Liquidity! It Affects Everyone, Not Just Big Banks

Image from https://www.treasuryandrisk.com/

You might have heard about the markets having “liquidity” problems, but to the average Joe, this could sound like technical mumbo jumbo.  I mean, how does liquidity in the markets affect you?  Believe it or not, it can massively affect you.  Besides inciting panic in the stock market, which probably has affected your investments since late February, lack of liquidity means there is less cash out there to lend.  For a few weeks, this made it difficult for people already in a home purchase contract to close on the deal without paying a premium interest rate for their new mortgage. 

Most conforming loans are made by a mortgage lender who fully intends to sell your loan on the secondary market, typically to a real estate investment trust (REIT) that takes capital from investors, ranging from ordinary people to big funds owned by the likes of Vanguard or Fidelity.  The REITs also take out loans from big banks to buy more loans.  Then, when people pay their mortgages, the cash from those payments flows through the REITs to pay off principle and the interest is distributed to shareholders as dividends.  The principle in reinvested into new mortgages, and the cycle of life continues.  The main investor draw to REITs is their high dividend yields.

In March, something crazy happened related to the Coronavirus crisis.  Some of those big banks called the loans made to the REITs.  Why?  The banks were worried and wanted to get some cash to act as a safety net in case cash flows from operations waned significantly.  The REITs didn’t envision being so unstable that the banks would ever call the loans due.  At the same time, stocks like AGNC and MITT dropped by as much as 80%.  MITT could not come up with enough cash to pay back the called loans, and many feared default.  Lucky for the REITS, their knight in shining armor, A.K.A, the Fed rode in on their shining horses and bought up some of the REITs’ holdings at a discount, potentially staving off a wave of bankruptcies.  This also shored up the mortgage market for future loans.  This situation is a case-in-point on how delicate the economy is.  Liquidity is everything. 

Without the government providing free capital to all of these REITs and banks, mortgage rates would go much higher.  This was the case for many years.  I remember in the 2000s, a 5.50% interest rate was fantastic.  A good rate in the mid-1990s was 9%.   I also remember earning 4-5% on my ING savings account.  I would be elated for rates on my savings like that now.  I keep chasing a 1.40-1.70% yield on savings and the banks keep dumping the rates because they can get cash for less from the Fed.  Banks make their money on the margins of what they pay out in interest and what they charge on loans and credit cards.  When you deposit your money in a bank, the bank keeps a mandated reserve and can loan the rest.  If they fall below this threshold at the end of each business day, they take an “overnight loan” from the Fed at the low, low rate that you hear about in the news constantly.

Liquidity makes the capitalist market ebb and flow.  Many may talk badly about day traders or big fund managers, but the cash coming into the markets is what keeps prices real.  If they were not there, trading every day, you would never be able to sell investments out of your 401(k) and retire.  Everyday traders keep things going, even though some view Wall Street as criminal, the reality is most are out there working hard so that those who put money into the markets get a healthy return over the long term and can make their dreams come true.  The alternative is Social Security, which we know isn’t enough on its own for most to live a comfortable life in retirement.

So, all hail liquidity!  It’s essential for a smooth-running economy and stability for you and me.  To work, it needs a good balance of those who want to lend or invest and those who want to borrow and pay back the principle and interest, as scheduled. 

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Disclaimer:  William owns AGNC and has recently traded MITT.  He also owns shares of SRET, an ETF that holds a range of REITs.  This article is not intended as investment advice.  Please consult a licensed investment broker for complete investing advice that aligns to your risk tolerance.

If You Want to Retire, It Takes Money to Make Money

Everyone has different ideas on how they should spend (or not spend) their money and that is fine.  If we all did the same thing, our economy would be vastly different and highly predictable.  However, I hear a great many people say they can’t get ahead or can’t afford to save, whether for a rainy day or retirement.  My question back to them is how can you not afford to save? 

Image from learn.stashinvest.com

In an earlier post, I talked about how difficult it was to save and all the mistakes I made.  It was difficult for me to get started as well.  I did not start contributing to my 401(k) plan at work until I was 25 years old.  I always had an excuse, yet when I lived in Southern California, I always had designer clothes from Abercrombie & Fitch and was eating out quite often.  Keeping up appearances and going out was my thing back then and my income was much lower that it is today.  So many people, especially younger ones, spend to keep up with their friends, coworkers, and even strangers they are somehow trying to impress for no known reason. 

