What to Do With Historical Low Fed Rates – Episode 381

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[00:00] Listeners, welcome to another episode. We’re going to be talking about some of the historic changes that we’re seeing in our world. And one of those major changes is about our interest rates. And the Fed has recently come out and said that the rates are going to be at near zero for a number of years coming forward. So Kim, with your expertise and the knowledge you have and gained in this financial world, I’m presenting this to more or less take out the crystal ball and say here are some things that we need to be watching for and that may happen. Well, it is definitely a sad state that interest rates are that because interest rates are supposed to be the buffer in the economy and adjust accordingly.

[00:49] However, if they’re going to do it, we need to figure out how to work with it, right? We must focus on what we can control. And since we don’t control that, we need to focus on what do we do about it? You know, like all aspects of life, it’s not what happens to you. It’s what you do about it and how you think about it really, because that’s where it starts. So without a doubt is we’ve stated numerous times mortgages of a variety of sorts are fabulous. So 30 year fixed mortgages that have low interest rates, good, good, good or 20 or if you’re talking commercial loans, get them, lock them in and make them be a part of your life. Then additionally, if there are true zero percent interest rates, which we always need

[01:36] to be careful when that gets said, because many times, for example, like in the car financing industry, they’ll call something a zero percent rate. But in actuality, all they’ve done is add usually a six or seven percent interest cost to the cost of the item. In other words, they took a $50,000 car and they added, you know, $14,000 of interest to it, called it a $64,000 car and then said that there was zero interest. So assuming they are not doing that. And like after 2008, we absolutely saw true zero percent financing on cars. After 9 11, we saw true zero percent financing on cars. But just moving away from do dads, if you will, to credit Robert Kiyosaki for a great word applied to things that people spend money on that really are not

[02:33] assets. Let’s move into what else we might do. And it’s a tricky area. So you asked for a crystal ball, and I’m going to say if you can borrow at let’s forget zero, just even two or three or four percent, let’s acknowledge that this is not against your primary residence. OK, this is just maybe you have the ability to get a personal loan. Maybe it’s a credit card. Maybe you have the ability to get some type of business financing because of a business structure that you’ve created or something like that. If you can borrow it two or three percent and find investments that are earning just four or six percent, then you are doubling your money. And it is a risky proposition. Anytime you borrow to invest, it’s extra risky.

[03:25] I don’t mean extra risky like Bitcoin, but there’s an extra element of risk when you borrow to invest. So it’s something that we need to be super careful of. And yet, if you’re just asking me for the math and the capability, it’s cool because with lower interest rates that are borrowing costs, we can do well with investments that have lower interest rates. And so that’s a valuable thing. So a lot of financial experts are saying, hey, get out of cash right now, get out of cash and put it into assets. And you’re giving an example right here. Now, depending on a person’s education and their hate to use, I hate the term risk equals reward because that doesn’t correlate. But what I want to use is depending on a person’s risk tolerance.

[04:21] Is that better said? Because I hate the risk. I do equally agree with you and dislike the risk reward thing. Risk tolerance is tricky, too, but it’ll work for today. We know what you’re speaking of. Keep going. OK, good. So what you’re presenting here, hey, if we can get money in the 2%, 3% range, getting the 4% to 6%, we’re doubling there. This is the stop gate that I have put on for other friends and people that I know. And this is just my piece of what I’ve also learned from you, which is this. If you’re trying to head yourself forward, and especially for business owners and entrepreneurs that don’t have the predictable income as often, what you want to do is you have to cover one thing first.

[05:16] And this is what I always say. You have to cover your emergency fund. And that emergency fund, I have stated a minimum six months. I say 12. I think many times you’ve said, if you’re self-employed, closer to 12, correct? Absolutely. OK, so once you have that, then you can make the decisions on other things. But that money should never be touched. That is your emergency fund. So next step, what do you see? So we can say, OK, money’s there. Emergency fund is set. We’ve got the good habits in place. Now what? How are we pouring cash into assets? Well, I think the first thing to identify is the best place to store whatever cash you do have. And it cracks me up. I see all these webinars and blog posts and things

[06:06] that people are creating to scrap together a good place to store cash. And they don’t have a good answer for it. The question, where do you store your cash? Absolutely, they, the typical financial planning community that’s out there, they do not have a good answer for it. And so I am absolutely going on record, as if I haven’t already, stating that life insurance is a fabulous place to store cash. And even if the life insurance companies pay no dividends, which could happen if we stick around in a 0% interest rate environment, there is still a guaranteed increase in cash value that you’ll earn, probably about 2%, net, net, net, after the cost of the death benefit, cost of the commission, cost of running the mutual life insurance company.

[06:46] So moving cash from a savings account to a life insurance policy is purchasing an asset. That’s an important distinction. It’s not purchasing an investment, but it’s purchasing an asset. Now, from there, once that emergency fund is built, as you identified, stored in the life insurance company, you can borrow against everything over and above that. And like I said, if you have your growth rates of two, like we said, if you’re just guaranteed cash values growing at two, let’s say your borrowing cost is four or five, then now you need to be looking for investments that are earning eight or 10. But I still think that’s a pretty reasonable rate of return in this economy. And so that’s something that people could go out there and look for.

[07:38] But I want to make a really important point, too, as we wrap up here. And that is that you do not have to borrow against your life insurance policy to make it work. So many people misunderstand the importance and the position of cash and how the life insurance policy works. And they think that they have to borrow against it to make it work. That is not true. The life insurance policy is going to work just fine. I have clients that have funded and funded and funded and have seven figures, multiple seven figures, some of our clients, of cash value just sitting there, stored at the life insurance company as an asset. And a position of cash that causes them strength and tax deferment and confidence, like you read about.

[08:26] And then there will be an opportunity, maybe, that presents themselves and that they’re able to take advantage. Or maybe not. Maybe they’ll just sit there with the cash and all the peace of mind it provides. Ooh, so good. You know, I’m going to wrap up with one quote. It’s by Warren Buffett. And he says, be fearful when others are greedy and greedy when others are fearful. Yep, the investor of the century. Yes. And what you just said, using life insurance, is the answer to it. Because, as you mentioned, clients with seven figures in there, doesn’t mean they have to use it today. Doesn’t mean they have to use it tomorrow. But when the market shifts, they’re going to be so glad they did it. Yes, stock market, real estate market, economy,

[09:12] whatever it is that’s shifting, they will be in a position to seek out opportunity at that time. So good. Thank you for sharing the wisdom today, Kim. Yes, yes. 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.