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How to Take Advantage of the Low Interest Rates

22 Apr

Interest rates have been at record lows for a while. Actually, they are near zero and have nowhere to go but up. For illustrative purposes, a graph of the 30 year fixed mortgage rate shows that we have gone a long way since the 1980s when the rate was upwards of 17.5%. (Source: Yahoo Finance)

interest rates graph

The Federal Reserve has maintained the interest rates low in an effort to stimulate the economy by discouraging saving and encouraging borrowing Chairman Ben Bernanke said last month that while the U.S. economy has improved, it still needs support from the Fed to help lower unemployment. Bernanke says that short-term interest rates will stay near zero until unemployment falls to 6.5 percent. Forecasters expect that won’t happen sooner than 2015. (Source: NPR News)

Do you feel like you should be doing something to take advantage of the interest rates at record low? Probably.

Whether you want to save, spend or invest, consider your options and choose the strategies that best suit your particular financial circumstances. Here are five tips for low-interest-rate periods:

  1. Consolidate debt. With interest rates at historic lows, it makes sense to consolidate debt into one low-interest loan. For example, if you have outstanding balances on several credit cards, consider transferring those balances to one credit card with the lowest interest rate. If you qualify, it may be a good time to apply for a home equity line of credit to consolidate debt or make a home improvement.
  2. Shop around for credit cards with the best interest rates. You may be able to get one with better terms than the one you are currently using. Or, ask your credit card issuer to lower your interest rate to make it more competitive.
  3. Make large purchases now. If you’ve been thinking of making a major purchase like a house or a car, today’s low-interest rates make it a good time to finance big-ticket items. However, make sure you have a good credit record and can pay off the loan before applying.
  4. Order a free copy of your credit report. Review the report carefully to verify its accuracy and dispute any errors. Errors in your credit report may affect your credit score, and higher credit scores can mean lower interest rates. If your score is lower than you’d like, pay down your balances and pay bills on time to raise your score. Read more about What to do if you are a victim of identity theft.
  5. Keep saving. Just because standard savings accounts aren’t paying a lot of interest now doesn’t mean you should stop saving for your future. Your savings will still accrue, you’ll be less likely to spend it and you know it will be safe. If you can afford to lock up your money for a while, longer-term Certificates of Deposit (CDs) typically pay the highest interest rates. Specifically, Market Linked CDs are an extremely effective and popular solution as they are the only financial product that combines the guaranteed return of your principal and the protection of FDIC Insurance with the potential to earn reasonable rates of return.

In conclusion, although interest rates are at historic lows, it is important to ensure that whatever your strategy is, it makes sense in your particular situation. It’s probably not a great idea to buy an overpriced home now just because mortgage rates are low. Neither is it a good idea to acquire more debt just because it is cheaper to do so.

In any economic environment, the strategy that will ultimately bring you closer to financial freedom is one that focuses on debt elimination and creating tax-free income.

Myths and Facts About Sequestration

14 Mar

By now, you probably have a good idea as to what is sequestration. There are however several common myths about the sequester. Here they are:

1. Sequestration is a one-time budget cut.

Myth. “Sequestration” is actually series of automatic, across-the-board spending cuts to federal government agencies that are scheduled to take place in fiscal years 2013 through 2021.

2. Sequestration will affect Social Security, Medicare and Medicaid Payments

Myth. Social Security, Medicaid, and Medicare benefits are exempt from sequestration. Although cuts to Medicare provider payments are on the table, they can’t exceed 2% of current payments.

 3. Sequester will cut growth and lead to job losses

Fact. The cuts, totaling $1.2 trillion, will be split evenly between defense and domestic discretionary spending. The cuts are effective March 1. (The cuts were originally scheduled to take effect January 1 but were postponed to March 1 as part of the last-minute fiscal cliff deal reached on New Year’s Day.

4. Sequester will not affect defense spending

Myth. The automatic cuts are effective March 1, 2013. From 2013 through 2021, sequestration is scheduled to cut $1.2 trillion from government agencies, split evenly between defense and domestic programs. More than $500 billion is scheduled to be cut from the Defense Department and other national security agencies. The remaining cuts will affect a variety of domestic programs, including education, public safety, energy, national parks, food inspections, housing aid, transportation, and law enforcement.

