Three Ways to Benefit from the Low Interest Rate Environment
In part 1 of What do Low Interest Rates Mean?, I talked about the cyclical nature of interest rates and the economics behind the interest rate trends. Today is advice day where you get some tips about how to benefit from the current interest rate environment.
It is a certainty that economic environments change. The low interest rate environment will not last forever. At the outside, you have less than two years before interest rates will rise. After reading Part 1of this article you understand a bit about the economic and monetary policy behind the interest rate environment. Next learn how you can profit. After all, I can’t write an article without giving strategies for wealth building.
3 Strategies to Grow Your Wealth in Spite of Low Interest Rates
1. In How to Get a Decent Return on Your Cash, I wrote about options for savers. The best savings option right now for cash you won’t need for a year or more are Government I (Inflation) Savings bonds. The I bonds pay 3.06% until April 30th when they will reset for their six month adjustment and reflect the current rate of inflation. The return on these investments has two parts; a fixed rate of interest which does not change and an adjustable rate of interest that moves along with the inflation rate. The beauty of I Bonds is that there is no chance of default and your investment is guaranteed to keep up with the pace of inflation. In other words, the purchasing power of your investment is protected.
Buy these risk free investments on line at Treasury Direct. You can purchase up to $10,000.00 worth of these bonds annually in increments of $25.00.I bonds are even available for purchase with your tax refund. Except for paying off debt, there is probably no better use for your tax refund.
2. For lenders, I recommend peer to peer lending. This type of loan is about lending money directly to folks who need it. The peer to peer lending investment cuts out the bank and directly matches lenders and borrowers. I am loaning money to other borrowers through a peer to peer lending site and so far am earning 10.69% Returns With Prosper.
I started investing in October, 2011 with Prosper.com. You can read about my initial experience in this article; My Experience with Peer to Peer Lending. In contrast with government bonds, please realize that this is a risky investment. Borrowers might default on a loan in which case, you would lose your total investment in that particular loan. For that reason, I only invest $50.00 in each loan that I fund. There is also the option to invest $25.00 per loan, further reducing the default risk of the loans. Although I currently have over one hundred loans, our total invested capital in peer to peer lending is only a very small portion of our investable assets.
I only recommend this for folks that can afford to take a loss on their investments in the expectation of receiving out sized gains. The Social Lending Network is a blog devoted to peer to peer lending. If you’re interested in the topic, it is a great place to learn more. If you do decide to loan through peer to peer lending, make sure that you only invest a small portion of your investment funds in this type of opportunity.
3. Take advantage of the historically low interest rates and borrow. Don’t borrow on your credit cards as those rates are way too high (and probably always will be). But if you are considering buying a home or refinancing your current abode, now is the time to do so. Home prices have sunk across the country and mortgage rates are at all time lows. There are even FHA loans with low down payments available for those that lack enough saved up for a 20% down payment. The FHA website has a handy calculator to help figure out if you qualify for a low down payment FHA loan.
For those looking to lock in a low interest rate loan or refinance their current mortgage, according to Bankrate.com, a 30 year fixed mortgage can be had for about 4.0% and a 15 year fixed mortgage for 3.27%. In many parts of the country, your house payment would equal or be less than a comparable rental.
Although we just bought our condo seven months ago, we are refinancing with a low interest rate 15 year mortgage. Our thinking is that when retirement rolls around, it will be a bonus not to have a mortgage to worry about. So even though our new interest rate will be lower than that on our current 30 year mortgage, the payment on the 15 year loan will be a bit more. The monthly increase is worth it to us to save over $100,000.00 in interest payments over the life of the loan and pay it off in half the time.
Don’t forget to check out the first article in this series, What do Low Interest Rates Mean?
Please add your strategies to capitalize on the current low interest rates.
image credit; Madison short sale.com