I am a Financial Profossional providing financial services and all insurance needs.
Hello: My name is Lance I am the owner of my own company, RL Price Finance & Insurance. As the name says it I provide financial service and advice. I am also a Muliti-line insurance specialist. I provide all property and casualty insrances, life and accident, for both individuals and businesses
Mission: My mission is to help individuals, families and businesses create a never ending chain of income and protection.
summitws-co.com Currency has been around for a long time. Here’s a quick history lesson.
So, in my very first post, which was well over a year ago, I asked everyone three questions about the future economy. Since, now one answered the questions I thought I would ask them and give you my opinion for your thoughts and review.
1. Do you think we will have a financial debacle in the future such as we had in 2008?
One thing that is for sure, unlike lightening, financial strikes can happen more than once. Obviously, we have had more than one recession and have had numerous recoveries, as well. But one thing that I think might lead to another “crash” is when people start borrowing money so they can borrow more money. Or borrowing money to pay off a debt. I think some savvy financial gurus can handle this, but for the most part, I see people borrowing to pay down loans and ending up with multiple loans limiting their ability to pay off their original loan.
Such was the situation in the mortgage industry in 2008, and I think some of this is happening again today.
2. How about social security? As a subsidy, is social security going to be enough to maintain your standard of living during your retirement?
In all actuality, most people know the answer to that, and it really was never formulated for that purpose. It was started as a kind of bonus to those who lived past their life expectancy. But now, especially since most people live decades past their retirement age and considering inflation, it is just a drop in the bucket as a subsidy to a generation X future retiree. Glad I’m not a millennial.
Many of my clients don’t even include it in their retirement plan.
3. How about market risk? Do fluctuations in the market make you nervous?
Well, from the standpoint of losing your principal, did you know that there is a way to ward off a financial debacle, add to your retirement bucket and at the same time mitigate, even eliminate market downfalls?
You’re going to have to call us if you want the answer to that question. 303-667-4278
Thanks for reading.
Inflation Risk – Go Broke Slowly
Inflation risk refers to the problems that investors face when prices rise. In general, prices have tended to rise gradually and continually over time. For the most part, rising prices are barely noticeable – but the effects can be dramatic over long periods of time. Of course, there are also times when prices stay stagnant or even decrease, but for the most part prices have risen throughout history.
An Example of Inflation Risk
You may wonder what all this talk of “rising prices” is about. For a basic example, look at the price of milk. In 1960, a gallon of milk cost $0.49. The Bureau of Labor Statistics shows that in 1995 the cost was $2.47, and the most recent price available is $3.43.What can you get for a nickel?
You might not care that much about milk, but the prices of most other things move in a similar fashion. Perhaps you’ve heard people older than you talk about how much they paid for their first house, for example, and you also will see prices rise over your lifetime.
What’s the Risk?
The fact that prices go up may not seem like such a bad thing. In fact, you may actually want the value of your house to rise because you’ll earn a profit. But you already own your home. There are plenty of other items, such as food, that you’ll need to buy for many years to come. If you’re alive in 20 years, there’s a good chance that you’ll want to buy a loaf of bread at that time.
A problem arises if you don’t have enough money to pay for things in the future. You might have a lot of money saved up right now, possibly even enough to cover your annual expenses 20 times over – but that doesn’t mean you’ll be able to afford anything in 20 years. The prices you’ll pay for most things will rise, and you have to budget for those increases. The longer you live in retirement, the more important inflation becomes. That’s why inflation risk is closely related to longevity risk.
Inflation Risk and Investments
It’s essential to consider inflation if you’re an investor. Inflation risk can cause problems in the short term, as well as over the long term.
For long term investors, it’s fairly easy to see why inflation is important: you’ll be better off if your investments grow faster than the rate of inflation. Unfortunately, you typically have to use riskier investments (investing at least some of your money in the stock markets, for example) to outpace inflation. Conservative investments like bank accounts and bonds may appear to earn money, but you also have to look at your purchasing power: how many gallons of milk can you buy after inflation with the money you invested? If your money isn’t growing in “real” terms (that’s another way to say “after inflation”), you’ve got a problem. Either you need to come up with more money, or you need to try to outpace inflation, or you’ll have to learn to live with less.
