The Finatical
Week of October 26th, 2021 - Borrowing Tips, Truck Drive Shortage, Japan's Shift in Economic Policy
FinaticTips - 3 Tips to Learn about Borrowing
Borrowing can be a headache. Even though borrowing money allows you to take care of your expenses and needs, there is always the lingering concern of paying the money back. To make the process simpler for you, here are some unpopular borrowing sources that you should definitely keep in mind when you’re in need of money:
401(k) Plan
A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages to the saver. It is named after a section of the U.S. Internal Revenue Code. The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds.
If you’re in need of a loan, you should really try borrowing from your 401(K) plan. The interest rate on 401(k) loans tends to be relatively low, perhaps one or two points above the prime rate, which is less than many consumers would pay for a personal loan. Also, unlike a traditional loan, the interest doesn't go to the bank or another commercial lender—it goes to you. Since the interest is returned to your account, some argue, the cost of borrowing from your 401(k) fund is essentially a payment back to yourself for the use of the money.
Even if you find yourself unable to repay the loan, there is substantially less risk involved since you do not owe someone else, just yourself in the future. Bear in mind, though, just because you're your own lender doesn't mean you can be sloppy or lazy with repayments. If you don't pay on schedule, and the IRS finds out, you could be considered in default and your loan classified as a distribution (with taxes and penalties due on it).
While borrowing from your 401(k) plan might seem fine, it is usually treated as a last resort if you are unable to receive credit from other sources. There are many reasons for this. For example, If you remove money from your retirement plan, you lose out on the funds compounding with tax-free interest. Also, most plans have a provision that prohibits you from making additional contributions until the loan balance is repaid.
Margin Accounts
A margin account is a brokerage account in which the broker lends the customer cash to purchase stocks or other financial products. The loan in the account is collateralized by the securities purchased and cash, and comes with a periodic interest rate. Because the customer is investing with borrowed money, the customer is using leverage which will magnify profits and losses for the customer.
The interest rates charged by margin accounts are usually better than or consistent with other sources of funding. In addition, if a margin account is already maintained and the customer has an ample amount of equity in the account, a loan is somewhat easy to come by.
Margin accounts are primarily used to make investments and are not a source of funding for longer-term financing. That said, an individual with enough equity can use margin loans to purchase everything from a car to a home. However, should the value of the securities in the account decline, the brokerage firm may require the individual to put up additional collateral on short notice or risk the investments being sold out from under them.
Dos and Don’ts
Dos:
Do negotiate the lowest possible interest rate when taking on debt.
Do make more than the minimum payments on loans, as this will result in you paying significantly less interest over the life of the loan.
Do concentrate your borrowing to a single lender, or as few as possible.
Do keep your overall credit utilization ratio below 30%.
Donts:
Don’t borrow when you’re already deep in debt.
Don’t choose variable rate loans for mortgages, car notes, student loans or anything else.
Don’t borrow money without reading the fine print carefully.
Don’t borrow more than you can afford to repay.
FinaticTrends - 2 Financial Trends
1 - Shortage of Truck Drivers
Reports suggest a global shortage of truck drivers which has begun to negatively affect the trucking and transportation industry. There are many reasons for this shortage. The increased demand for goods, low pay, challenging work conditions, and immigration barriers have all contributed to the trucker shortage. Perhaps the largest disruption to the trucking industry has been the change in consumer preferences during the pandemic. Spending on goods has surged, boosting demand for the truckers needed to transport those goods. Acute labor shortage in the industry can be seen in countries like the United Kingdom, Germany and the United States. Long stints away from home and periods of unpaid work can certainly make trucking seem like an undesirable profession. Efforts must be made to revive the interest in the profession. One such method is to simply increase the wages that come with the job. Stats suggest that trucking is a male dominated profession, so efforts should be made to increase female participation. The United States is piloting an effort to lower the age requirement for interstate trucking. Some are advocating Europe do the same. It will be interesting to see how the global economy will be affected by this shortage.
2 - Japan’s New PM Signals a Shift in Economic Policy
Japan’s new Prime Minister Fumio Kishida has called for a new election to take place on October 31. In anticipation, he is offering a new approach to economic and social policy. In an interview with the Financial Times, he said that Abenomics, the economic policy mix of former Prime Minister Shinzo Abe, had failed to provide a broad-based improvement in living standards. He wants to achieve a virtuous economic cycle by raising the incomes of not just a certain segment, but a broader range of people to trigger consumption. Kishida wants to focus on raising the purchasing power of a broad segment of society. This will entail financial incentives for companies to boost wages and other measures meant to address rising income inequality. He has also called for greater collaboration between the government and the private sector to assure Japan’s competitiveness in key industries. The danger is that such efforts could entail protectionist restrictions on trade that would boost costs and prices, inhibit symbiotic relations with companies in other countries, suppress innovation, and retard growth.
Financial Guidance
“To contract new debts is not the way to pay old ones.” - George Washington
Our first president wrote these words back in 1799, making it clear that borrowing additional money to pay for existing debt is not the best method of dealing with financial obligations.
Money Fact
There are 2,150 billionaires — worth a combined $10 trillion.
That’s just under half of the total gross domestic product (GDP) of the United States.
 |
|