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The Fed just screwed Americans savings accounts · Credit Matters Podcast

• 0:02
  Speaker 1: In September, the Federal Reserve did something it had not
• 0:04
  Speaker 1: done in more than three years. It raised interest rates.
• 0:08
  Speaker 1: If you have money in a savings account, that should
• 0:10
  Speaker 1: be good news. Higher rates, bigger interest payments, your cash
• 0:15
  Speaker 1: finally earning something. So why is everyone suddenly telling savers
• 0:18
  Speaker 1: they are the ones about to get hurt? Your cash
• 0:22
  Speaker 1: is being eaten alive, they say. Being debt-free is a trap,
• 0:26
  Speaker 1: and the way out is to borrow against your home
• 0:28
  Speaker 1: and put that money to work before inflation takes it.
• 0:31
  Speaker 2: Here is what they leave out.
• 0:32
  Speaker 1: The loan most people would use to do that gets
• 0:34
  Speaker 1: more expensive every time the Fed does exactly what it
• 0:37
  Speaker 1: did in September. By the end of this, you will
• 0:39
  Speaker 1: know which of those claims holds up, which one is
• 0:42
  Speaker 1: half a truth dressed up as a whole one, and
• 0:44
  Speaker 1: which one can cost you your house.
• 0:47
  Speaker 2: I know how that sounds. Let me earn it.
• 0:50
  Speaker 1: We are going to test every claim against the real
• 0:53
  Speaker 1: numbers with one saver, Nora, who did everything right and
• 0:57
  Speaker 1: is now wondering whether doing everything right was the mistake.
• 1:02
  Speaker 1: Before we test anything, here is Nora's money exactly as
• 1:06
  Speaker 1: it sits today. Nora has $ 40, 000 in savings.
• 1:10
  Speaker 2: It took her years to build.
• 1:12
  Speaker 1: It sits in an ordinary savings account at the same
• 1:14
  Speaker 1: bank she has used for as long as she can remember,
• 1:17
  Speaker 1: and it has never been touched for anything.
• 1:19
  Speaker 2: That was not a genuine emergency.
• 1:21
  Speaker 1: She owns her home, she has a fixed-rate mortgage, and
• 1:24
  Speaker 1: over time she has built up real equity in the house.
• 1:27
  Speaker 1: She pays federal income tax at 22% on the top
• 1:29
  Speaker 1: slice of her income. She is not reckless, and she
• 1:33
  Speaker 1: is not naive. She has simply never had a reason
• 1:36
  Speaker 1: to question the way she saves.
• 1:37
  Speaker 2: Until now.
• 1:38
  Speaker 1: Three claims keep reaching her from every direction. Her cash
• 1:42
  Speaker 1: is being eaten alive. Being debt-free is a trap. And
• 1:45
  Speaker 1: the smart move is to borrow against her home and
• 1:48
  Speaker 1: put the money to work.
• 1:49
  Speaker 2: We are going to take them in.
• 1:50
  Speaker 1: That order, and each one gets a verdict backed by
• 1:52
  Speaker 1: numbers anyone can check. And one rule applies to the
• 1:55
  Speaker 1: whole video. Every figure is measured against inflation. A balance
• 1:59
  Speaker 1: that goes up while prices go up faster is not growth.
• 2:02
  Speaker 1: It is a slower way of going backwards. The first
• 2:07
  Speaker 1: claim is the one almost everybody has already half accepted.
• 2:11
  Speaker 1: Your cash is being eaten alive. Start with the number
• 2:15
  Speaker 1: that sets the pace. Over the 12 months to August,
• 2:18
  Speaker 1: prices across the economy rose 3.4%. That is the government's
• 2:23
  Speaker 1: own measure, the Consumer Price Index.
• 2:25
  Speaker 2: So Nora's $ 40, 000.
• 2:26
  Speaker 1: Has to grow by 3.4% in a year just to
• 2:30
  Speaker 1: buy what it bought a year ago. Anything less and
• 2:32
  Speaker 1: she has lost ground, even if her balance went up.
• 2:36
  Speaker 1: Now look at where Nora's money actually sits. The average
• 2:39
  Speaker 1: savings account in America pays 0.37%. That is the national
• 2:44
  Speaker 1: rate measured across the country by the agency that insures
• 2:47
  Speaker 1: bank deposits.
• 2:48
  Speaker 2: On $ 40, 000, that earns Nora $ 148 in a year. Then
• 2:50
  Speaker 2: the government takes its share.
• 2:55
  Speaker 1: Interest on a savings account is taxed as ordinary income,
• 2:58
  Speaker 1: so at 22%, Nora keeps $ 115. 44.
• 2:59
  Speaker 2: Now put that next to inflation.
• 3:00
  Speaker 1: After tax and after rising prices, Nora's savings lost 3.01%
• 3:02
  Speaker 1: of their real value over the year. In dollars, that
• 3:04
  Speaker 1: is about $ 1, 204 of buying power gone. She did not
• 3:07
  Speaker 1: spend it. She did not lose it in a bad investment.
• 3:23
  Speaker 1: It simply stopped being worth what it used to be.
• 3:26
  Speaker 1: So far, the claim holds. But remember the question from
• 3:29
  Speaker 1: the start. Higher rates are supposed to be good news
• 3:31
  Speaker 1: for savers. So let us give the rate hike its
• 3:34
  Speaker 1: best chance and move Nora's money to the best savings
• 3:36
  Speaker 1: account on offer. The top high yield savings rate right
• 3:40
  Speaker 1: now is 4.2%. That is exactly the kind of rate
• 3:44
  Speaker 1: a higher interest rate world is supposed to deliver.
