Frugaling

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The Curious Case Of Rising Interest Rates

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Watch your savings rate!

On Wednesday, December 16, the Federal Reserve opted to raise interest rates for the first time since 2006. The Fed pointed to healthy economic indicators – specifically, job growth – as the key motivator for action. Chairman Janet Yellen explained that rates would rise from 0 to 0.25 to 0.25 to 0.5 percent. Experts are suggesting this is just the beginning for rate hikes.

I’m not a Federal Reserve expert, fan boy, or aficionado. Nor have I spent years chastising its existence and advocating for a gold standard (I’m looking at you, Ron Paul). But I fundamentally understand the borrowing window. When the Fed keeps rates low, it makes borrowing cheaper. Vice versa, higher rates tend to make borrowing more expensive. Rates can also discourage or encourage greater savings rates.

The Federal Reserve seems to hold the reins on savers. As an advocate for frugality, I wondered how banks had changed their rates since last Wednesday’s decision. CNBC reported that Wells Fargo, JPMorgan Chase, and U.S. Bancorp “almost immediately” changed their “prime rate” (for borrowing). With a higher prime rate, new borrowers would see more expensive car loans, credit card interest, and home mortgages. It should bring new revenue to the banks, too.

A couple days ago I received a notification regarding my American Express credit card. Despite perfect payments, a near-800 credit score, and constant monitoring, my interest rate was being changed. The credit card would now inflict a 22.49% interest rate for carried balances. In other words, if I purchased something and wanted to pay it off over time, I’d be taxed an extra 22.49%. The move corresponded perfectly with the Fed rates, as my interest rate was previously 22.24% (still astounding).

When it comes to credit and borrowing, the changes were swift. Curiously, my savings rate remains unchanged. I still receive 0.10% and 1.00% for my Ally checking and savings accounts, respectively. These sit stagnant. While I understand that banks have an interest in protecting and securing greater profits through higher borrowing rates, I’m struggling to see the same “immediate” benefits for savers. Where is this additional quarter-point interest rate to encourage more savings?

It seems banks play the best of both worlds. When rates lower, they advertise and sell huge amounts of loans. Suddenly, the economy becomes bloated with cheap money and people spend instead of saving. And then higher rates create reason and rationale for banks to raise loan rates, with little care for updating savings rates.

Unfortunately, as banks keep rates low, the average saver suffers. Many low income and vulnerable populations rely on strong savings rates, but haven’t received them for years. Heck, I remember a time when my savings account paid 2-3% interest. Those days seem to be long gone — even with higher rates on the horizon. Today, savings rates can’t even keep up with modest inflation. Maddeningly, putting more in savings simply means you’re losing money each month!

As we consider this double standard in the banking world, let’s consider what we can do and where there’s money to be made:

1. Stay on the capital side

There’s power in capital. Whether you’re lending cash through peer-to-peer lending programs or investing in rental properties, those who put their money to work are handsomely rewarded. The game doesn’t shift much when interest rates change moderately. However, if you don’t have much savings, it’s important to build a little egg before engaging in these tactics.

2. Invest your spare cash

If you’re unable to buy real estate or invest larger amounts in lending, make a simple portfolio to invest your spare cash. There are various platforms that can automatically invest spare change, but nothing is easier or cheaper than opening a Vanguard account and choosing their exchange traded funds (ETFs). I’d recommend Vanguard Total Stock Market ETF (VTI) and Total Bond Market ETF (BND). Together, they afford rapid exposure to the markets with reduced risk due to diversity. Depending on your risk allowance or aversion, portfolios can be split 50/50, 60/40, 80/20, or even 90/10 between the VTI and BND. You’ll likely get a fantastic expected return no matter what you decide — in comparison to savings rates.

3. Advocate for higher savings rates

Unfortunately, the default — savings accounts — are too miniscule to help people who need it most. Despite the Fed’s decisions to raise interest rates, it seems that many interest bearing cash accounts aren’t receiving the benefits. As banks continue to hit record profits, there seems to be some wiggle room for better interest rates. Advocacy isn’t often talked about in personal finance, but speaking out and up is one of the most effective ways to change situations. Write your representatives in Congress and tell them you are waiting for banks to reward savings. Tell your bank that you’re looking for alternative locations for your money, and maybe even leave for a credit union (as they tend to pay better rates).

Think You Can Trust Credit Card Reviews? Think Again.

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Advertising in New York City. Flickr photo by Pascal Subtil

These ads are everywhere!

The multinational, multibillion-dollar bank, JP Morgan & Chase, spent about $1.9 billion on advertising in 2013. That was down from a peak of $2.35 billion in 2011, but still one of the largest amounts by any bank. With that kind of money, you should be curious what they get in return.

Advertisements for companies like Chase, Citigroup, Barclays, and others are plastered over billboards, magazines, newspapers, and websites. You’ve likely passed by one of their ads today if you live in a modest size city. Heck, there could be one next to this article, due to the Google ads running on Frugaling!

