall even lower if a more severe recession occurs.
I am very bearish on TFC and do not believe there is any realistic discount potential in the stock besides that generated by speculators. Since there is a significant retail speculative activity in TFC and some potential for positive government intervention due to its larger size, I would not short TFC. Although TFC downside risk appears significant, many factors could create sufficient temporary upside that it is not worth short–selling. That said, I believe Truist may be the most important financial risk in the US banking system due to its solvency concerns combined with its size and scope. Accordingly, regardless of their position in TFC, investors may want to keep a particularly close eye on the company because it may create more extensive financial market turbulence than seen from First Republic Bank should it continue to face strains.