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Don’t be Fooled by Low-Interest Rates
On New Year’s Eve, I was struck by the fact that everyone kept referring to 2020 as the Roaring Twenties. Really, is that what we want to call it? The Roaring Twenties!? Do you know what happened after the end of the Roaring Twenties?
“Look, honey, we’re riding into the Great Depression! Weee!”
Nope, I don’t like it.
We’ve had a pretty good run. If you have been one of the lucky ones, then you know that it’s been great making money over the past few years, but something is brewing…
I will be the first to tell you that I am not an economist by any means, but I would like to share a few numbers with you.
- US Household Debt – $13.95 Trillion as of the third quarter of 2019. This is eclipsing the debt level at the height of the great recession in Q3 2008 by 1.28 Trillion in Nominal terms.
- Of the 13.95 Trillion, student loans make up $1.5 Trillion with delinquencies on those student loans are up to 10.9%
- Credit card debt makes up only .88 Trillion of the $13.95 Trillion, and 8.3% of those are delinquent.
- Corporate debt is a record $10 Trillion as of December 2019. Which comes out to be roughly 47% of the overall economy.
- And finally, the derivatives market is up to 1.2 QUADRILLION! And yes, these are the same derivatives that got us in trouble in 2008
A lot of my readers like the fun-loving Armond that doesn’t get into the numbers too much. I’ m sorry. I guess I should have told you to skip 1-5.
From here on out, I’ll just break it down for you in a fun-loving way.
WE HAVE A LOT OF DEBT!
Goooo ROARING TWENTIES!!!!!!!!
Free Money
I’m not telling you all this to scare you or to make you scream at the TV over companies and legislators being completely irresponsible. I am telling you this so that you can get your house in order and not be fooled by the low-interest rates.
Low-interest rates are how they get you. We automatically think its free money. If you don’t mind, at this point, I’ll have my Oprah moment.
You get free money
You get free money
And you get free money!
I digress.
What the Hell is Good Debt?
I love the commercials that say 0% interest.
THEM: It’s time to buy a house. Not yesterday, but NOW because rates are so low. You never know when they will go back up, so take on more debt.
I am also amused by those who refer to some debt as good debt.
It’s like they’re petting a dog in the back yard. Who’s a good debt? Are you a good debt? Good debt? Yep, it’s a good dog until it bites you or pisses on your rug.
Preparing for the Blimp
Needless to say, for the past few years, I have been preparing for a blimp in the market. As a matter of fact, I have been trying to get my clients to prepare for it too.
I have no idea how bad this next recession is going to be, but I like to be prepared for the worst-case scenarios. Check out my blog post on preparing for a recession.
Take this as a warning: Don’t be lulled to sleep by the great times because the great times are powered by debt.
How the Economy Works…
Unpreparedness is a massive problem because many of us fail to realize we have a symbiotic relationship with the economy.
I will try to simplify how the economy works as best as I can.
For the economy to remain healthy, you have to buy crap. You have to buy crap from companies that employ us all. You have to take the money that your employer gives you and buy more crap to keep the economy going.
I hope all this makes sense.
Now, because everyone has debt, that debt has to be serviced. Meaning, you have to make payments to that debt (check the figures—numbers 2 and 3— I gave you before and see that student loans and credit cards are becoming more delinquent).
Now, when people stop paying their debt, that usually means they can’t incur more debt i.e., they can’t spend as much money. That also means that companies don’t make as much money. When companies don’t make money, their debt can’t be serviced. This means the bond funds owned by other people don’t get paid; therefore, the companies will have to lay people off.
Now more people don’t have money to buy supplies, and the cycle continues.
Out of Control Debt—Not Good
When your debt gets out of control, it is harmful to your family. No matter what hardship you face, the company you owe will want their money.
To my financial leaders out there: that doesn’t mean that there aren’t ways to leverage the situation. For instance, if you are already in your home, you may want to look at refinancing. Also, if there is a way to get your credit card debt to a lower interest rate, take advantage of that too. You can call your credit card company and ask them to lower it for you. Trust me, they’d rather drop the interest rate than let you transfer the debt.
My point is, don’t go out and incur more debt unless you are very intentional about it.
I get the feeling that we are going to be living through some interesting times. There is no better feeling than to get your budget under control and prepare your family. Being financially prepared will give you and your family a better foundation to weather any storm that comes your way.
Any stress on you will be felt by your family.
They are going to see it; there’s no hiding it. Your family is tethered to your emotions. If things are stressful, financially, and you start to show signs of that stress, they are going to feel it too. The troubling thing is that stress can reverberate through your family for a very long time.
Being prepared and not incurring more debt—even when it’s good debt—could positively impact your family in more ways than you might imagine.
If you haven’t already, buy The Financial Effect e-book to get more insight on how to make financial decisions for your family, also subscribe to my blog.
Photo by Micheile Henderson on Unsplash
*Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear a loss, including total loss of principal.
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