That money is spent to attract new “customers” of credit. Their hope is to entice people with signup bonus offers, and keep them for life. After they click an ad, sign up online, and begin to swipe, the banks begin to profit. From credit card transaction fees to late payment fees to cash advance fees to interest rate fees, companies enjoy lucrative profits. For every new customer, banks trust they’ll make hundreds of dollars over the next few years – if not more.

Personal finance writers are easily influenced

Those advertising pressures and interests can trickle down. Websites that aim to address personal finance concerns and offer advice might succumb to the fire hose of potential profit available to them. With my hat in hand, I must admit I was one of them.

I made thousands of dollars in about 1.5 years by marketing credit cards. By placing links to select offers, I was able to make $50, $75, and even $150 per person who signed up. The affiliate money helped me radically change my life and pay off my debt. But as it helped me pay off my debt, I began to see how I had been duped.

In financially unsound and uncertain situations, people do things they’d rather not do. Frankly, society sometimes encourages us to put our heads down and work through the pain and ethical dilemmas – ignore your internal compass for the good of the company, profit, and revenue. I had become one of those people.

When reviews are really advertisements

Reviews aim to feature both the pros and cons of certain products. Readers want honest feedback and advice from authors, but they weren’t getting it. Visitors to my site were coming droves to see my “reviews.” But that’s not what they were really getting.

Unfortunately, moneyed interests in banking have a tremendous sway on the rating of products. Look through many websites that market credit and banking products, and you’ll begin to notice an overwhelming pattern of 4- and 5-star reviews – across the board. With this positivity, you’d expect credit cards to wash your dishes, clean your laundry, and chauffeur you to work.

How could any company’s product be rated this highly? There’s a reason for optimism and it all comes down to money. Those advertising dollars – billions from banks – trickle down to the simplest of bloggers, directly influence the content, favorability, and overall reviews.

Visitors who are interested in honest, open advice might be shocked to know that when they click that link to sign up, they are crediting that blogger hundreds of dollars in the process. Even more, that the entire review was fabricated to drive more clicks to the bank’s site. When I wrote these articles, I suppressed the negatives to encourage clicks. I was advertising products, and framing them as reviews.

Credit cards aren’t the devil, but they’re not for everyone

We live in a world where big banks spend billions to get at us. Their money travels onto TV, print, and diverse digital media. Eventually, it even lands into the pockets of personal finance websites. That’s when the magical influence occurs, and people end up following the manipulated “advice” of trusted sources.

With revenue pouring over the Internet from companies, my real advice is simple: be skeptical. My hope is that no one gets tricked into thinking that a writer completely – and out of his or her own volition and without profit motive – decides to write a credit card review.

Here are 9 important questions you should ask yourself before following any credit card review:

  1. Do the reviews link directly to the bank’s sign up forms?
  2. Are there affiliate tags embedded in the links?
  3. What makes the writer optimistic about the company and card?
  4. Do they personally use all of these cards that they recommend?
  5. What income bracket is the reviewer in?
  6. What’s their credit score?
  7. What was their experience with customer service representatives?
  8. How long has the reviewer been providing advice?
  9. What makes them an expert in credit cards?
  10. How might incentives influence the quality of this review?

Credit cards aren’t the devil, and they don’t tend to be the sole contributor to debt. Usually, it’s a lifestyle of spending more than you can afford, with little income to pay the bills. That doesn’t mean excessive purchases at Burberry and Hermes; rather, that any amount over what you take in will lead to debt (groceries included). Credit cards just facilitate that process – faster – as the fees quickly compound.

When personal finance writers begin to weigh in, it’s vital that their advice be accurate, fair, and balanced. Unfortunately, it’s frequently manipulated by advertising revenue potential. I learned how the money could influence what I ultimately write, and I no longer want to lobby for an industry that sometimes preys off of people that genuinely need help. If you see a review article from me, it’s my hope to be as analytical as possible.

Debt Is The Illusion Of Success

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Lamborghini on Rodeo Drive
Lamborghini on Rodeo Drive in Beverly Hills, CA. Photo: John Beagle/Flickr

I’ve never had an empty bank account without some support from others. I’ve never hit zero dollars, and then decided what I need to sell to make ends meet. I’ve never run out of money, and been unable to make a co-pay or buy food. This is a privilege of my social class, but it’s also a consequence of this country’s acceptance of debt.

When I turned 18, I immediately applied for my first credit card. I researched and found the ultimate cash back card for my beginning credit line. At the time, that meant a $50 bonus for opening the account, and a check every time I hit $50 in rewards. The bonuses weren’t much, but they were a taste of the good life.

Even before I was accepted into graduate school, I started spending more. A computer sound system — that was amazing! A beautiful road bike. New smartphones whenever I wanted. Life was good, but it was all an illusion. It was all charged to credit cards, and my poor spending habits only descended as my academic career continued.

Eventually, I needed to take out a balance transfer, and opened a new credit card that allowed me to transfer and put off my debt. When I finally started getting student loans, I needed more to pay off the credit debt. This is the classic “robbing Peter to pay Paul” concept of debt payments. I constantly owed one bank something or another. Frankly, this life was stressful and full of unknowns. I constantly questioned, “Will I have enough to pay off this debt?”

