Most of us are kind of horrified by personal finance. It can be mystifying. However, there are also a lot of ways to profit from basic economic concepts. The problem is that sometimes the bad is good. And, other times the good is bad.
Is Halloween a horrifying holiday or a cute community event? Is it more trick or more treat? Like lots of things in life — it is both. Debt, inflation, high interest rates and soaring stock prices are also both tricky and a treat — depending on circumstances.
So here we offer you the trick and the treat of these concepts. When are they a trick for your retirement and when are they a treat.
When is Debt a Trick? When is Debt a Treat?
Debt is when you owe someone money. Typically you pay interest on that money.
It is mostly a bad idea to carry debt. If debt were a Halloween character, it would be the tricky clown or magician. You think you only owe a little, but it can easily be transformed into a lot.
Trick: If you buy something with debt, you are often paying a lot more than the purchase price.
Depending on the interest rate and payback period – paying with debt may raise the total cost for whatever you are buying significantly. The most expensive kind of debt is usually on a credit card. Some credit cards have interest rates that can be 25-30% annually – mostly used for shorter term financing.
However, if you get stuck paying the minimum on this debt, then you are getting a nasty trick. For example – if you were to charge up a $2,000 credit card balance and make only the minimum payments – you’ll be paying this debt for 30 years and it will cost you close to $5,000 in interest — much more than what you originally paid for the purchases.
Treat: Most of us spend a fair amount of energy trying to get out of or avoid debt. However, even debt can have a positive spin.
Some debt can be used for very good reasons like buying a house – interest rates are lower since the debt is secured by the house and the payback period is usually long – however you get the utility value of the home and home values are often tied to inflation which makes them a good inflation hedge. If inflation, the value of your debt goes down and the power of your debt payments goes up — lowering the real cost of your mortgage debt.
When is Inflation a Trick? When is Inflation a Treat?
Inflation is a really bad awful word. In fact, high inflation is a real dastardly thief if you are retired. In fact, when you are retired, just the threat of inflation can be like walking through a haunted house — never sure if or when the awful thing will jump out at you. However, high inflation does have a few good points.
Trick: For retirees, inflation erodes the buying power of your savings. For example, if you have $100 to spend, you could buy a certain amount today. If the cost of goods and services went up by 5% (inflation), then you could only buy 95% of what you could originally purchase.
You can guard against the negative impact of inflation by investing in a way that offers returns equal to or higher than inflation. And some sources of retirement income offer some inflation protection. Social Security usually offers cost of living adjustments and you can purchase annuities that offer inflation protection.
Treat: As discussed above, inflation can lower the burden of paying back debt if inflation is going up and your wages are going up with inflation.
When Are High Interest Rates a Trick? When Are They a Treat?
Interest rates are like a two headed snake. Whether you benefit from high interest rates or low will all depend on your overall situation.
Right now you are probably experiencing both the good and bad of low interest rates. They are currently at historic lows.
Trick: If you are a saver, it is very difficult to make money from interest when interest rates are low. Low interest rates may also contribute to higher housing costs since buyers can afford to borrow more money — making it easier to buy a more expensive home.
Treat: Low interest rates make debt more appealing and less costly. Everyone from governments to home buyers as well as big and small businesses are getting a better deal when financing (borrowing to pay for) anything.
When Are Soaring Stock Prices a Trick? When Are They a Treat?
Trick: Nothing goes up forever – rapidly rising stock prices can lure investors in towards the top of a market and retail investors have a bad habit of buying stocks when they are going up and then seling after they have dropped.
Treat: Stocks or equities have proven to be the best way to invest your money – they offer the best risk return ratio so long as you have a long time horizon and don’t panic sell when the market (invariably) drops.
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