There is always something to spend on, but you have to make saving a priority.  Most who don’t save likely don’t budget.  Having a clear vision, or some kind of long-term idea, of what you want to see happen with your money over time is the first thing on the saving to-do list.  You don’t just save for the heck of it!  Life is short and you really need to have goals set.  Retirement may seem like it will never come when you’re younger, but trust me, you will wake up at 35 or 40 and suddenly remember your 10th or 20th birthday.  You are now 20 or 25 years away from 60, where you could retire on a 401(k) or Individual retirement account if you had enough saved.  Time will march on and you need to be ready.

If you can only save for one thing, save for retirement.  Social Security is not enough for most to live on today, and according to the Social Security Administration, benefits will likely erode over the coming decades.  Health care will likely need to be a larger part of your budget as you get older if you want a good quality of life or to live a long life.  I have learned from my mother and her recent change to Medicare still requires a supplemental plan to not have prescription drug costs and other procedures wipe out her savings over time.  While the plan is affordable, it is an additional line item many don’t have today. 

For those who make it to their golden years and have issues with retiring due to income, the problem isn’t whether they invested in mutual funds, stock index funds, or some other diversified way of building wealth, it’s that they didn’t put money aside to grow.  That is why this article is called It takes money to make money, because if you do not put anything aside, just like if you don’t plant seeds in the spring, you will not have a harvest to reap later on. 

Make a small sacrifice of three to five percent of your income and your older self will thank your younger self in your elder years.  It’s never easy to cut back or see your take-home-pay shrink, but you are actually just delaying pleasure.  That money will be there in the future, except it will have grown much more than what you originally contributed.  If something happens to you before retirement, you will be leaving a legacy for your spouse, kids, or whomever you designate as a beneficiary.

What was your turning point?  What made you start saving for retirement?  Was is being automatically signed up for your employer’s 401(k) plan, or did you make the decision consciously?  If you aren’t saving, what is your reasoning?  Please leave me a comment.  Thanks for reading!

Easy Tips for Making Your Savings Goals Achievable

For many people, saving money in a bank account is a real struggle.  Everyone knows they should save, but many are confused on techniques to be successful.  Questions such as “should I save for retirement or an emergency fund?” or “how can I save in my already strained budget?” are common.  I will touch on a few roadmaps and strategies I have used to become successful at saving money.

The first technique I use seems pretty simple.  I just use my workplace 401(k) plan to scrape my retirement savings off the top before I even see my net pay.  Think of this like a tax payable to you at some point in the future.  While Social Security is somewhat of a safety net, it likely won’t provide enough for a comfortable retirement, especially with the rising costs of healthcare.  Saving something, especially in your younger years, will pay off big because the money has more time to grow.  If you start saving later, then you will likely end up having to more to retirement, with less time to let your investments compound.

There is no hard and fast rule about how much you should allocate to this, but the more the better.  Dave Ramsey’s retirement page suggests 15% of your gross household income, not including any company match.  While 15% is a great number to shoot for, this may be difficult for those just starting out in their field or those that have student loans weighing them down.  In addition to Dave Ramsey’s site, Fidelity also has a great set of calculators you can use for free to get an idea of what you need to save.  If your company has a match, contribute at least the minimum to receive the match because this is “free” money, or at least extra compensation that can grow and can be worth much more down the road.  If you are up to your ears in debt, then I would recommend stopping any retirement saving and putting every extra cent into paying down high-interest debt.  Another tip, don’t turn down your savings so that you can “afford” a new car with a high payment or a house that is too expensive.  The older you, at age 65 will thank you for having self-control!

The second technique is using a zero-based budget that includes a line item for saving.  Now that your retirement fund(s) are automatically accumulating, you don’t need to have a line item unless you have separate accounts that pull from your net paycheck or net income, if you are self-employed.  Start with your expected monthly net take-home pay and list out your expenses. 

You should have some room built in for savings.  I typically plan out my expenses for each paycheck and there is something left over.  Sometimes it is a small amount, other times it can be a good chunk of money.  Maybe you can’t save on some paydays but can save more on some others?  Either way, you should have savings for an emergency fund, then savings for other goals such as a new car, house down payments, college tuition, and so forth.  If you don’t have anything special to save for, really evaluate your future needs for big-ticket items and plan for something to need replacement.  There is always something that you can be saving for to avoid going into debt in the future. 