Want an example? Let’s say you earn 1.5% per year on your investments. That’s about what you can earn from a CD or a short-term investment-grade bond fund these days, more or less. You might be perfectly happy with that return because you’re using conservative investments, and your risk of losing money is fairly small. But what if prices are rising at 2% or 3% per year? You’re actually losing money. It may not seem like much, but over the course of many years it will certainly add up. If you just keep your short-term money and emergency savings in the bank, that’s fine – it’s the price you pay to have your cash available, and you can’t afford to lose that money. But you need to have a good reason to keep long term money in conservative investments (perhaps that portion of your portfolio is providing diversification and a buffer against market crashes, or perhaps you’re aware of the issue and you just prefer not to take big risks because you are unwilling to lose money).
What about shorter term risks of inflation?
Inflation risk is especially troublesome for people who are heavily invested in fixed-income investments like bonds. Why? There are two reasons, but they’re both kind of the same.
First, interest rates typically rise during periods of inflation. This is partly due to the Fed’s attempts to slow down the economy (when things get overheated, prices rise more quickly than some would hope). When interest rates rise, bond prices tend to fall – especially longer term bonds. As a result, seemingly “safe” investments can take a hit, and that comes as a nasty surprise to many conservative investors.
In addition, bond investors typically receive a “fixed” income. That means their income won’t rise along with inflation, and it won’t keep up with the rising prices of things they want to buy. When your salary stays the same but your cost of living rises, things get unpleasant.
Finally, inflation can potentially be bad news for stocks as it gets harder for companies to keep earning profits. It costs more for them to borrow as rates rise, and their costs for materials and payroll also increase. However, inflation doesn’t affect stocks in nearly the same way as it affects bonds.
Managing Inflation Risk
So, what can you do to protect yourself against the effects of inflation? Perhaps not surprisingly, the best thing to do is diversify and think long term.
Certain types of investments are able to help you manage inflation risk. But the flip side is that you’ll have to expose yourself to market risk. You should never have too much of anything, but having some exposure to inflation-fighting investments is probably a good idea (unless prices start falling…). The most basic of these investments is an investment in the stock market. Yes, it’s true that stock markets can suffer when inflation heats up, but over the long term stocks have tended to outpace inflation. If you’re planning for a long retirement, or if retirement is a long way off, it may make sense to have some exposure to stocks.
Other investments, sometimes called “alternative” investments, may also help. “Real assets” or things that you can own, see, and touch, are typically considered to be good inflation fighters. That includes any real estate or precious metals you own, and indirect investments in those types of assets (mutual funds or ETFs with exposure to real estate or metals). You might also include commodities in this category. As with many things in life, moderation is key, and you don’t want to load up too heavily on any one thing.
Last but not least, Treasury Inflation Protected Securities (TIPS) often come to mind when thinking of inflation. These are bonds issued by the US Government, and the value of your investment adjusts according to inflation. In other words, you’re supposed to be able to take out (in terms of purchasing power) the same value that you put in. But these investments are far from perfect, and losing money with TIPS is very possible.
You should also plan for inflation when you plan for long-term goals. If you’re retiring next year, you might have some idea of what your annual expenses are, but what about your expenses in 10 or 15 years? They’re probably going to be higher, and you need to build that in to your retirement projections (you have done retirement projections, haven’t you?). In other words, you need to give yourself a raise every year in retirement to keep up with rising costs. You might even do several projections, including a “high inflation” scenario, just to see how your savings would be affected. It may turn out that you need to save more money or change your expectations – but it’s better to know that ahead of time than to run out of money.
If you own bonds, be aware of inflation risk. Longer term, high quality bonds tend to suffer the most, so you may want to start reducing exposure to those long before inflation rears its head (don’t try to time it just right). Shorter term bonds, although they pay less, aren’t affected as much. Floating rate bonds, tend to do okay during periods with rising interest rates, but they are riskier than investment-grade bonds for other reasons, so be careful and do your homework.
Can You Avoid Inflation Risk?
It’s hard to imagine how you can completely avoid inflation risk. If you could somehow pre-pay for everything you’ll need in the future, you might pull it off. But, in the case of retirement, that’s simply not possible.
When Will Inflation Come?
That’s another toughie. Very smart people often disagree on this, and timing anything in the economy is just plain difficult. As with most things, it’s best to manage your risk ahead of time – put yourself in a position that you can afford to be in if and when it comes. If it never comes, maybe you can think of your efforts to manage inflation like an insurance policy. Sometimes it’s worth taking precautions.
The Federal Reserve raised its benchmark interest rate on Wednesday for just the second time since the 2008 financial crisis.
Economists talk a lot about the impact this will have on markets, but what about everyday consumers?
The Fed’s decision can affect the cost of housing, cars, student loans and even the interest on your credit card — though not all necessarily right away. And when the Fed raises rates, all sorts of other expenses eventually tick up.
