Outside Economics

The yield on the 10-year U.S. Treasury fell to a record low of 1.318 percent in early July, sending bond prices higher throughout the fixed income markets. Bonds have continued their rally since the beginning of the year as the Fed has held off on raising rates, while central banks in Japan and Europe have maintained unprecedented low rates.

Repercussions from Brexit channeled money towards the perceived safety of German government bonds in July, as Germany became the first country in the EU to sell 10-year government bonds with a negative yield at auction. A negative yield means that investors are willing to essentially pay Germany in exchange for holding funds in German bonds. Germany sold  €4.8 billion ($5.3 billion) of 10-year notes at an auction, with a yield of -0.05 %. 

As of this past month there has been a continuous decline in long-term interest rates for 25 years, spanning from 8.3% in 1991 to 1.36% in July for the 10-year U.S. Treasury. Some bond analysts estimate that any continued decline in yields has become much less probable. But we all know, never say never!

With the Fed and its monetary stimulus efforts at capacity, many economists believe that this leaves ample room for fiscal stimulus in the form of lower tax rates. The presidential campaign has brought about the topic of lowering taxes and perhaps at a timely juncture that would help stimulate economic growth where the Fed may not be able to any longer.

A chellenge with this thought, is that this comes at a time when the federal government needs all the money it can get its hands on. (see the article: How Interest Rates Feed the Pig.) Its a fact that lower taxes has proven to increase the the total tax revenue, however to many people lowering taxes is unfair.  

This news on the heals of all the economy has been through since the Great Recession is a clear indicator that the economy has not completely recovered. With intermediate interest rates way below the historical average of 5.5%, this becomes a very serious concern for retirees who depend on their fixed income securities to help pay for their living expenses.

What to Do

Understanding this, the rate at which a person withdraws money from their retirement accounts will have a huge impact on the longevity of that account. People will need to simply save more for retirement and or live on less than originally expected. Both are unpleasant challenges. Getting out of debt will help with both of those challenges, as it frees up cash flow for additional savings and with little to no debt, it requires much less to live on. 

One strategy would be to take out much less during the earlier years of retirement and allow your savings to continue to grow, even for an additional five to seven years. This extra seasoning of your portfolio would make a world of difference.  Those who are preretirees may want to consider to start winding down their spending and try living on much less income, this will allow you to put more in savings and or get more debt paid off. It will also start you on a road of more discipline in your finances.

Sources: Federal Reserve, Bloomberg

Remember:

Training is everything. The peach was once a bitter almond, and the cauliflower is nothing but a cabbage with a college education.  - Mark Twain

The other day I was in a store that was having a closing sale nearly everything was 70% off. I struck up a conversation with the manager who was losing his job. I asked him about what he was going to do next. He told me that he had been with the company for 21 years and he was not sure, but he was going to just hang out until he decided and found the right opportunity. Then he said this, “when I learned that the two companies merged, and in the future there was a chance I might lose my job, my wife and I decided to get completely out of debt. So we have no debt and can live on very little.”  It was just over two years after the merger that we spoke and the store he managed was now closing. I though how insightful. I was thrilled to learn of another person who was debt free and had the freedom to choose what to do next.

Becoming debt free should be a goal of each person. I have seen young college graduates who have finished school with well over $200,000 in student loans. As one client was telling me it is “discouraging”. The bondage of debt is discouraging! And what do many young graduates do - load up more debt and buy a new automobile! This debt can be extremely onerous! Read more about auto debt here.

This weeks article is mostly coming from a friend, Shawn Lane who is the Chief Operations Officer at Financial Renovations Solutions, (FRS). His company has helped many people improve their credit score and at the same time get more of their debt paid off. Being debt free greatly strengthens your financial position. Simply put, It is FREEDOM. 

Unfortunately some people find that they have slipped so much into debt that creditors start calling and some accounts get sent to collections. Shawn provides some answers in those difficult situations:

Will paying off a collection account improve my credit score?

I get this question a lot. Although I would never suggest NOT paying your debts, you need to be very careful when paying a collection account. If you are 100% sure you owe it, then maybe you should pay it (more on this later). However, if your goal is to improve your credit score, paying it will likely have the opposite, negative effect.

