Are you thinking about starting gambling? Gambling can be fantastic fun and a chance to blow off some steam, plus these days it is easy to get started as there are so many online casinos and sports betting companies. While gambling can be a fun pastime, you will also find that there is a lot of risk and danger involved. Gambling can be a very slippery slope and you want to make sure that you are always in control of your gambling and never betting money that you can’t afford to lose. This post will offer a few tips for beginners that should help and ensure that gambling always remains a fun activity for you.
How to Increase Your Net Worth
Your net worth is a benchmark for your financial success. Notice that I said financial success and not just success. That was intentional because money doesn’t define your success. Money can afford you freedom, but I believe real success doesn’t involve money. That was free of charge, now let’s talk about how to increase your net worth.
What is net worth?
Net worth is assets minus liabilities. How much wealth do you have after you subtract what you owe versus what you have? It’s typically used to gauge your progress in your financial life. If you have debt, then when you pay it down, your net worth goes up. The same happens when you increase your savings.
How to increase your assets
Honestly, the only way to increase your assets is to save money. At least, that’s where it all starts. The more you save, the more you have to work with.
How do you save money? Decrease your expenses and/or make more money. That’s what it comes down to. Figure out what’s important – in terms of your budget and spending. Everything else that doesn’t fit on that list needs to either be removed or reduced.
Once you have money saved, then you can put it to work. Invest it in securities or assets that have a chance to increase in value. What kinds of things have a chance to increase in value? Stocks, bonds, mutual funds, ETFs, precious metals, real estate, certificates of deposit (CDs), and cryptocurrency/NFTs (though I would tread carefully here).
Growing your assets will help you increase your net worth.
How to decrease your liabilities
Pay down your debts. That’s it. Obviously, it’s more challenging than that. Ideally, what you’d want to do is pay down your debts before you focus on the saving aspect of it. If you have debts with high-interest rates, like credit cards, those should be your first priority.
We’ve gone into detail about the repayment methods before so we’ll only touch on them briefly, but what’s important is decreasing your expenses so you can make larger, more regular payments towards your debts.
The next step is developing a repayment strategy. The two we’ve talked about before are the debt avalanche and the debt snowball. The debt avalanche – you pay the debt with the highest interest rate off first before moving to the next one. The debt snowball – you pay the debt with the smallest balance off before moving on to the next one.
Paying down your debts will really help you increase your net worth.
Is there a net worth number you should hit?
At the end of the day, your net worth number is really a reflection of what you’ve saved for retirement. Ideally, you will not have any debts, including your mortgage. So there’s no math that needs to be done. What are your assets? Primary home, any rental properties, and then your retirement savings, with primary home and retirement savings being the two most common for everyone.
So the question becomes, how much should you save for retirement? Thankfully, we’ve created a guide for you to help answer that question (see below).
Related reading:
How much do I need to save for retirement?
3 ways to responsibly save money
Gig economy financial security
Disclaimer:
**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com
Technological Investment Opportunities
Throughout history, some of the best companies are ones that created a product or service that solved a problem. I believe the vast majority of successful companies in the future are going to be technological or innovative in nature. In the coming years, there will be incredible technological investment opportunities. Here are some areas I think we should watch.
Space
When billionaires start spending billions of dollars, it’s hard to ignore. Especially, when all eyes seem to be on them when they’re making these gigantic moves. When it comes to colonizing Mars, space tourism, and all of that, it’s hard to see, at least right now, a company being able to profit on this segment. Eventually, we’ll be advanced enough that it’ll happen, but I don’t know how far away that is.
When it comes to sending satellites to orbit and payloads to the International Space Station (ISS), profitability seems more likely and much sooner.
Medical equipment/Pharmaceuticals
These are separate sectors, but I’m lumping them together for the sake of organization. I do this because they are both going after the same goal, making the human population healthier. They are doing this by helping cure diseases and making it more efficient and effective to maintain health.
There are plenty of diseases that need cures and a lot of self-sabotaging behaviors that humans need help with. It’d be silly to think that this area won’t be innovative and an incredible technological investment opportunity.
Renewable energy/Nuclear fusion/Clean up carbon emissions/environment
I’m not going to lie, with regard to the areas/sectors in this article, this section is my favorite. With all of the reports, publications, politicians, and scientists sounding the alarm bell about climate change, it’s impossible to ignore the technological investment opportunities coming down the pike.