5. The sequester will result in a government shut-down.

Myth. You may have heard a great deal about what’s going to happen as a result of the sequester, and much of it has likely been alarming. It’s important to understand, though, that the government will not be shutting down. In fact, while it’s hard to know exactly how things will play out as the cuts are implemented, most individuals are probably not going to notice a significant, immediate effect. Federal agencies will notify employees of possible furloughs, and the Defense Department will do the same with civilian employees, but those furloughs likely won’t take effect for at least a month. In addition to potential layoffs and furloughs, individual agencies will begin announcing and implementing other cost-saving measures.

6. Despite the sequester, the government will run out of money.

Fact. This one is unfortunately true. Federal funding for the current fiscal year expires on March 27, 2013. Unless Congress authorizes additional funding, a partial government shutdown would result. In addition, a few months later, expect another debt ceiling debate. The federal government reached its $16.394 trillion debt ceiling limit at the end of 2012. Congress subsequently suspended the debt ceiling limit until May 19, 2013, and although the U.S. Treasury has some ability to continue operations beyond that date, at some point the debt ceiling debate will need to be addressed. Thus, it’s conceivable that any short-term agreement on sequestration would include provisions that address these deadlines as well.

Whether Congress addresses some or all of these issues over the coming weeks or months is anyone’s guess. So stay tuned.

How To Deal With The New Payroll Tax Hike

14 Jan

how to deal with the payroll tax hikeSo by now, most of you have probably already opened your first paycheck for the year and were unpleasantly surprised by the decreased amount of your take-home pay. In case you were living under a rock for the past few months, here is what caused the tax increase. Well, it is not really an increase. There was a temporary tax break (reducing the Social Security Tax rate from 6.2% to 4.2%) that all American workers got for the last couple of years. This temporary tax break was given to us in an effort to stimulate the economy by letting us have more disposable income and was set to expire at the end of 2012.  Congress decided to let the tax break expire and therefore allowing all Americans to effectively lose 2% of their income starting January 2013.  There is a lot of speculation on how this tax hike will affect the economy. Many economists predict that the decrease in money Americans have access to on a monthly basis will lead to economic stagnation; some even go as far as predicting another recession. However, regardless of the impact the tax increase will have on the economy, most of us are now mostly concerned with how to immediately deal with the decrease in income and how it will affect our own budget.

The reality is simple – 2% less income is a lot for most of us. If your annual salary is $50,000, then you are looking at bringing home $1,000 less this year. Here are some of my thoughts I would like to share with my blog readers and my past, current and prospective clients at The Baron Group:

  1. Reduce expenses. Of course the most obvious response to a reduction in income would be a reduction in expenses. Think carefully about your spending patterns and see if there is any discretionary spending you can easily reduce. Going out to eat, dry cleaning, daily lattes and buying lunch at work are some of the most obvious ones you can cut or reduce.
  2. Go generic. If your budget is already reduced to bare necessities, think if you can save money by buying generic brands as opposed to brand names. You don’t have to immediately look at your groceries list. Realistically, most of us prefer a certain brand of food/drink and even if we can easily see that the ingredients are exactly the same, switching to a generic brand doesn’t happen easily. Instead, consider other household items such as paper towels, cleaning supplies, diapers etc.
  3. Don’t reduce retirement savings. Reducing how much you contribute towards your retirement goals may seem like a good way to respond to the tax hike. This couldn’t be further from the truth. Remember with savings you have to always consider the effect of compound interest. Specifically, the amount you chose to not save today will be magnified because you will forgo the benefits of continuously accumulating interest on interest. So, before you decide to reduce your retirement savings contributions, explore every other strategy for cutting expenses. Ideally, you will avoid reducing your retirement savings altogether.
  4. Increase debt payments. You may think it is counterintuitive to increase payments when your income is reduced. Not when it comes to debt payments. As you are scrubbing your budget to see where you can find a few extra dollars to respond to the payroll tax hike, you may surprise yourself with reductions increasing 2%. If that is the case, and in an event of any room in the budget, I always recommend increasing debt payments. The sooner you are completely debt free, the closer you get to financial freedom and the realization of your financial goals. (Learn how to Eliminate Debt, including your mortgage in a fraction of the regular time)
  5. Deserve a higher raise. Usually 2% of annual income is what the average American receives as an annual raise.  However, since in 2013 this raise will be eaten by the payroll tax hike, maybe now is the best time to really excel and impress at work so you can make a case for an above average increase this year.