But that was all behind the scenes. On the surface, I was a brimming success. Look at the materialistic items I was able to purchase — the “things” I had amassed! I could scan around my room and provide details about the latest purchase — all without addressing a gaping hole in my story.

Everything was purchased with debt. My things were the banks’ things.

Debt prevents us from seeing how little we actually have. It’s a scary psychological trick that banks prop up for us. Why should anyone be able to spend more than they have? Why must we finance our vehicles, homes, and dreams? If we do not have the actual money, why should we be enabled and empowered to spend?

I’m not sure that, as humans, we’ve evolved rapidly enough to adapt to taking out and handling debt properly. And yet, our system pushes people to adapt or perish in bills and debt collectors. The victims of this systemic problem are blamed and tarnished — left to bankruptcies (unless it’s student loan debt — you must die to rid yourself of that) and court proceedings.

We need to reevaluate both success and reality. In reality, the life I lead is a modest one where I cannot afford that European vacation I desperately want. But my credit card and possible student loan access says otherwise. In reality, I cannot afford to own a nice car I want. But my bank keeps offering me car loans at 2% interest APR.

Where can I find the middle path? Where can I compromise and meet my budgetary reality? The simplest answer I’ve found is realizing that I don’t need much. In fact, most everything I ever purchased served an unnecessary status function in my life. The only way I’ve been able to stay afloat these days is by realizing how little I “need” and how much can be thrown away as “wants” — some of which are extrinsically motivated.

When I want to spend more than I have because I can, I constantly remind myself about the stress and unknown feelings surrounding debt. There was such powerful shame because I couldn’t “control myself.” We need to take responsibility where we can, while also recognizing that we live in a system that ushers out goodies to perpetuate and encourage spending — then blames you for participating. The best we can do is remove the credit card chicanery and unveil the truth: debt is the illusion of success.

Should You Donate While In Debt?

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Colorado State University Endowment Report Donate

I started fundraising and creating an endowment for suicide prevention at Colorado State University in 2010-11. Before I graduated and went to my doctoral program in Iowa, the fund was permanently endowed — reaching $25,000 in about a year. Last week I received my annual “Endowment Report,” which provides the earnings, contributions, and total value of the fund.

As I opened the report, it was hard to stay standing. Today, about 3-4 years since the founding, the scholarship has nearly $34,000 in funds! When the scholarship reaches about $50,000 in savings, it should be able to pay out multiple scholarships each year — or one large check. Ultimately, this can go into the pocket of a college student in need, who hopes to make a difference in the field of mental health.

But back in college, I only had a few hundred dollars in my name. When I got the idea to start a scholarship, I donated nearly everything I could to help seed the fund. I was passionate beyond belief and this cause was everything to me. I remember looking at my bank account, wondering how much more I could give without going broke. It was a delicate financial time, but I had money. And that’s an important point.

When I entered graduate school, I took out massive amounts of student loans, was ignorant about budgeting for the semesters, and irresponsible in spending. Between car, credit, and student loans, I amassed about $40,000 of debt in two years. Throughout this period, I never stopped giving to charity.

Each year, I spent anywhere from $200-500 — small sums in the grand scheme of things — in donations. I kept giving and giving — even when I had nothing. Zilch, nada, zero. Loans were the only thing keeping me afloat.

Even worse, I began to feel the pull of credit debt. This is the particularly nasty kind — an undertow that’ll sweep you out before you know it. With thousands in credit debt, I started engaging in credit balance transfers. These are financial shell games that you can play with yourself and credit companies. You open a new account that provides a 0% balance transfer, and then pay a little fee. Usually, that company provides 0% interest in those funds for about a year. A great deal, if it weren’t for the fact that my spending never stopped.

My spending was out of control and that included charitable spending. I hate writing that line. I hate the idea of cutting back gifts to charity. And I certainly hate the advice I must give today.

I need you to be ruthlessly defensive of your finances when in debt. I need you to ignore your desire to help others, so that you can help yourself. I need you to consider a future where you can help others even more, when you have the savings available.

To those in debt today, you need to put the mask on yourself first — before helping others. Now you may ask, “Why would I do that? Generosity is exceptionally important to me!” In response, I’d say, “I can relate to that feeling. I have given every year of my adult life to charities — in and out of debt.” But it’s time to change our perspective to charitable giving while in debt.

See, when you spend beyond your budget and give to charities when in debt, you’re actually writing a fat check to banks. Those that retain and house your loans — from the federal government to private corporations — receive their own donations when you make this financial mistake. The interest on loans given to you allows banks to realize ever increasing profits and earnings. Worse, it forces you into debt longer than you need be, and prevents you from being able to give more at a later date.

It’s with a pained heart that I must suggest that you stop giving until you’re back in the green (or black). I don’t want banks to make another dime off you, and I’m sure you don’t either. So let’s make a pact to stop giving until we’re done with debt. Then, and only then, let’s consider how we can best help those in need.

Special shoutout to Ben and Stefanie at The Broke and Beautiful Life for an awesome article that inspired this!

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