Should we change how we use our money?
The question came to mind recently as I checked interest rates. I found, yet again, that anything short-term and safe started with a zero to the left of the decimal point, as in 0.1 percent. ; According to Bloomberg.com you now need to commit for at least 3 years to earn a yield that starts with a 1 on U.S. Treasury debt.
At the same time, investors are so convinced the future holds inflation that short-term Treasury Inflation Protected Securities (TIPS) have, for the first time, sold at prices over par. This means people are paying a premium for the government to hold their money.
As economies go, this is not your father’s Buick.
So, we have a choice. We can sit around and talk about the good old days when money actually earned money. Or we can figure out what our best choices are. Here’s my list.
Capture the match. If you work for a company that has a 401(k) plan with an employer match, save enough to capture the entire match. Where else can get a tax break while earning an effective 50 percent, if your employer matches at 50 cents on the dollar?
This isn’t new. Capturing the match has always been a good idea. But today it is the biggest slam dunk going.
You may not, however, want to save more than the amount required to capture the employer match. Why? There are bigger opportunities for cash than investing in stocks and bonds.
Zero out your credit card debt. In the late 1970s, when inflation was roaring and interest on credit cards was tax deductible, you could make a case for credit card debt. What you bought this year could cost 10 to 20 percent more next year.
But that was then. Today, credit card interest isn’t tax deductible, and prices for many consumer goods are flat or declining. Some people are delaying purchases, hoping that prices will be lower in the future. It’s often a good bet.
Credit card interest rates, according to creditcard.com, are a bit over 14 percent. They’ve been higher, but they’re still no bargain. If you pay off credit card debt you’ll be “earning” a return far higher than the long-term return on common stocks.
Some readers will think this is a no-brainer idea. It is. But while we have collectively reduced our revolving credit from nearly a trillion dollars in 2008 to a recent figure of $800 billion, millions of people who carry a monthly balance still “don’t get it.” ;So it’s still a major opportunity.
Build a cash ‘opportunity’ account. Our cash may not earn anything in interest, but it’s still better to have cash than not to have it. As Lord Byron wrote long ago, “Ready money is Aladdin’s Lamp.” It can make your wishes come true. You may be able to “earn” far more on an opportunistic purchase than you could earn in interest on the same cash.
With ready cash you can buy in quantity and enjoy the benefit of bulk purchases. Think Sam’s Club and CostCo. With ready cash you can wait for regular seasonal bargains from retailers. You can do the same thing at resale shops, auctions, and garage sales. As I suggested three years ago in “The Coming National Yard Sale”, with lots of people trying to convert the contents of their closets, garages and boat slips into cash, having ready cash can provide a “yield” in savings far greater than anything you could earn on a bank deposit. One good purchase can bring more benefit than years of savings interest.
The last resort: Paying down your mortgage. Back in the boom years few paid down their mortgages. They thought they could earn more on a new investment than they were paying in interest on their mortgage. Their financial advisors encouraged this because the advisor earned fees on investments, not mortgage reductions.
Today there is a better reason to pause before paying down a mortgage— it is one of the few inflation hedges that we’ve got. If you’re young and likely to make payments for many years, there is a significant chance that you will pay less back in purchasing power than you borrowed due to future inflation.
So pause before paying down a mortgage. But if you’re approaching retirement and you’ve taken all the other steps, just remember that debt-free is a great place to be.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.