The move is part of what will be a slow, upward climb for what’s known as the federal funds rate. Banks are ordered by law to have a certain amount of money in reserve, so they typically make overnight loans to each other to keep those balances up. The federal funds rate is the level of interest that applies to those short-term loans.
Because the rate has been close to zero since 2008, as part of the Fed’s strategy to bring the nation out of a recession, there’s hardly anywhere for it to go but up. As the economy improves and President-elect Donald J. Trump unveils his stimulus package, economists expect rates to rise steadily over a period of years.
“The bottom line, ostensibly, is that the economy is getting stronger,” said Dean Baker, co-director of the Center for Economic and Policy Research. “Nobody in their right mind would say, ‘I’d rather have higher unemployment and lower interest rates.’ Nobody wants to pay a higher interest rate, but I think that’s an easy choice for most people.”
If you’re going to buy a home, chances are that you will opt for a 30-year, fixed-rate mortgage. Most home buyers do. Those loans have become remarkably affordable, especially since the financial crisis, with their interest rates bottoming out at around 3.5 percent.
In general, movement of the Fed’s rate does not have a large, direct impact on long-term mortgage rates. But when the Fed’s rate goes up, banks find ways to pass their higher borrowing costs along to consumers.
And because long-term mortgage rates are set in stone, they also factor in the anticipation of future rate increases. That’s part of why mortgage rates have been shooting up in recent months: The Fed has suggested that interest rates are likely to continue rising for years.
The average interest rate on a mortgage this month is 4.3 percent, according to LendingTree, and the average loan on a 30-year, fixed-rate mortgage is worth about $237,000. If the borrowing rate were to rise by, say, another percentage point in the coming year, this would mean an additional $138 a month on the average mortgage — leading to nearly $50,000 in added interest over the duration of the loan.
As mortgage rates go up, people are a little less likely to buy a house, and those with fixed-rate mortgages are less likely to refinance (because they probably will not end up with a better deal).
An uptick in the Fed’s interest rate might cause the interest rate on credit cards to bounce by one or two percentage points. Credit Tamir Kalifa for The New York Times
An interesting wrinkle is that as a result, volume — that is, the amount of new mortgage contracts being issued — goes down. So brokers could also start loosening their requirements for new mortgages.
Credit card rates
The annual percentage rate on your credit card can be anywhere from 15 percent to 20 percent — much higher than the interest rate on a mortgage or a car loan.
An uptick in the Fed’s interest rate might cause your credit card’s A.P.R., if it’s variable as opposed to fixed at a specific rate, to bounce by one or two percentage points. The effects of that can be larger than they may initially seem, in part because the interest compounds. That is, you begin to pay interest on what you owe and the interest that you have been accumulating on that.
“If you’re accumulating credit card debt for a year,” said Markus K. Brunnermeier, a Princeton economist, “moving from 13 percent interest to 15 percent is a much bigger deal than moving something from 1 percent to 3 percent.”
Rates for student loans, like other forms of borrowing, are at a relative low. But as the Fed’s rate rises, that will change for those just starting to think about paying for college.
Federal loans are tied to the 10-year Treasury rate, which factors in the Fed’s anticipated interest rates over the coming decade. Because these rates are projected to tick up steadily by the Fed’s own forecasts, students planning to take out loans in the next few years can expect the government’s student loan rates to rise.
“Students taking out new debt will be looking at higher payments,” Dr. Baker said, adding that he expected rates could rise by one or two percentage points in the next few years.
Rates for car loans, too, are already climbing in response to the Fed’s expected move. Auto loans tend to last only a few years, so there is still time for car buyers to get ahead of the curve.
That’s because the Fed, in its most recent economic projection, predicted that interest rates will continue climbing into the next decade. A few years from now, a car loan issued in 2017 could be fully paid off, and interest rates may still be on the rise.
“If you’re thinking of buying it now or in two years’ time, you should buy it now,” Dr. Brunnermeier said.
What about renters? An interest-rate increase may also affect them — just not as directly.
Higher rates mean that landlords must pay more to purchase and renovate their properties, so in the long run, those are costs they could easily pass on to renters — though it’s not necessarily a given that it will happen.
And with the labor market improving, workers’ wages could rise at about the same time as rent prices, said Stephen D. Oliner, a resident scholar at the American Enterprise Institute and former member of the Federal Reserve Board. “It’s possible that with their wages rising, people will be able to keep up with the higher payments on their rents,” he said.
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