Switching Gears In A Zero Interest Rate Environment

kcfield
  |     |   40 posts since 2012

According to the CME Fed Watch Tool, the Fed rate is projected to remain at 0%--at least through March 17, 2021. Since savings and CD rates will very likely remain historically low during this time as well; our choices as savers are to complain or to switch gears. Switching gears means changing mindset as well as strategy during this arid savings season. It means taking positive actions with respect to savings that do not depend on high savings interest rates. Let me suggest two in particular.

1) Emergency Savings: While some Deposit Account readers have long ago achieved this goal; many have not. It is essential--regardless of interest rates--to make sure that you have at least three to six months of expenses in an emergency savings account. This will create a safety net in the event of a crisis like job loss, unexpected medical expense, or major home repair. Whether a savings account pays 4% or 0%--you must have emergency savings--so this season is as good as any to get it established.

2) Debt reduction. Sometimes we forget that paying down a debt is like earning interest at the rate of the loan. For example, since savings rates are so low (and I am debt free except for my house), I recently made a 13K extra principal payment on my mortgage. My mortgage has a fixed interest rate of 2.875%; thus my principal payment was like earning 2.875% interest on the amount I payed down. If you have credit card or high rate loan interest, there is even a greater advantage. If you, for example, if your credit card has an interest rate of 10% and you pay down 2k on your balance--that is just like earning 10% on that $2000.00.

What about the fortunate Deposit Accounts readers who are completely debt free and have also paid off their mortgage? If that is the case, you know as much or more than I do, so I have little counsel to offer, other than to stay the course and keep your gaze on the long term.