Fintech
I’ll be perfectly honest, I’m not 100% sure what kind of advancements will come out in the financial technology space that hasn’t come out already. Perhaps what will end up happening is more efficient iterations of the processes, programs, and products we have right now.
Robotics/AI
Right after the renewable energy section of this post, in terms of my favorite, is this one because it has the ability to have an impact on everything.
Here’s the challenging part, at least challenging in terms of investability. There are going to be a lot of companies that invest in AI and machine learning. The biggest spenders and investors of AI technology are large technology companies that exist already.
Apple, Amazon, Google, Microsoft, and the like are already changing the game for AI. Finding a smaller company whose sole product/service is AI is going to be tough, but that doesn’t mean it’s impossible.
There are a lot of cutting-edge, technological investment opportunities that will present themselves in the future. Make sure you’re paying attention and take advantage of those opportunities.
Related Reading:
Investment Concerns and Opportunities
Why Financial Literacy is Important
Inflation, Gold, Semiconductors
Disclaimer:
**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com
Should You Invest in Mobile Homes?
Mobile homes get a bad rap, but they could really be a good place to invest money. Investing in real estate is a good way to diversify your portfolio. Mobile, or manufactured homes, could be a good little niche in that sector. Should you invest in mobile homes?
What is a mobile home?
Mobile homes, also known as manufactured homes, are residential structures built in a factory or separate location and moved to the desired location. These homes are built according to HUD guidelines.
Those guidelines are as follows:
- Design and construction
- Strength and durability
- Transportability
- Fire resistance
- Energy efficiency
- Overall quality
Why invest in mobile homes?
Social stigma around mobile home parks prevent people from investing in them
Investing in individual mobile homes is difficult because the people that rent them are a (and I’m making a big generalization here) a challenging bunch to deal with. Invest in the grounds and infrastructure where the mobile/manufactured homes are.
There are several benefits to investing in mobile home parks:
- Recession-resistant (held up through the GFC)
- Tenants rarely leave, but sometimes, evictions are necessary (as they are with any real estate endeavor)
- Supply is waning, demand is increasing
- Predictable maintenance costs
- Stigma reduces competition with other investors
- Great financing options
- Limited need for contractors
- They’re inexpensive (you can buy individual units to rent on your property for less than $10,000 – depending on the area and demand)
(List provided by BiggerPockets)
Conclusion
As I mentioned in the beginning, investing in real estate is a great way to diversify your portfolio. It can also be a good way to get a return on your money.
Within the real estate sector, mobile home parks can be a very good niche, for the reasons I mentioned above. Should you invest in mobile homes?
Related reading:
Why Financial Literacy is Important
How to Invest in Real Estate without Getting your Hands Dirty
Hard Money Loans: Benefits for Real Estate Investors
**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com
Should You Be Investing in SPACs?
Many investors are constantly on the prowl for new options that could help them make a bit of cash. If SPACs have recently made their way onto your radar and you’re wondering if you should be investing in them, here’s what you need to know.
What Are SPACs?
SPAC stands for “special-purpose acquisition company.” Also referred to as “blank check companies,” SPACs are publicly-listed, but are considered non-operating. Instead, they exist solely to purchase private companies, allowing the company that has been acquired to have a connection with a publicly listed stock.
Generally, the process of becoming a publicly-listed is cumbersome. By going the SPAC route, a private company can avoid the challenges associated with an initial public offering (IPO). The SPAC is already public. Plus, by using a reverse merger after the acquisition, the once private company can transition to a public one while maintaining autonomy.
Are SPACs a Good Investment?
Like any part of the investment landscape, there is certainly risk associated with investing in SPACs, even if there doesn’t appear to be any on the surface. While it’s true that if a SPAC doesn’t find a private company to scoop up, investors get their money back after a set amount of time, your money may not be working for you as hard as it could going another route.
Additionally, there’s no guarantee that the private company a SPAC grabs is going to be successful once it is part of the market. As recent history has shown, not all IPOs go well. If the SPAC selects the wrong company, you can certainly experience losses.
Finally, by design, SPACs benefit the SPAC sponsors far more than individual investors. Generally, the sponsors get a significant stock allocation for the SPAC IPO, and the founder shares can dilute common stockholders.
In many cases, a SPAC’s performance can be subpar. When there is a high-valued private company serving as a potential target, it can generate competition among SPACs. When that happens, the price may inflate, causing the SPAC that “wins” to overpay, something that doesn’t work in investors’ favor.
