Interest Rates On Investments – Episode 263

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[00:04] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Welcome to another episode of the Prosperity Podcast. Last time we talked about interest rates and we were seeing our interest rates going up and what should you do? Well, we’re flipping the conversation and we’re going to talk about investments because it’s not every day that you’re seeing these interest rates on investments go up. And if they are going up or going down, well, wouldn’t it be nice to know what to do? And so we’re going to bring on Kim Butler to answer those questions. Are you there, Kim?

[00:49] I am, Spencer. Sounds like a fun discussion. You know, it’s interesting as I look back over really almost 30 years of helping people with their money, the interest rates that we’re going to talk about today, you’d think there would be a big difference, like, oh, you know, 10 years ago, 20 years ago, 30 years ago, different interest rates as it relates to investing. But they really aren’t the the numbers that I’m going to give today. I think have played out, you know, of course, one or two percent one way or the other. You’re going to see that kind of differential. But I really believe that the interest rates that we’re going to talk about, that I’ll share with people from a generic standpoint are pretty accurate year in and year out over time.

[01:37] Well, what are some of the most common ones that people focus on? Let’s start there because we’ll call it the the golf course conversation. Someone’s going to say, well, my bank, I’m getting this rate on my CD. So what are the most common ones? Yes. And let’s do let’s start with the most liquid asset, because as you get away from liquidity, in other words, into investments that tie up money, your opportunities are higher. So we’ll just start at the bottom, which is liquid money. And you’re right, it’s the bank CD. It’s the money market account. It’s the cash value of life insurance. It’s anything where you would put emergency opportunity money. So I’m talking seven days liquid. And as a rule of thumb, those interest rates have gone on the bank side,

[02:26] like money market, CDs, savings accounts, extremely low of late. One, two percent range, and that is abnormal without a doubt. And it’s a real shame that they’ve been basically manipulated down to that level, whereas normal liquidity should sit in the four to five range, even three to six to extend each side out a little bit. I remember back to my banking days right out of college, a seven percent CD was on the high side. You know, sure, we saw them at nine, 10, 11, but not for very long, not not for anything really of worthwhile substance that was going to last a long, long time. So I think liquid money, four to five percent. That’s really what we should be seeking. And if you happen to be new to this podcast,

[03:17] if you’re frustrated because your liquid money is still in the one to two percent range, then please reach out to us because we have our clients store their emergency opportunity money, their liquid money in cash value of life insurance, the oldest, boringest, most effective product known to man, which is whole life insurance. And it is a very, very efficient place to store liquid money. And in today’s world is earning in that four percent range. And that’s without tax. So that’s just a good, solid number to be expecting for your liquidity. OK, so that is the typical lowest hanging fruit right there. And to to give some context at my credit union on their long term savings accounts under 15000,

[04:06] I just checked they’re paying three point four nine percent. But anything over 15000, they’re paying point one percent. Wow. So and I’m testing you on your decimal point there. They’re really paying three point four under fifteen thousand dollars. Correct. Absolutely. And I even asked at the counter. I said, this you guys have to be kidding. This is it. But it’s under only under fifteen thousand dollars. Exactly. Yeah, that’s their their kicker. But, you know, good for them. At least they’re doing something. I’m proud to say each one of my kids has an account there in there doing that. So it’s good. So what’s the next most common type of we should say investment. But I want to say a place where people are talking about their interest rates.

[04:54] Yeah. And that’s a good thing to clarify. And I do think we can roll into the quote investment world. So the first discussion was savings. It was liquidity. Now we are going to talk about investments. And to me, investments fall into two very broad categories. And yes, we could split these up into about 10 each. But either an investment is earning income, like creating cash flow, monthly paychecks, or it’s growing. That’s really the two ways that I like to look at it. And there’s other people that use different terms. But for the most part, I think we could really boil everything down to an income creator or a growth creator. And so I’d like to talk about the income ones first, because those tend to have a little bit shorter timeframes.

[05:41] And they can have both lower and higher interest rates than the more growth oriented ones. Again, we’re using some fairly broad discussions here in terms of what to call these investments. But if you are looking at, say, a one to two to maybe three year time frame, and you want to create income from your investments, you should be expecting interest rates in the six to eight percent range. And that’s typically an interest only deal. And oftentimes, the dollar figure requirements like the minimums are on the lower side, maybe 20, 25,000, something like that. So you should be expecting, again, six to eight percent. That’s going to be interest only. At the end of one, two, three years, you’re going to get your money back.

