October 2020 Newsletter

Keagan Kinsella | October 1, 2020

October is here….wow, can you believe it has been 6 months since I started this newsletter during the beginning of quarantine? COVID has changed our lives in so many ways! From a personal finance perspective, you may find it interesting to find that the coronavirus crisis has sparked more than just toilet paper hoarding—it also affected money hoarding! That’s right, in April, the US Bureau of Economic Analysis said the personal savings rate jumped up to 33%. This is a historic high! Did you find yourself being more of a saver during these times of uncertainty? Or are you one of those who got the most bang from every buck of their Amazon Prime membership?

Today we’re covering the following topics:

• Question of the month: More interest please?!
• Trendy TESLA and an Econ 101 moment, talking “Veblen Goods”
• Refinancing in 350 words. How…and why now?

Question of the month: “How can I make more interest on my savings? But with no risk and keep it liquid, please!”

Have you looked at the interest rate your bank is giving you on your savings account lately? If you haven’t, prepare yourself to be underwhelmed. According to the FDIC, the national average interest rate on savings accounts currently stands at 0.05% APY. That’s right, on a $5000 balance, that is a whopping $2.50 of interest per year!

Unfortunately, with the Federal Reserve reducing interest rates dramatically this year (and planning to keep them low for the foreseeable future), it looks like low interest is here to stay for a while.

What if I told you there is a safe, easy way to make 18x the average annual interest rate!? If you are interested, I would recommend checking out online money market, or high-yield savings accounts. Interest rates can still fluctuate—they were around 2% a year ago, but they are still higher than what you can get at a standard bank. An example is Citibank, which offers 0.90%, no minimum balance!

The question of the week came from someone who has an online money market account, but is wondering if there is any way to make more while still having the money safe, and liquid. Unfortunately, the answer is no. In order to increase reward, you have to increase risk as well. You may be able to “have your money work harder for you” in the stock market, but you can also lose money as well. If we are talking about emergency reserves here, the potential to lose money doesn’t sound like security to me.

Some like it pricey! Stock market trends, Veblen Goods, and more

Do you get excited when you see the price of gas go up? Probably not. Do you get excited when you see the price of Apple stock go up? Probably yes. Does it make you want to buy more? Also, probably yes!

This concept stood out to me the other day, and made me curious to learn more. I found it interesting to learn that “Veblen goods” exist in the world of economics.

The basic principle of a Veblen good is the more expensive they are, the more customers want them. Basically, demand increases because since it is more expensive, it must have greater value. Think about it this way. If you had an unlimited budget and were looking at two pieces of artwork, and one had a $100 price, while the other had a $10,000 price tag…it wouldn’t surprise me if the $10,000 piece was picked every time, because you would assume it was done by a better artist. Other examples include designer handbags, vintage wines, diamond jewelry, or sports cars.

Which made me think…are stocks like Tesla becoming a Veblen good? I know on social media, and just in conversations, I have heard people “name dropping” adding Tesla to their portfolio, to sound impressive. Tesla, looking back one year, has a 771% return. Compare that to Toyota, which is up 1.03%. If you bought Tesla years ago, that might be something to talk about. But if you buy it now, you are paying a 771% premium for the same company!  

I found this example on Financial Times.com to be insightful. For comparison, Toyota and Volkswagen combined made about 22 million cars and generated $15.6B of free cash flow in 2019, according to JPMorgan. At the same time, in 2019 Tesla made 366,000 cars and $1.1B of cash. If you break it down further, that means the stock market “values” every car Tesla sold last year at over $1M each. While they are expensive, we all know they aren’t that pricey!

While there is more that factors into stock prices than “trends” or “hype,” it does make me curious if the Veblen theory can be applied to the stock market as well! As Tesla becomes more expensive, even if there isn’t full reasoning and proof to back it up, people want to get in on the hype. How expensive is too expensive?

Housing market highs & refis…oh my!

While strange things are happening in the stock market, the housing market is in a unique situation as well! The local housing market essentially froze this spring due to COVID. At the same time, buyers looking to purchase have flooded the market. All the while, the supply of homes on the market is staying pretty low.

On the other hand, interest rates for mortgages have directly reflected the Fed’s decision to cut rates, and over the last few months we have seen record lows, and they are still low today (30 year at 2.90%).

For those who already have mortgages, and want to take advantage of lower rates—refinancing has become very popular (86% higher than September of 2019!). Basically, in a home refinance you replace your current mortgage loan, with a new loan (hopefully with more favorable terms!). A lot of times it is done to take advantage of lower interest rates, to reduce monthly payments, to consolidate debt, or to free up cash.

We get a lot of questions about if or when it makes sense to refinance. It is important to factor in closing costs. This is the cost of taking out a new loan. You then have to compare that amount to your interest rate/cash flow savings, to see when you breakeven. Refinancing is great if you plan to stay in your home long term. The longer you have the loan- the more you save on interest!

For those who are unsure of how long they will be in their home (ME!), it gets a little trickier! I am going through the refinance process right now, so I thought this was timely. Instead of a 2.90% rate, I am paying 2.99%, but I am paying lower closing costs up front. That is because I asked if there were any low (or no cost) options. I am paying ~$2,500 in closing costs, but I am saving $125/month from what I am currently paying. That means if I stay there more than 20 months, I am truly saving money!

All right, that’s it for this month! Stay tuned for my next newsletter where I will continue to share and inform in new and creative ways. If you want to sign up for the newsletter email, click here!  And let others know they can sign up! Also, let’s connect on LinkedIn!

Advisory services provided through AdvisorNet Wealth Management (AWM). Dorval & Chorne Financial Advisors and AWM are not affiliated