SPAC Overpays
However, the sponsors – due to the nature of the arrangement – can still come out ahead even if the SPAC overpays, creating a level of conflict of interest. The decisions may not be in the best interest of individual investors. Instead, only the sponsors serve to gain.
Ultimately, it’s wise to be cautious about investing in SPACs. You may not know exactly what the SPAC will scoop up when you invest, which isn’t ideal. Additionally, there can be issues with transparency, as well as potential conflicts of interest.
In many ways, a SPAC is riskier than a traditional IPO. If you’re risk-averse, that’s far from ideal. However, even if you are open to some risk, the low historical performance should give you pause. If you do think SPACs are right for you, research is your ally, as it may give you an indication about the SPAC’s ability to choose the right private company. Make sure you really dig in, as that may be your only way to determine if a SPAC has potential.
Do you think investing in SPACs is a smart move? Do you plan on adding them to your portfolio? Why or why not? Share your thoughts in the comments below.
Read More:
- What Is Ethical Investing and Is It a Feasible Investment Strategy?
- 6 Investing Tips for Risk Averse Individuals
- 4 Ways to Track Monthly Dividend Income on Your Investments
Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.
Annuities and Taxes: Here’s What You Need to Know
Annuities can be a reliable source of income in retirement. Once you begin receiving benefits. You’ll receive a set amount of money each month or year for the rest of your life. Even if you live for decades more. However, annuities can come with tax implications. Both on the front and back ends. If you want to find out more about annuities and taxes. Here’s what you need to know.
Annuities and Taxes – Qualified vs. Non-Qualified Annuities
First, it’s important to understand that how an annuity is taxed does vary depending on the type of annuity involved, especially how it was funded.
Qualified annuities are funded with pre-tax dollars. In most cases, these involve principal payments from a type of tax-deferred retirement account, like a 401(k) or a traditional IRA. However, there may be other approaches available, as well.
When you make withdrawals from a qualified annuity, you pay taxes on the money just as you would other traditional kinds of income. Since none of the money has been taxed, every dollar in the withdrawal is treated the same.
Non-qualified annuities are funded with after-tax money. With those, when you make withdrawals, you’ll only owe taxes on earnings, not the deposited amounts. The money used to fund the annuity has already been taxed, so it won’t be taxed again. However, the earnings haven’t, making them subject to taxation.
Usually, with non-qualified annuities, the taxed amount is determined by the exclusion ratio. This calculation determines how much of an annuity income payment is taxable by separating the portion of the payment funded with the principal from the part funded by interest earnings.
In some cases, annuities purchased with funds from a Roth 401(k) or Roth IRA are tax-free. However, very specific conditions have to be met for that to happen.
Tax Rates on Annuities
When you’re receiving income from an annuity, the taxable amount is taxed based on traditional income tax rates. Annuities aren’t eligible for capital gains rates, which are often lower than income tax rates.
If you need to estimate how much you’ll owe, use the traditional tax tables from the IRS. That will give you the most accurate picture, at least on a federal level.
In some cases, you’ll also need to pay taxes on the state level. State income tax rates vary, and some may exclude annuities – as well as other kinds of retirement income – while others do not. Additionally, not all states have an income tax in the first place. As a result, you’ll need to research rules in your area to determine how much you may owe.
Depending on where you purchase your annuity, you may also owe a state premium tax. Some states tax insurance premiums, including during the sale of annuities. If you live in one of those states, you may see a 1 to 3.5 percent tax. However, some states waive the fee under certain circumstances, such as if you make the purchase using funds from a qualified retirement plan.
When Withdrawal Timing Impacts Taxes on Annuities
Another factor in how money from an annuity is taxed is when withdrawals are made. Usually, if you take any money out before you reach the age of 59 ½, you’ll owe a penalty of up to 10 percent to the IRS. However, by waiting until you’re at least 59 ½, you can avoid this entirely.
Additionally, if you take a lump sum instead of annuity income payments, at a minimum, all of your earnings are taxed right away. If you funded the annuity with pre-tax dollars, then the entire lump sum, including both the principal and earnings, are taxed immediately.
Inherited Annuities and Taxes
If you inherit an annuity from another person, the same tax rules apply to you as would to the deceased. As a result, if the annuity was qualified because it was funded with pre-tax dollars, you’ll owe taxes on the entire value of any withdrawals. If it was non-qualified, then you’ll only owe taxes on the earnings.
