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The Two Kinds of Interest: Earning V Paying

Two Kinds of Interest: Earning V Paying Interest

Interest Rate 101!

Albert Einstein once claimed the most powerful force in the universe was compound interest.  That’s pretty impressive praise from the person whose work helped create nuclear power and atomic bombs.  While interest can be powerful, it can also be confusing, because when people talk about it on the news, they mostly talk about it in terms of vague forces and odd numbers.  Here’s a quick rundown on what interest is, as well as how it affects your life today and in the future.
 
When someone borrows money, they pay back more than they borrow.  Whatever extra money they pay back is called interest, and that’s one way that financial institutions and credit card companies make money. That money is basically paying the lender for the risk they take, since there is a chance some of the money wouldn’t get paid back. So interest rates can go up or down depending on how likely the money is to be paid back.  Credit unions like 705 Federal Credit Union work in a lot of the same ways, except that the money they make from interest is shared with credit union members, like you and your family.
 
So, a high interest rate must be bad, because that means people have to pay more money back, right? Well, it’s not really that simple. If it were that easy to understand, then interest rates wouldn’t be on the news all the time.  There’s another kind of interest, which is what you earn on your money.  At a credit union interest on savings accounts is referred to as “dividend” because it is what you are paid for your share of the cooperative.
 
When you deposit money into your savings account, it’s like we’re borrowing money from you.  After all, we’re holding onto your money, so we pay you dividends.  The more money you put into your account, the more we pay you.  So, when you save money, you want a higher dividend rate, which allows you to make more money as your savings account balance increases.
 
That’s the confusing part about interest: Some people want a high rate and others want a low rate.  Unfortunately, those rates are part of everything around you:  If you own your home, you’ll want a low interest rate.  If you’re saving money for college, you’ll want a high dividend rate.  Just about any business that wants to open new locations or get new equipment is going to need a loan, so they’ll want low interest rates.  Retired people who have money saved are wise to seek out the highest dividend rates so their retirement savings will last.
 
Trying to balance all of these people is difficult, which is why the government created a central bank, known as the Federal Reserve (or the Fed) to manage all of this.  It can raise or lower the rates for everyone, but it can’t do both at the same time.  The Fed spends a lot of time figuring out what’s best for the country, and it tries to keep its work secret until it’s ready to reveal whether it’s going to raise or lower rates.  It sends out secret shoppers to check the prices on thousands of goods around the country, and uses all that information to figure out what to do.
 
Hopefully, the next time you’re watching the news, it’ll be more interesting when they talk about interest rates.  It might sound like boring business talk and math, but really it’s a report on secret government shopping spies who are working to figure out whether we need businesses to open up new locations or your college fund to grow.
 
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New Year’s Resolutions

New Year’s Resolutions? We Have Some Easy Suggestions!

fireplace with candles around itBy the end of January, many of us will have forgotten all about our New Year’s resolutions. It can be difficult to change our lives, even when it’s for the better.  Knowing this, we want you to know that, in your financial life, there are changes you can make today that will last the entire year.  Here are three resolutions you can set today and some follow-up goals for the rest of the year. 

Today:  Save money automatically.  If you want to improve your net worth, build financial security or make a big purchase at this time next year, the easiest way to do so is simply to automate your savings.  You can set up an automatic transfer to savings so you won’t be tempted to spend it.  With many of our savings products, you can even access the money if an emergency arises.  Check out our savings accounts and automatic transfer options for those savings accounts.

Later:  Set up an emergency fund.  How much do you have set aside for a rainy day or to cover the unexpected?  If an emergency came up, would you have to sell investments, cash in your retirement or borrow from family?  Make this the year for setting up your emergency fund.  You’ll eventually want to have at least six months of income put aside where you can get to it. for now, start with $1,000, a month’s income, or whatever feels realistic.  It might be difficult to get in the habit of saving money, but this is the resolution you’ll be really happy you kept if something unexpected happens.

Today:  Pay down your debt.  If you’re struggling with debt, there are three basic solutions for paying it down, getting your payments under control and getting ahead of debt.  You can make more frequent payments, pay more each month or lower your interest rates.

Paying more frequently makes sense if you get paid every two weeks: You might already know about the advantage of bi-weekly payments, which let you make the equivalent of an extra monthly payment every year.  If you’re already doing that or you don’t get paid on a weekly schedule, you can also increase the amount you pay every month.  Even an extra $25 per month is $300 per year, and you can set up those payments automatically.  Make sure you increase your payments the most on the bills with the highest interest rates first, even if they don’t have the largest balances.

Finally, you can get ahead of your debt by lowering your interest rates.  You can call the creditors who are charging you the highest interest rates and pay the bill, transfer the balance to a credit card or loan with a lower interest rate, or see if they’ll offer you a lower rate due to improved credit.  One way to make this work is to arrange a home equity loan at a lower fixed rate, then move your balances with the highest interest rates to the loan.  You can apply for a loan here!

Later:  Get control of your spending.  It’s time to make a budget and stick to it.  Build rewards into the budget so you’ll actually be happy to follow it.  Take a look at what you use your credit cards to buy, then budget at least some money for those items or activities.  You’ll never keep a resolution like “stop eating out,” but you have a good chance of keeping a resolution like “don’t go over the eating out budget.”  This also gives you 12 chances to succeed:  Every month you can do better than the month before.

Today:  Make a drawer.  Many of us who have had the misfortune to act as the executor on a loved one’s estate have had the terrible task of finding all the savings, debts, insurance policies and other financial parts of their lives.  Don’t do this to whomever is taking over your life.  Empty a drawer in your kitchen or study and put as many relevant documents in it as you can find.  Make a list of everything in the drawer and everything that’s missing.  Put a copy in the drawer and another with your will so it’s as easy as possible for the grieving individual in charge.  As with any sensitive, personal data, keep this information in a safe place that only you and the likely executor(s) of your estate will have knowledge.

Later:  Fill the drawer.  What’s missing from the drawer?  Do you have a will?  How much life insurance do you have?  Do you have enough savings to take care of your children?  What about a plan for how they will receive that money?  

Talk to a financial planner and insurance specialist to make sure you’re set.  With any luck, 2016 won’t be the year you need it, but if it is, it’ll be better for everyone involved if there’s a plan.

And that’s it … three things to do today and three projects to complete during the year.  None of them are out of reach, so you’re setting yourself up for success by making resolutions you can keep.

Financial Resources: 
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