deplorable_1
  |     |   134 posts since 2020
Very good points and I did pay off my mortgage the last time rates were at 0%. My mortgage was at 5.875% though and I couldn't beat that rate anywhere(safely). I personally would not pay down a mortgage with a rate of 2.875% since I can earn 5% on small capped savings accounts. Over 4% tax free using a 2% cash back card to purchase CD's and 3.04%-3.75% on various add-on CD's.
This is the toughest rate environment I have ever seen(since the Obama years) and aside from some bank bonuses you almost have to venture into the stock market with dividends to make anything decent yield wise. There is definitely a political war on savers going on and both parties have been hammering us on the rate front. Those of us with savings are considered "rich" and expendable. The only hope is for a big economic recovery with inflation to force the FED to hike again. For that to happen we need to stop the fear over this virus with either a vaccine and/or more therapeutics and open everything back up 100% and that would include schools this fall.
kcfield
  |     |   40 posts since 2012
Deplorable: That is quite ingenious: initiating CDs with a 2% cash back card! I didn't know that was an option at some financial institutions. Indeed the development of a vaccine or significantly symptom reducing therapeutics with respect to Covid-19 are essential. The inextricable link between medical safety and economic recovery is a unique challenge. With respect to paying off a house, there is respectful disagreement among wise savers. One school says to pay down a mortgage only to the extent that better returns are not available through other saving strategies/vehicles--I respect your position on that. The other position is that paying off a mortgage allows for significantly higher financial freedom during retirement and emotional peace of mind, as it reduces monthly costs so drastically. In this mindset, while paying down a mortgage would still not take precedent over emergency savings or maintaining adequate cash flow; it might take precedent over higher rate of return options.
deplorable_1
  |     |   134 posts since 2020
I hope you didn't take that the wrong way it wasn't a criticism you just have a good mortgage rate IMO. Your advice is sound and I have seen disagreements on whether or not to invest vs. pay down the mortgage which is a guaranteed win. I just lost a good chunk of change in the market when this covid crisis hit so no guarantees there either. At least I made most of it back recently.
This may sound crazy but I actually paid off my mortgage with a long 0% no fee balance transfer from Bank of America for 21 months @ 0%(targeted offer). I had to first write a check to myself and deposit it into the bank and let it clear but it worked. At the time rates were 0% at the FED and CD's were 2% tops so I figured 5.875% return was pretty good.
I got in late to the funding CD's with a credit card game as some FI's allowed from $10,000 to even $100,000 in credit card funding. Most of those deals have dried up now or the cap is very low like $250 or less. Then you need to make sure it will be treated as a purchase and not a cash advance. So far I have been lucky.
Recently with banks not giving you balance transfer checks to deposit to take advantage of 0% no fee balance transfers I have combined these 2 strategies together. I did a targeted 15 month 0% no fee balance transfer from NFCU to my Citibank 2% card and then used the negative balance to purchase multiple 6 month CD's bringing the balance to $0. All without having to write any checks or requesting a credit balance refund from Citi since I just spent it down. I call this the "corona" method.
I'm starting to run out of ideas though as even most 0% no fee balance transfers have disappeared recently as banks have been trying to cut down or risk due to this virus and layoffs I'm sure.
kcfield
  |     |   40 posts since 2012
Thanks. No criticism taken. I was fortunate to find a local family owned bank that beat every other fixed mortgage rate by nearly 100 basis points. Our particular fixed mortgage is 22.5 years, which worked well for us. Speaking of 2% cash back cards--that is another savings vehicle for us. I have a Fidelity cash back credit card, so my 2% cashback goes into my regular investment account (no annual limits on the 2%).  I earn about 1200.00 a year cashback with that card, and use my Pen Fed credit card for gasoline only as it is 5% cashback.
deplorable_1
  |     |   134 posts since 2020
For sure maxing out rewards credit cards is a good way to earn passive income while spending. I have several 2%-5% rewards cards and can earn up to $3,000/yr. because of the 5% quarterly categories mostly. I even charge all my utilities and get 3% back with the Huntington voice card.
If you have Speedway in your state check out their free rewards program combined with the Speedy rewards MasterCard. It's a points based system and it took me a wile to learn all the tricks but I get around 7% cash back on gas 24/7. You have to buy the gift cards with the Speedy credit card then you get bonus points and use those to buy your gas. You save up points for the $200 free gas card and you even get 2-7 cents off per gallon while using it. I usually get from $400-$600 in free gas every year. I count this as cash back.
kcfield
  |     |   40 posts since 2012
Good work turning the maxing out of reward cards into part of your financial strategy. We don't use Speedway because they do not use top tier gas, but that is another topic and forum.
Ally6770
  |     |   2,923 posts since 2010
I joined Costco when they started using Top Tier and use my PenFed 5% off on gas card there. I use my city name and put gasprices.com after the city name to find out what the price of gas is at Costco before I leave the house and I top off the tank if it is low. I go by it on the way to the stores or to the doctor etc.
kcfield
  |     |   40 posts since 2012
Good strategy. We use Pen Fed credit card as well for gas due to the 5% cash back. As you probably noticed, Pen Fed's redemption points used to be worth a penny each (meaning a true 5% cash back) but now are worth somewhat less than a penny, so that the effective cash back is somewhat less (e.g. takes 2940 points instead of 2500 points to get a 25.00 Amazon gift card). But still a good deal for gas cash back.
Duck
  |     |   82 posts since 2010
Now I use to have the Pen gas card some years back like around15yrs now yeah I'm old but did they change it back or something I got rid of it cause they were going to start charging $50/yr for the pleasure of using their card ???
kcfield
  |     |   40 posts since 2012
Duck, we have the Pen Fed Visa and there is no annual fee. Still get the 5% cash back (though see my caveat above about Pen Fed's redemption points). You might check out their website for zero fee options with the 5% gasoline cash back.
111
  |     |   126 posts since 2019
I still carry my old PenFed 5% gas cashback Visa. It offers a true 5% cashback (their “points devaluation” several years ago did not include their cashback cards). However, about the only thing it saves you much on is gas - even for items bought inside the gas station, there's no 5% off. I'm pretty sure you can't get this card any longer. However, they do have a points card offering 5% on gas paid at the pump (worth about 4% or so), with a $100 statement credit. No annual fee.
deplorable_1
  |     |   134 posts since 2020
For a true 5% cash back at all gas stations try the Sams's club/Synchrony bank MasterCard. It also has a great 3% cash back at all restaurants and travel. I have it and it works great for when there is no Speedway around while traveling.
Duck
  |     |   82 posts since 2010
Yes think it works great that's the 1 I got also plus Id say an this is being conservative 8 out of 10x Sam's/Costco have the cheapest price here in Texas. That aside honestly don't care for Syncrony but they do give 5% at every single solitary station they changed it this year it use to be only 5% at non competitors in other words Kroger an the likes of Buc-ee's and of course Costco(Not sure if thats still blacklisted or not do not belong to them anymore) lol. An the rewards are given yearly in Feb an you can either get cash at cs desk in any Sam's or use it to purchase crap.
deplorable_1
  |     |   134 posts since 2020
Yeah that's the only downside of both the Sams and Costco cards. You have to wait a year to cash in and go into the store to get the cash. They both give 3% on restaurants and travel though.
I started using the NFCU Amex rewards card for the 3% on restaurants and grocery stores now as it has no cap and you can cash out at any time for $50 and above. It beats even the actual Amex card which I think has a $6,000 annual cap on the 3% rewards. With the way food inflation is going this saves me quite a bit.
Duck
  |     |   82 posts since 2010
Yes but only restaurant I really go to is Joe's in Allen cause I can not make a real NY style pizza but everything else I just cook myself feel safer never know what places put in things guess I watched to many Kitchen nightmares lol.
Do wish they would let ya draw it out monthly with the Sam's though and I went by Pen fed they have changed em an do not have the green one or the platinum I use to have I just don't care for points an kinda remember the system was not favorable like it was more points than the visa card you would get if memory is correct like 22500points for $20 55k points for $50 an so on) IDK if that's changed???. But if they ever come to their senses an offer a normal CD again I'll check em out as their rates have really been in the garbage for a # of yrs I kinda cut ties with them after my last CD there matured
deplorable_1
  |     |   134 posts since 2020
The NFCU AMEX is 3% on all food including restaurants, fast food and grocery stores.
I usually stay away from the "points" based cards but as long as 1 point = 1 cent and you can opt for cash back with no reduction in rewards the points cards are fine.
You really have to do the math with the points based rewards cards as the point value can be all over the map. Many of the points cards are only worth 1/2 a cent or less when redeeming rewards for cash. These cards are a scam and take advantage of those who are math challenged.


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