Ultimately, annuities are fairly simple to understand from a tax perspective. Earnings are typically taxed as income, and withdrawals from principal only are if the annuity was funded pre-tax. While your income tax rates may vary depending on your total income level, how your annuity factors in is reasonably straightforward.
Is there anything else people should know about annuities and taxes? Share your thoughts in the comments below.
Read More:
- Structured Settlements vs Annuities: What’s the Difference?
- Ultimate Estate Planning Guide
- Should You Report Income from the Sale of Your Home on Your Income Taxes?
Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.
The Pros and Cons of Index Investing
What Are Index Funds?
If you are tired of trying to beat the stock market, index investing may be the best solution for you. Index funds work by investing your money into an index of stocks. (You may have heard of S&P 500 or the Dow.) When you put money into an index fund, you are investing in all of the companies that make up that particular index’s portfolio.
This is an alternative to choosing and investing in particular stocks. The same risks exist for you as those who buy stocks individually. However, investing in an index can provide broad diversification for your equity investments. Instead of putting your eggs in a few baskets, you’re putting one egg in 500 baskets (using the S&P 500 as an example).
Pros:
They are inexpensive
There are usually no hidden fees or sales commissions with index funds. They have low annual fees- much more insignificant than the large fees that hedge funds and other alternatives charge. You can also increase your investments regularly without facing additional charges. Avoid indexes that do charge investors extra.
They Allow You to Invest in A Diverse Selection of Stocks
A well-balanced portfolio is key, and index funds aim to achieve this. As an individual, our investment opportunities are far more limited. By teaming up in an index fund we are able to share in the investments of many different stock companies. This is a much more attainable goal when we are part of an index fund.
They’re Efficient
Index funds financially outperform the majority of mutual funds. Although solo investors enjoy trying to “beat” the stock market and outsmart the institution, research has shown time after time that index fund earnings are much more consistent.
On top of bringing in more earnings, they are also user-friendly and easy. You can link your bank account to the index fund and it will automatically withdraw on a regular basis for you. No work on your part at all! Not only do you avoid having to study the stock market, but you also do not have to move the money over regularly.
It’s A No-Brainer
For anyone who is a newbie when it comes to investing, index funds are a life-saver. You don’t have to pick individual stocks or worry about the market rising and falling. All you have to do is provide the money, and the market should grow over time.
Cons of index investing:
They Can be Vague
The assets making up a fund’s portfolio are constantly changing. It can be difficult to see exactly what you own and exactly how much you have made by investing. This is due to the fluctuating values in the underlying stocks and the index itself.
Limited Upside
Although investing in individual stocks can be messy and dangerous, some investors have a special eye for it. The professionals can often beat the market and get ahead of the game. In an index fund, you will never beat the market, because you will only grow consistently alongside it.
You’re Not in Charge
If you like to be in control, it could be difficult to learn to trust your money with strangers. Your index fund managers will be the ones in charge of what the fund gains in assets. You will likely never be personally able to call the shots in an index fund, and that is something you will have to come to terms with.
Not Suitable For All Investors
One of the most obvious cons of index investing is the “blanket” suitability for all investors. That’s, simply, not the case. The risk/return relationship suggests that higher return investments usually involve higher risk. Index funds are typically designed to capture the median performance of markets such as the S&P 500 or the Russell 2000.
As a result, they usually return market performance – no more and no less. If you want a very risky investment strategy, say, for example, investing in reverse convertible bonds, you likely won’t find index funds a suitable investment vehicle.
There Can be Fees
Some index funds do charge high fees and commissions. Be sure to stay clear of these.
My Concern
Generally speaking, index funds are great. They offer broad exposure to the market and do an incredible job at limiting fees.
But, in my mind, there are two more cons of index investing:
- Accidental concentration – As the market ebbs and flows, some sectors and industries will do better than others. For example, over the last 10+ years, the technology sector has outperformed the broader market by a large margin. As a result, tech makes up a greater portion of the index. If that sector experiences a pullback, the index as a whole will fall.
- Liquidity concerns – This mainly applies to index ETFs, but if the market, as a whole, drops, inexperienced investors will sell out of their positions to limit their losses. When there is a rush for liquidity, these ETFs need to sell underlying positions to provide investors with that liquidity. This can lead to an acceleration of losses. Investors sell, portfolio managers sell to give individuals their money, so underlying assets drop. This can cause more investors to sell, and again, portfolio managers to sell more. It’s a domino effect
Related reading:
Can you afford not to use index funds?