The FICO scoring model treats collection accounts as closed accounts, and the balance on these accounts have no impact on your credit score. What matters most is “the date of last activity”, which is the date the original debt went bad, or the date of your last payment to the collection agency. This means that a $150 collection account from last month has more negative impact to your credit score than a $3,000 collection account from last year. Therefore, paying it will not increase your credit score. In fact, often times paying it will drop your credit score even more by creating new and more recent activity on this account. 

Further, paying a collection account does NOT remove it from your credit report. You end up spending your money and reducing your credit score.

If you plan to pay a collection account, first secure an agreement with the collection agency to remove the entire collection account from your credit report upon receipt of payment. Better yet, make them first prove you owe the debt by sending them a debt validation letter AND make the credit bureaus prove they are reporting the account 100% accurately on your credit report. If they can’t prove it, they must remove it! Utilize the Fair Credit Reporting Act and the Fair Debt Collection Practices Act, as these protect consumers like you and me! You will have a very good chance of getting the account deleted from your credit report, which WILL increase your credit score.

I know Shawn has worked with people all over and is straight up honest in what he does. He truly cares about his clients. If you would like to contact him, , he will provide a free consultation. Everyone of us knows someone who needs help with their debts, pass this article on to them, you never know what will really flip a switch with someone. I wish you the best of luck in obtaining real freedom, by becoming debt free.

Remember:

"Continuous effort - not strength or intelligence - is the key to unlocking our potential." ~ Winston Churchill

A couple days ago the Federal REseve raised its short term rate 0.25 points, on that note we hope tha it has not spoiled your holidays! Americans seem to love debt, as many use debt for major purchases and economist use debt as economic indicators. While Americans are paying off their debt in one area they are increasing it so much in another area that economist are now following that debt much more closely…

Debt…

Following the financial crisis of 2008-2009, bank loans and financing became very challenging for U.S. consumers. As the job market has improved over the past few years, more Americans are working, thus allowing them the ability to pay down left over debt from the crisis.

Demographically, most loans are taken out by younger consumers with growing families in the prime of their spending and borrowing years. Improving debt, characteristics of younger consumers, may also lend to better saving and investing behaviors as finances are managed better.

Delinquencies are a gauge of how well borrowers across the credit spectrum are able to repay their loans on a timely basis. Should delinquencies rise, it is an indicator of various factors, including weakening job market, lower wages, increased household expenses, and overextended consumers.

Over the past several months, delinquencies have dropped with an increased number of consumers paying their debt off on time. Such a pattern is an encouraging indication of improving consumer dynamics.

Auto Loans

Rather than struggling to get approved for a new home loan or refinance, Americans are instead financing cars, where getting a loan approval is easier. The ability of fresh loans available to car buyers is also helping to elevate auto sales dramatically throughout the country.

This past quarter, auto loans, outstanding reached $1 trillion for the first time ever. The amount of total auto loans is rising faster than the amount of mortgage loans.

The average car loan is approximately $21,700, with the average monthly payment at $400. The average purchase price stands at about $32,529.

As expensive as some automobiles have become for some people, an auto loan is the only method of actually affording the pricey cars of today. Over the years, several automobile companies have established their own financing thus allowing buyers to buy and borrow directly from them.

Economists have always placed a value on home mortgages, an indicator of economic growth, since homeowners must eventually furnish and maintain their valuable purchase. But now, the amount of auto loans being made is tracked by economists as yet another indication of consumer spending ability. An improving job market and stable wages have allowed consumers the ability of obtaining larger loans on more expensive cars.

Years ago I learned that most people (more than half) purchase a new car within six months after buying a house. I have watched many people do this over the years and then watched the struggles afterwards. Debt no matter the purpose is a cruel task-master. I encourage everyone to get out of debt, however fast you can, get out and stay out of debt.

I remember the old silly joke: if you are going to spend money on a car vs. a house spend it on the car, because you can always sleep in a car, but you can’t drive a house!

Source: Federal Reserve

REMEMBER:

The best pillow is a clear conscience. Merry Christmas