[06:29] And then, of course, you can go on and do what you’d like with it. So that’s what I’m going to call an income oriented investment. And clearly, it’s medium term. We don’t really want to use the word short term because that would imply back to the cash discussion. But medium term time frame, six to eight percent interest only income oriented investing. OK, that makes sense. Now, what about the growth? Yes, this is where everybody always wants to go. Right. This is the fun discussion, the upper end, the adage of, oh, if you take on more risk, you’ll get more reward, which we know that is a lie. And yet sometimes you do get more reward. And so what gets you that more reward? Oftentimes, it’s time frame.

[07:16] So the growth oriented investments are going to be more in the five to 10 year time frame. And we’re going to see interest rates now in that eight to 10, maybe even 11 to 12 percent range. And so we could just say maybe eight to 12 to get to give a good broad perspective. Again, five to 10 years of your money locked up. Now, of course, somebody is going to ask, well, you know, 12, that doesn’t seem very high. Can’t you do better? And the answer is yes, absolutely. We can do better on the income side and we can do better on the growth side. But it’s not something that I think people should rely on. In other words, you don’t want to jump into your financial planning software, which is not very helpful anyway.

[07:58] But let’s just say that you wanted to do some financial planning. You don’t want to jump in there and project 15 percent rates returns every single year for the rest of your life. It’s just not reasonable. Not that you couldn’t get that. I personally have investments that do that type of rate. And I know clients have investments, both income oriented investments and growth oriented investments that do those lower teens, if you will. The 13, 14, 15 percent range. But I think the goal should be the low double digits. So that’s the 10, 11, 12 percent range in terms of good, consistent growth. Now, the funny thing is that a lot of people are going to want to turn to averages and averages can be a very tricky environment when it comes to investing,

[08:48] because averages can be mathematically correct and yet have absolutely nothing to do with reality of the growth of your investments. So as an example, if you take your typical stock oriented mutual fund, everybody’s going to want to quote the average or the index or whatever it is that they’re using as their measuring stick. And yet we know that those rates are moving all over the place. And there’s a huge difference between the average, which is a mathematical calculation that you can make, add up the number of years, divide it by the number of years. And that’s a mathematical average and that’s mathematically correct. But if you run actual dollars through the interest rates year by year by year, which you basically need a financial calculator to do, you’re going to get your actual rate of return.

[09:45] And it’s a little bit hard to describe on a podcast, but it can be an extremely different number. This actual rate of return versus average rate of return. Does that make sense so far? That does make sense. Now, with the calculator that you’re talking about, is it because you’re factoring the interest and compound interest and all those other pieces? It’s partly that the compound interest has part of the role to play. But really where the bigger factor lies is the time and the actual interest rate that is being used on a particular year. So, in other words, to give a simple example, if you just took two years and the first year earned a positive 100 percent and the second year earned a negative 100 percent.

[10:35] Well, you could add those two up, which 100 percent plus negative 100 percent is 100 percent. And you could divide that by two, which is 50 percent. But if you took actual dollars through there, let’s say you had one hundred thousand dollars in the account and you have one hundred percent growth. Well, that’s two hundred thousand. Well, then if the next year you have negative 100 percent, then that’s back to one hundred thousand, which is a zero percent return on your one hundred thousand dollars. And so it’s a sequence of the return. In other words, the positive and then the negative. And it’s the the actual dollar figure running through the particular interest rate for the period of time that is identified.

[11:20] And so really, since we’re doing this verbally, the best thing I can say is don’t use averages for most investments. They’re horribly misleading. Now, there are some investments out there that you could use legitimate averages for. Let’s say that you had a particular income or at an investment. You were wanting growth, but it did create income and it’s a eight percent payout. Well, if you have it for two years and they pay you eight percent interest only. And obviously, you can add that up and divide by the two years. And it’s still going to be eight percent because that’s how that investment is structured. But for the typical growth oriented investments, you might earn zero percent in the first year, zero percent in the second year,

[12:02] zero percent in the third year, and then all of a sudden earn 40 percent in the fifth year or fourth year and then another 40 percent in the fifth year. And, you know, who knows from there? So you can run that mathematical average. And I think it is helpful because it puts it back in a perspective because clearly you don’t want to talk about that as a 40 percent investment. And yet, again, people don’t really know because we don’t tend to use financial calculators. We don’t really know how to do that to put in those differing time frames and those differing interest rates and the corresponding differing cash flow that accompany it. You have to have a financial calculator in order to determine what that actual average is.