Robo-advisers: What I like and what I don’t like
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com
Appreciating vs. Depreciating Assets
I think it’s widely known that there are two types of assets: appreciating and depreciating. I think it’s less known what’s classified as appreciating and depreciating.
In this article, we will look at what each term means, examples of each, and how to use them effectively.
What’s appreciation?
Appreciation is the increase in value. The majority of assets used to accumulate and grow wealth, appreciate. An asset can appreciate because of supply, demand, or a change in interest rates.
What’s depreciation?
Depreciation is the exact opposite. It’s the loss of value. The most common example is a car, but more on that later.
It is a new year and time to start thinking about tax plans for this financial year. The tax depreciation schedule calculator is a simple online tool that allows an employer to calculate the depreciation value of vehicles used for commercial purposes. This tool can help employers who wish to ensure that the correct amount of tax is deducted from their staff’s wages and prevent any penalties from being handed out.
Appreciating assets
- *Stocks – It’s commonly known that investing in stocks is the best way to not only keep pace with inflation but to grow your wealth. A stock is partial ownership in a public company. Popular examples include Apple, Amazon, Facebook, etc. (Click here to learn more about stocks)
- Real estate – Single-family homes, duplexes, apartment complexes, etc. Though the pace at which real estate appreciates dwarfs compared to stocks, it does so slightly over time. (Source)
- Private equity – This can be starting a company of your own or you can invest in a startup. There are also private equity funds that exist, as well. Basically, it’s a company or venture that is not open to the public (i.e. stocks on the exchange, etc.).
- Alternative – Less common assets that could appreciate (cryptocurrencies, precious metals, art, and other collectibles).
- Bank accounts – Savings accounts, certificates of deposit, etc. These don’t appreciate much, especially in the current “low-interest-rate”. Some may argue that you shouldn’t classify these as appreciating assets because inflation erodes away the purchasing power over time.
Depreciating assets
- Cars
- Boats
- Furniture
- Equipment
- Patents/Copyrights – Patents, other than section 197 intangibles, have a useful life of 10 years and can be amortized over that 10 year period. (Source)
What’s the point?
- Appreciating assets – Owning and investing money in an appreciating asset is the key driver in growing your wealth. Those who’ve accumulated significant amounts of wealth have done so by earning a living, saving, and investing diligently over decades.
- Depreciating assets – There are a few reasons to own a depreciating asset.
- Fun and convenience – We own and drive cars because we need them to go places. We buy boats because they are fun. In either case, you could also own a car or boat for your business, in which case it would serve a different purpose.
- Business – Owning and operating machinery and equipment is how many of us make a living or run a business.
- **Tax write off – If you use equipment, machinery, cars, etc. for business, oftentimes you can use the depreciation of that equipment as a tax write off. Financial advisors use a set of fancy calculations to come up with the tax benefits of depreciation, we won’t go into that here.
Conclusion
Appreciating and depreciating assets both serve a purpose. It’s important to know the difference between the two and how to use each one as effectively as possible.
*Stocks can sometimes experience periods of volatility and negative performance. During such periods, the value of such stocks may decline.
**Be advised: talk to your accountant about specifics.
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com
Financial Planning Basics: The Financial Pyramid
The first time I heard about the financial pyramid, I was instantly intrigued. I had never thought about it in this concept before, but I unintentionally had been practicing this in my own life.
In finances you have to build the base before you can reach the top or it will all fall apart, hence the allegory of a pyramid.
The Base
The base of your financial pyramid should be a solid financial plan. This includes your written budget, short-term and long term goals, and how you will make your income as well as an investment plan to be implemented in the future.
You should have a positive cash flow, meaning, no longer using debt to fund your lifestyle.
RELATED: The Importance of a Personal Investing Statement
Once you have implemented the base, you can move onto the first building block: protection.
Protection
You must protect yourself from the unimaginable, so I recommend everyone have a will and power of attorney, insurances such as life, health, auto, homeowner’s/renter’s, and disability, and a basic emergency fund of at least $1,000-$2,500.
I was thankful to have my mini-emergency fund when I had some car issues because I was able to pay cash to repair them instead of having to go into debt. The overall pyramid looks something like this:
The second building block is low-risk wealth accumulation. This would include saving for a home, retirement, and children’s college education, in addition to reducing consumer debt.