How about you? What will you do (have already done) to respond to the payroll tax hike? Please share in the comments section below.


WHY IT MATTERS: Europe’s Economic Crisis

10 Oct

WHY IT MATTERS: Europe’s Economic Crisis.

How to Take Advantage of This Zombie Economy

18 Jul

It has already been almost four years since the beginning of the Great Depression in 2008 and the economic reports do not seem to get more encouraging. Actually for a while we were feeling hopeful that a recovery is well on its way when towards the end of 2011 and into the first quarter of 2012 unemployment figures were lower, more jobs were added and home prices were slightly rising. The revival was however short-lived when in the second quarter of 2012 the growth rate of the economy slowed down again and the number of jobs added in June was only 80,000 after 77,000 added in May and 68,000 in June making the second quarter the worst in two years.

It’s discouraging, to say the least and it feels like the US economy is moving in a slow zombie like state.

With interest rates at all time lows, companies holding back on hiring and low consumer confidence, is all hope dead? Not quite.

Experts expect things to pick up after the election. And until then there are ways to take advantage of the zombie like economy and revive your financial health. You can even profit from the recession. Feel free to let me know if you can think of anything else.


Take advantage of the historically low interest rates – this is probably the most obvious one as low interest rates equal cheap loans.

            Refinance your home mortgageIf you haven’t already done so, get in touch with your current lender or shop around for the best combination of rates and costs of refinancing. If currently the rate on your loan is higher than 4.5% and you are able to qualify for a refinance at 4% or lower, take advantage of the savings. Do not forget to calculate the total cost of the refinance and compare that to the monthly savings so you can estimate how long it would take to recoup the cost of the refinance. A few hundred dollars a month can go a long way. Recently, I stumbled upon this blog post which discusses How Often Should You Refinance Your Primary Home Mortgage? It makes some excellent points.

Repay your credit card debts faster – Very often credit card rates are variable and based on Prime plus a certain percentage depending on your credit score. Since the Prime rate is at an all times low of 3.25%, chances are your variable credit rates are as low as they can be meaning the more you repay every month, the more you pay towards principal. Aim at paying more than the minimum payment.

Also, if you have above average credit, you are probably seeing quite a few zero percent transfer offers from credit card companies. Take advantage of those offers by transferring higher rate credit card balances but be disciplined and know the date by which the accounts need to be repaid before the interest rate defaults back to a high rate. Just make sure you do not add more debts.

Take advantage of deals – weak consumer confidence and low consumer spending is not helping corporate profits as more Americans prefer to save any disposable income or repay debt. Desperate companies are trying to lure consumers by offering significant discounts. Of course, refrain from spending just because prices are low but if there was something you need to buy, be patient and wait for the right deal.

If you have subscribed to discount websites like Groupon and LivingSocial, take advantage of the deals they offer. Just make sure you do not fall prey of the “how fun” mentality when you receive the daily emails. Do you really need that pottery class or bungee jump lesson? Even if they come at a 60% discount.

Most importantly, if you are in the market for a new car, home electronics, appliances or any major items that you really need, chances are if you do your research, shop around and are patient enough to find the best deal, you will able to take advantage of significant discounts.

Take advantage of distressed properties – It is quite unfortunate that there are so many foreclosures out there but if you are on the market for a home, now may be a great time to buy. Whether you are looking at a foreclosure, a fixer upper or a regular sale, chances are you will get a great deal. Historically low property prices coupled with unprecedented low interest rates make becoming a property owner very attractive. Plus you will take advantage of the tax deductable mortgage interest. Just remember that you do not have to borrow the maximum amount a bank qualifies you for.

So even in this zombie like economy there are ways to revive your financial health. What are you doing to take advantage of this economy?

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