[12:45] And so here I go again using the word actual. Then you have to back out and get actual. So there’s average, which is mathematical. And then there’s actual, which is actually what’s going on. That makes a lot of sense. You know, I’m thinking and I’m just coming from the perspective from the mid 30s. If I look back and I think of my grandparents, it seems like it was so much easier to manage your money and to make an investment. Because often you hear them talk about, oh, my annuity did this or oh, my CD. Whereas nowadays you step into the bank and you say, really, is this what it’s like a slap in the face almost. So have you seen it that that it’s harder nowadays in a person has to be more savvy and observant of all of their options than it used to be?

[13:32] Yes, very true, because there’s so many options out there. And what I am grateful for is people are, I think, finally starting to realize that in the realm of investments, the stock and bond market are not the only place. And they have a lot of sway for a lot of people. They truly sometimes people when they think investments, that’s the only thing they think of. And that’s not accurate at all. There’s real estate, there’s oil and gas, there’s life settlements, there’s land leases, there’s merchant cash accounts. There’s all kinds of different things that are out there that are used by people that work in the space of what I’m going to call alternative investments. And then there’s also the stock and bond broker, if you will, that thinks they have alternative investments.

[14:18] Those are typically things like REITs and exchange traded funds and et cetera, hedge funds, that type of thing. So I think the largest lesson that we can learn here is one, to have some reality and some perspective around interest rates, which our discussion was great for this. You know, you’ve got maybe 4% for your liquidity, annuities, by the way, I think typically around 6%, maybe 7 to 8% for income oriented investments, you know, maybe a little higher. It depends around 9, 10, 11, if you will, for growth oriented, again, higher potential, but it depends. And a lot of the alternative investments are only available for accredited investors, but we have often found alternative investments that are available for non-accredited investors because a lot of our clients are not accredited.

[15:05] So we like to work on both sides of the fence, if you will, there. I think just that perspective is super helpful. And then the recommendation I’m going to close with is to learn and just be a seeker of information and learn and learn and learn. And as an example, even if you’re not accredited, you can still learn what’s out there so that you know when you get there that those will be available to you. And learning and asking questions and reading and listening is a great way to get some perspective on what investments are available so that you can be ready when you have monies available for this type of thing. I absolutely agree with that. Right now is the best time to learn. And I think it’s kind of humorous when you talk with people and they explain how diversified they are with their investments.

[15:55] They say, oh, I’ve got my money in this mutual fund account and this mutual fund account and I’ve got it in this stock here. You say, no, no, no. It’s just like talking to someone saying they have this single family house and then this other single. It’s not that vertical. You have to look at all of the options you have. And so what our listeners can do is one, make sure you subscribe to the podcast. That’s how you can accomplish the goal of being educated and learning about all of your options. Two, you can go to the website and read at partnersforprosperity.com. There’s tons and tons of articles, years and years of knowledge on there and content that’s readily available to be able to dive into and learn as much as possible.

[16:38] And the last I would say is to read your books. Is there a book that you would suggest that our listeners should dive into? That’s a great question. We really haven’t written a lot specifically about investing, and that’s fine because a lot of people really aren’t ready for that. You know, you need to save first. And I know that’s really boring and not what people want to hear, but it’s absolutely what should be happening. So in the savings category, I’m going to talk about the book Live Your Life Insurance. And then one of the books that we have does address investing a little bit, and it’s called Busting the Interest Rate Lies. And it’ll pick up the discussion on the cars, on the 30-year versus 15-year mortgage, and then also about one of our favorite alternative investments.

[17:26] Well, thank you for sharing these things. And for our listeners, make sure to go and check out Busting the Interest Rate Lies. You can get that on Amazon. And it’s a wonderful read. I’ve got a copy here in my office. So thank you for spending time with us. Again, for listeners, make sure you hit that subscribe button. If you enjoy what you’re hearing, please leave a review. Let us know what you think. We’re always looking for wonderful topics. And if you have questions, you can send those in at hello at partnersforprosperity.com. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.