If You're A Saver,You'll Earn Less

When I seen the headline in this morning's online version of the news paper, I was worried. By the time I read the first paragraph, I was relieved.

Savers will earn lower returns on their money market and certificates of deposit as a result of the Federal Reserves decision Tuesday to cut the federal funds rate, a local banker said Wednesday.

The Fed's decision likely will weaken the U.S. dollar against world currencies, but on the other hand, certain borrowers may find a bit of relief in their interest rates.
- Topeka Capital Journal

Not very good news if you use these sources to save. However, that is exactly why Dave Ramsey advises avoiding Certificates of depression deposits. Instead, it would be better to save your (and mine) hard earned money in a good mutual fund with higher returns. Sure there will be down years. However, as Dave explains, if you do your homework and invest in a GOOD mutual fund, then even the down years will bring in more then these low interest payments.

There is some good news in the article though. If you have a wealth draining loan, specifically one that is tied to the prime rate, then you will see your interest rates go down.

Borrowers whose loans are tied to prime rate will see their interest rates decline following Tuesday's decision to cut the federal funds rate to 4.75 percent from 5.25 percent.

Bank of America and several other of the nation's largest banks cut their prime rates to 7.75 percent from 8.25 percent.

The prime rate is the rate that banks charge their most credit worthy borrowers and is a benchmark for pricing car loans and adjustable rate mortgage loans.
- Topeka Capital Journal

That is good news. However, again Dave Ramsey says to avoid Adjustable Rate Mortgage's (ARM's), for the very reason we have seen in the news in recent months. When the prime went up, many of the owners of these type of loans (those tied to the prime) found that they couldn't afford the loan payments any longer.

All in all, loans are bad anyway. They serve no purpose, other then to drain the wealth of those, with the attitude, "I want it and I want it now." They also make the banker rich, while draining your wealth. The better way, is to be patient, yet aggressive, with your savings, so that you can buy the item with cash.

If you borrow to buy a car, over the course of the 5-year loan you WILL pay twice as much, then you would have, if you had just paid cash. The same goes for a home (30-year) mortgage. In fact Dave believes a mortgage is the only type of loan anyone should get as long as it's for no more then 15-years. However, the more you save for that home the better, because it will keep more of your money in your pocket, when it comes to those interest payments.

The Fed's action will translate into a lower value of the U.S. dollar, experts said. The U.S. dollar has been falling the past six years from 90 cents for a euro to $1.38 for a euro Wednesday. The dollar isn't only weaker against the euro and the British pound, but it also is weaker at home as consumers are paying more for food, gasoline and other goods.

About the only thing that hasn't gone up in price this year is computing power, said Todd Reeves, portfolio manager with Capital Portfolio Management, Topeka.

"Milk is way more expensive, college is more expensive, computing power is cheaper, but everything else went up," Reeves said.

Reeves said the half-percent cut by the Fed was good for the stock markets because it will pump more liquidity into the markets.

The interest rate cut gives such banks as Citi, Washington Mutual and Bank of America more liquidity to deal with the subprime mortgage crisis, Reeves said.

"But it decreases the value of the dollar," Reeves said. "This may compound the inflation problem down the road. I don't think cheap money is necessarily the answer. There needs to be some reckoning. The mortgage industry got way too loose, way too easy, people were getting mortgages who five years ago wouldn't have qualified. These were people who had no business buying a house."

Financial experts said they didn't expect the rate cut to turn around the sluggish housing market.

Nor do I.

"We've got a long ways to go in the housing sector," Greg Fankhauser, president and chief executive officer of Heritage Bank in Topeka, said.

While in Lawrence (Kansas) on Monday, Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said the subprime mortgage crisis was far from over. Another 2 million adjustable-rate mortgages are scheduled to reset by the end of 2008, meaning homeowners' monthly payments will rise from low introductory rates.

Reeves said he likes gold, which is up 15 percent so far this year, now around $715 per ounce.

He expects big financial stocks to also do well this year.

While I am intrigued by a desire to own a bar of gold, I often wonder, if I did ever buy one, where would I sell it, when it came time to say retire.