There is a fight, a tug-of-war if you will, in between savers and customers in this country.
On the saver's side, conditions are dreadful. Rate of interest on certificates of deposit (CD) have dropped substantially to the point where the average rate for a 1-year CD is 0.55% and simply 1.63% for a 5-y CD.
Review that for a bit ... your cash locked-up for 5 years making just 1.63%!
Other savings cars are struggling too. For example, a popular fund that contains corporate bonds from Wells Fargo, AT&T, Wal-Mart, and other blue-chip American business has an average maturity of 12 years and presently yields about 3.75%.
That's 3.75% of taxable interest income. Assuming your tax rate is 33%, you're entrusted an effective, after-tax yield of 2.5% which, my pal, is less than the historic inflation average of 3%.
So, while your bond investment is much better than new fidelity funding address cash in the bank and protects you to some extent against inflation, you still end up with 0.5% lower buying power every year.
So savers can't be too happy about this.
While Customers Rejoice
Borrowers, on the other hand, are having the time of their lives. Recently, the average 30-year fixed-rate home mortgage struck its lowest level of 4.19%. The kicker here is that home mortgage rates must really be more than 0.5% lower - in the 3.8% variety - based upon their connection with interest rates on Treasury bonds.
However, rates are unlikely to go much lower so here's a suggestion: If you remain in the market to refinance, waiting is probably not going to help you much.
Furthermore, clients of mine are borrowing millions at 2.15% to money their business activities.
Seems a Little Unfair
Without taking an ethical position, it does appear a bit unfair that savers, who in a sense are the "good guys" building wealth for their future, contributing capital for financial development and saving for a rainy day, are being punished for the actions of irresponsible customers and greedy lending institutions. Customers got in over their heads, didn't take reasonable safety measures, and are now getting loan adjustments and lowered rates on the money they owe. Banks experienced huge losses since of bad lending practices and triggered this drop in rates to ultra-low levels.
Nevertheless, this type of conversation does not get us anywhere. What has actually taken place, has happened - reasonable or unreasonable.
So where do we go from here, and how do we profit from all this?
What Debtors Can Do
Have a look at your financial resources from a customer's perspective.
First: re-finance your mortgage NOW if you can because rates probably aren't going to fall much lower.
Second: store, shop, buy a better rate on your charge card. Loaning costs are dropping all around so why should you pay the usual high rate on your credit card? Find banks that are hungry to provide you cash such as smaller institutions and Credit Unions, and prevent mega-banks that normally have all the money they require.
Third: secure a company loan if you need the cash. Banks are chilling out and making loans at relatively low rates that are very engaging in spite of the danger of slower service in this weak economy.
However, use sound judgment and profundity as you take on more financial obligation. Take on "excellent" financial obligation that funds your home purchase or properties that value in worth. Stay away from taking on "bad" debt for diminishing possessions you can ill manage such as a brand-new car or boat. If you must take on "bad" debt, ensure it is short term and pay it off really quickly.
What Savers Can Do
Now the tough part: finding offers as a saver.
First: search for a longer-term CD that will adjust greater if rates increase. There is little even worse than locking your cash in a 5-year CD at 1.50% only to see rates rise to 5% 2 years from now.
2nd: consider purchasing corporate bonds with maturities of 5 years or less. These bonds still yield more than CDs, but make certain you understand what you are purchasing - if the corporation goes bankrupt, you could lose a good chunk of your "safe" investment.
Third: think about purchasing high dividend-paying blue-chip stocks. Warren Buffet just recently said that stocks are cheaper than bonds today, and he's right. There are lots of strong companies out there whose dividend yields are above 3%. For example, Altria currently has a dividend yield of 6% and a solid history of constant dividend payments.
So ... it depends on you to be a winner or loser in the savings and borrowing video game. All you have to do is know the realities, decide to act, get on the phone or in your car, and start getting your affairs in order.