The Chestnut Blog

With interest rates at a 40+ year low, you can bet that it’s not going to stay there forever. As I am a realist and always look at the yin and yang of life, to really define how good or bad low interest rates are really depends on how you use this tool, and what side of the fence you are on- the giving or the receiving.

Firstly, let’s look at the income side of the fence. Assuming you are on a fixed income and rely on some of your income from savings accounts, CD’s and fixed income instruments, you have

(as I have no doubt, and not that I have to tell you) realized a significant reduction in your income stream. Your interest payments from the bank have gotten smaller as your CD’s have rolled over, and a 5 year rate is somewhat paltry to what you received as a 1 year rate not too long ago. Savings accounts are paying next to nil, and so are money market accounts. Conservative investors have had to look for alternative investments to supplement their income source, causing the age old battle between sleeping at night and creating sufficient income.

What is right? Only you and your conscience know.

If you own bonds, the effect of interest rates works likes a child’s teeter-totter: on one side is the value of the bond, the other interest rates. Just like the see-saw, if the interest rate side goes down, generally the value of the bonds will go up with regard to marketability. Once the interest rate cycle reverses and starts on the uptrend, the value of the bonds will begin to go down. The upside in all this is when interest rates begin to rise, interest rates on your savings accounts, money market accounts and new issues of bonds will go in the same general direction. So buck up- better days for your fixed income investments may be coming.

Secondly, let’s look at the expense side of low interest rates. Car loans, mortgages, personal loans, and some credit card companies have had sustained low rates for you to obtain: as long as the banks are willing to let go of the purse strings. Refinancing your loans at this historic time of low rates may be a great opportunity to lower your monthly and annual outflows, and only a close analysis of your personal finances can reveal if it is a good move for you. Be sure to carefully calculate all the factors involved before making any big financial decisions.

It is important to consider “interest rate risk,” a factor in comparing the income rate on your investments vs. the declared inflation rate. You may be safe, for example bringing in 2% on your CD’s, but if the price of living in your area is increasing by 3%, the purchasing power of your dollar will decrease each year by the spread between the two. Now add in taxation and expenses to bring in the income, and you could experience serious erosion of the long term purchasing power of your nest egg. It may be a great time to reposition yourself with your finances, but just be careful, and be sure to consult your Certified Financial Planner and tax advisor before making any decision that my effect you in the short and long term.