Low Interest Rate Traps

Posted on August 1, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

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IRs at Historic Lows

[By David K. Luke MIM CMP™ http://www.NetWorthAdvice.com]

David K. LukeWhile our economy is still in a “Land of Make Believe”, despite the “mini-crash” today and with interest rates still at historic low levels, now is a good time to remind ourselves of a couple tempting financial missteps:

Taking On New Debt

Debt is Debt!

When you borrow money to buy that second home, nice boat, or remodel the kitchen, it is easier to justify considering the lower monthly payments at 3 to 6%. That $110,000 Sea Ray 300 Sundeck boat you have always wanted is only $729 a month (240 months @ 5% no down). Affordable, right?

Whether or not it easily fits within your budget is one thing, but the low interest rate does not negate the fact that you now have an $110,000 liability on your Balance Sheet. Depending on depreciation and resale factors, you may also be draining your net worth with such a purchase if you end up “upside down” on the value.

Neglecting Existing Debt

Your mortgage is under 3.5%. Your practice just scored a low interest rate on a needed new piece of medical equipment. Your local bank just quoted you 1.99% on a new car loan. Life is good for medical professionals!

Perhaps because the emotional benefits of paying off debt is difficult to quantify, paying off low interest rate loans is not usually a priority for most physicians. Professor Obvious states: “Once a debt is paid, you have freed yourself of future recurring interest costs and an outstanding obligation.” While this seems like a trite concept, the point is that funds that have been previously used to pay interest, no matter how low the rate was, can be used for other purposes. Unfortunately physicians and financial advisors, CPAs, estate planning attorneys tend to be over analytical and miss the “happiness factor” of getting out of debt and owning your abode and other assets. For the strictly number-oriented person or over analytical physician, this can be a sticking point. After all, why pay off a 3.5 % mortgage (that after tax is costing you around 2.5% or less)?

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Euro Debt

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A physician would never remortgage their home to invest in a mutual fund. In fact, it is now accepted by FINRA, the SEC, and other regulatory bodies in the financial services industry that a financial advisor that encourages a client to leverage principle residence equity (take out a 1st or 2nd mortgage) to make a security investment is akin to committing malpractice. Yet I hear the rationale that funds are being deployed to other “investments” rather than paying off a low interest rate mortgage.

Life Is Good!

From a financial planning perspective, avoiding new debt and retiring existing debt obligations as soon as reasonable gives a physician and his or her family more options. Taking a locum tenens position, retiring early, and working less hours are just a few of these options.

Assessment

With a little consideration and restraint on your personal debt situation, even at these low interest rates, financial freedom and the resulting empowerment is achievable earlier.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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2 Responses

  1. Salvitore, on July 11, 2015 at 2:21 PM said:

    IRs,

    The Federal Reserve dropped its policy rate (the federal funds rate) to near zero in 2008, where it’s sat through episodes of sputtering growth and evolving guidance on when the time would be right to raise it again. Now it seems that the time for a rate rise is approaching, with inflation beginning to move back towards the 2% target and a labor market that’s continuing to strengthen.

    The Fed’s target for inflation (an annual rate of about 2%) may be some time off, but they’ve made clear that, rather than needing to achieve this target outright, they must be comfortable that core measures of prices will continue moving towards it. Now that last summer’s steep decline in oil prices will begin dropping out of year-over-year calculations and measures of inflation expectations appear persistent, they may just be getting more comfortable.

    Meanwhile, the headline rate of unemployment has improved dramatically over the past three years, to 5.3% in June, but some are still questioning the strength of the labor market.

    Why it matters?

    The federal funds rate has far-reaching implications for the U.S. economy and globally. It can affect the rate you pay for a car loan or a mortgage, the rate a foreign investor earns when buying a U.S. Treasury or corporate bond, levels of job creation, and manufacturing activity.

    Salvitore

    Like

  2. Ann Miller RN MHA, on October 12, 2015 at 7:25 PM said:

    FOMC – Neg IRs?

    Federal Reserve officials now seem open to deploying negative interest rates to combat the next serious recession even though they rejected that option during the darkest days of the financial crisis in 2009 and 2010.

    http://www.msn.com/en-us/money/markets/fed-officials-seem-ready-to-deploy-negative-rates-in-next-crisis/ar-AAfj85d?li=AA4Zjn&ocid=U348DHP

    Ann Miller RN MHA

    Like

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