If you don’t have enough money for savings or extra debt payoff, you need to think about what you can cut to get more money in your budget.  If you have cut to bare-bones and are still coming up short, think about how you can grow your income.  Side hustles, or second jobs, are a good way to plug your budget holes, especially if the cash flow crunch is temporary due to paying off debt.  If the shortage is permanent, think about what you can do to increase your income permanently, whether applying for better paying jobs, or re-training for a more lucrative career. 

My last tip is to always be looking for “found” money, or windfalls.  These can be great ways to build up your savings faster than planned.  Income tax refunds, credit card cash back checks, birthday gifts, or refunds are all common and can boost savings quickly.  Also look around the house for items you no longer use and try to sell them on Craigslist, LetGo, NextDoor, or FaceBook Marketplace.  Social media makes it so much easier to sell things quickly while decluttering our homes.

Be sure to sock that money away in a safe, FDIC insured, high-yield savings account.  Some online banks are offering accounts with yields between 1.5% and 1.75% APR.  This is far better than the standard .05% paid by many large national banks.  You can visit NerdWallet.com for a review of the best savings accounts, plus ones with one-time bonuses for depositing larger amounts. 

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Looking on the bright side of things: Unintentional savings during the COVID-19 lockdown

Another day of social distancing, self-quarantine, and isolation is in the books in hopes of curbing the spread of COVID-19.  The debate continues in Washington, D.C. on how the economy should be propped up, and the stock markets took a little more of a stumble today, which is seeming the new normal.  This prompted me to think about controlling my outgo as opposed to hoping for a government bailout.  This lockdown of society is helping me to spend less.  I thought about how my inability to go out to dinner with friends, shopping malls, or the movies has cut my spending in recent days.  My gasoline usage is down about 90% from normal.  Not to mention the fall of oil futures has impacted the price we are seeing at the pump, which is compounding the savings. 

I did go out on Saturday, sanitary wipes in-hand, so that one of my Great Danes could get her scheduled vaccinations, and happened to be near the Home Depot.  I stopped in for a few items needed to get some things done around the house.  Besides reading, homework, and intensive home sanitizing, I have been able to get outside and start some spring projects such as pruning and recovering the backyard from the dog-pee fest that gets left unchecked because of the cold weather.  One of the Items I picked-up at Home Depot was a Simple Green Outdoor Pet Oder Eliminator.  This was my cheap Saturday entertainment! 

Normally, I would be going out the get lunch and hit up multiple grocery stores for sale items and impulse my way over budget.  However, to reduce exposure to the outside world, I made a list and sent my roommate and friend out to execute my list, which saved me money because he is great at not adding extra items to my list.  I also didn’t get to go to other stores like Marshall’s, Target, or Kohl’s for the same reasons, or the fact they are closed.  To boot, I have been eating at home since I’m working from home, which is saving me at least $10 per day over going into the office.

Your savings could be growing! Image courtesy https://www.myfinance.com/how-to-save-money/

I also have been making due with what I have because it is more difficult to just pop out to the store.  Instead of shopping for a new rug for my office that was recently re-arranged to make it more work-from-home friendly, I remembered I had a rug shoved under my roommate’s bed.  Albeit, it is eventually going back to the living room when my roommate moves his stuff out, it’s better than nothing under my office chair, which has a tendency to mar the floor if not on a rug.  Quite often our propensity to easily go out and buy something new makes us forget about old things stored away in closets or the garage.  I am planning to use more of this time to go through and really assess what is needed and what can be donated when this all passes.  You may be surprised at how those clothes fit that you put away two years ago?  Maybe you’ll fall in love again with that pair of jeans or a shirt that you had forgotten about?

In this time of uncertainty, get your mind off the news and think about the bright side of things.  Maybe you are like me and working from home and saving all that commute time?  If so, make sure you are using that time productively.  Make more food at home, try to resist ordering out unless you are financially secure and just have those funds in your budget.  We will make it through COVID-19 and eventually, things will return to normal. 

Have you been able to save money on day-to-day expenses like food, gas, or groceries?  Have you been able to cut childcare expenses if you are working from home?  Reply to this blog post and let me know!