Debt Reduction
Financial guru Dave Ramsey teaches that you should get completely rid of any debt before beginning savings, although, in my opinion, you should still invest in retirement while reducing debt only if your employer offers a match.
I, myself, am in the debt reduction stage but still contribute to my retirement account since my employer offers up to a 4% match into my 401(k).
Additionally in this step, you should create your emergency savings fund. Many people believe an emergency fund of 3-6 months’ worth of expenses is adequate.
Investing
The third building block is high-risk wealth accumulation. This includes investing. Expanding on the second block, in this stage, you will max out your retirement accounts and then build a non-registered investment portfolio.
Once you have built your net worth to an amount sufficient to fund your lifestyle and retirement, you can move to the next stage of investing– speculation (also known as speculative investing.) In this stage, you invest money into investments such as start-up companies.
This is very risky, so you don’t want any debt by this stage. Also, you should only invest a small portion of your total investments into speculation. Also in this stage, you’ll want to begin tax planning, especially as your retirement investments increase.
Estate and Charity
The final building block is wealth distribution. You’ll gift and spend the money you have earned. As well as plan your estate for future generations or charity upon your death. Since your net worth increased quite a bit since you first started the financial planning pyramid, you should update your will and/or trust.
Finally, once you’ve got these basics nailed down, it’s time to hire some help. One approach a lot of millennials use is robo-advisors. A robo-advisor is a machine that uses various theories about portfolio allocation to make investing decisions. If you’re interested in a critical review of this, consider checking out Roboadvisorpros.com, they have a good article on the topic.
If you aren’t into trusting your cash to a computer, consider signing up with Personal Captial. They’ve pretty much become an industry leader among the newer financial planning firms.
If you’re’ going to use them, please use this link or click on the banner below. It will help keep the lights on here at The Free Financial Advisor.
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My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com
Our New Low(er) Interest Rate Environment
With the talk of interest rates and recession in the headlines, I figured it was a good time to check-in, and give a little update on interest rates and how lowering them can impact the economy, issuers, and investors.
Why is the FED cutting?
Basically, the FED is cutting to extend the current economic expansion we are in.
The fundamental reason behind that is lower interest rates encourage corporations and consumers to spend more.
For two reasons.
One, they get paid very little, in interest, to put their money in the bank. And two, they are able to borrow money at lower rates.
Current income needs
People who need income, retirees, for example, invest their money in income-producing securities. Often times, those securities are fixed income instruments, like bonds.
Bonds pay interest on a semi-annual basis. The higher the credit quality of the issuer (company or government entity) the lower the payout. The inverse is true for a low credit quality issuer.
It’s the ever-present adage in investing, more risk equals more potential for reward.
When interest rates continue to creep lower, then those people start to make different choices.
What people are doing now
People are getting paid less, in interest, to invest in high-quality debt issuers, so they’re getting riskier. Meaning, they are investing that money with low credit quality companies and/or government entities.
Their risk of not receiving interest payments and getting their principal (the initial investment) back goes up.
The FEDs tool kit
I’ve touched on this point a few times in the past, but I’m going to hammer it home.
The Federal Reserve, essentially, has two tools. Lowering interest rates and buying Treasuries. Lowering interest rates promotes spending and buying Treasuries provides liquidity.
Because they are lowering interest rates during an expansion (whether we are still in one or not is debatable, but let’s say we are for the sake of argument), they are, effectively, removing the number of tools they have available.
When the next recession comes, my fear is they won’t be able to do enough to help us out of it.
Corporate debt
Currently, the amount of corporate debt in the market is the largest in history. Additionally, the amount of debt that’s rated BBB is also the highest in history.
BBB is the last rung on the investment-grade scale. Investment grade is anything BBB and above.
That’s a problem for basically one reason. When a BBB rated issuer gets downgraded (to BB) they are classified as junk (high-yield). When that happens, they need to tighten up their debt and improve their balance sheet. This means less borrowing and less spending.
It’s a dynamic that feeds itself. The issuer is downgraded, they spend less, GDP gets weaker, more corporations follow suit, and here comes the recession.
Investors
Once the corporate (high-yield) debt pops, issuers of debt will have trouble meeting their obligations. They’ll start to default, and their investors will be left high and dry.
Conclusion
This post is not intended to scare people, it’s to inform.
One last point. Because interest rates have been so low for so long, there are economists/academics that think the lowering of interest rates won’t actually help.
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*The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com