• 3:47
  Speaker 2: And before tax, it works.
• 3:50
  Speaker 1: At 4.2%, Nora's money grows faster than prices by 0.77%
• 3:55
  Speaker 1: in real terms. On paper, the promise of higher rates
• 4:00
  Speaker 1: is real. Then the tax bill arrives. 22% of that
• 4:05
  Speaker 1: interest goes to the government, and what is left no
• 4:08
  Speaker 1: longer keeps up. After tax and inflation, even the best
• 4:12
  Speaker 1: savings account on offer leaves Nora down 0.12%. About $ 48.
• 4:20
  Speaker 2: A year.
• 4:21
  Speaker 1: That is the contradiction resolved. Higher rates did help savers,
• 4:25
  Speaker 1: but only the ones who moved their money. And even
• 4:27
  Speaker 1: they are only treading water. The tax is charged on
• 4:31
  Speaker 1: the interest you earn, while inflation is charged on the
• 4:34
  Speaker 1: whole balance, and the saver is caught between them. Here
• 4:37
  Speaker 1: is the figure that makes it plain. For Nora simply
• 4:40
  Speaker 1: to keep pace with prices after tax, her savings would
• 4:43
  Speaker 1: need to earn 4.36%. The best rate on offer is
• 4:45
  Speaker 1: below that, What about the tools that were built specifically
• 4:51
  Speaker 1: for inflation? Savings bonds indexed to prices known as I
• 4:55
  Speaker 1: bonds are designed so that their rate rises when inflation does.
• 4:59
  Speaker 1: Even they, after federal tax, leave Nora down 0.08%, about
• 5:06
  Speaker 1: $ 30 a year. Closer to even than anything else we tested,
• 5:09
  Speaker 1: but still not ahead. So the first claim gets its verdict.
• 5:13
  Speaker 1: Your cash is being eaten alive.
• 5:16
  Speaker 2: It holds up.
• 5:17
  Speaker 1: In an ordinary account, it is being eaten at about $ 1, 204
• 5:22
  Speaker 1: a year on a balance like Nora's. And even the
• 5:25
  Speaker 1: best safe options are only losing slowly, which is exactly
• 5:29
  Speaker 1: why the next two claims sound so convincing. If saving loses,
• 5:34
  Speaker 1: surely something else must win. The second claim is more
• 5:39
  Speaker 1: sophisticated than the first, and that makes it more dangerous.
• 5:43
  Speaker 1: Being debt-free is a trap. The reasoning goes like this.
• 5:47
  Speaker 1: Inflation shrinks the real value of money. That is bad
• 5:50
  Speaker 1: news if you hold money, but good news if you
• 5:52
  Speaker 1: owe it, because you repay your debt with dollars worth
• 5:55
  Speaker 1: less than the ones you borrowed. The saver is the lender,
• 5:58
  Speaker 1: and the borrower comes out ahead. This is a real mechanism,
• 6:02
  Speaker 1: and the rest of this video depends on it. Picture
• 6:04
  Speaker 1: a debt with a payment that never changes. At 3.4% inflation,
• 6:07
  Speaker 1: that debt loses about 3.29% of its real weight every year.
• 6:14
  Speaker 1: because the dollars you pay it with are worth a
• 6:16
  Speaker 1: little less each time. If your income rises with prices,
• 6:20
  Speaker 1: every payment takes a slightly smaller bite than the one before.
• 6:23
  Speaker 2: Nora already has one of those.
• 6:24
  Speaker 1: Her fixed-rate mortgage is quietly getting lighter in real terms
• 6:27
  Speaker 1: every year.
• 6:28
  Speaker 2: So far, the claim sounds right. Here is the first
• 6:31
  Speaker 2: thing it leaves out. That benefit belongs only to fixed-rate debt.
• 6:35
  Speaker 1: If the rate on your debt can rise too, the
• 6:37
  Speaker 1: lender is no longer stuck with the old terms. The
• 6:40
  Speaker 1: lender simply charges you more. The second thing it leaves
• 6:43
  Speaker 1: out is the rate itself. Inflation only makes a debt
• 6:47
  Speaker 1: cheap if the interest you pay sits close to inflation
• 6:49
  Speaker 1: or below it. Above that, you are still paying a
• 6:52
  Speaker 1: real cost every year. And the debt this advice pushes
• 6:55
  Speaker 1: people toward is exactly the kind where both problems show
• 6:58
  Speaker 1: up at once. It is a home equity line of credit,
• 7:01
  Speaker 1: usually called a HELOC. Most of them are variable. Their
• 7:05
  Speaker 1: rate is built from the prime rate, which moves in
• 7:08
  Speaker 1: step with the Federal Reserve's plus a margin set by
• 7:11
  Speaker 1: the lender when the line is opened. Take Nora's version.
• 7:14
  Speaker 1: Prime is now 7%. Add a margin of half a percent,
• 7:18
  Speaker 1: and Nora's line of credit would cost her 7.5%. Subtract inflation,
• 7:23
  Speaker 1: and the real cost of that borrowing is still almost
• 7:26
  Speaker 1: 4% a year. 3.97%, to be exact. So inflation is
• 7:31
  Speaker 1: not paying off that debt. It is taking the edge
• 7:33
  Speaker 1: off while the rest of the cost lands on Nora.
• 7:36
  Speaker 1: The third thing it leaves out has no number attached.
• 7:39
  Speaker 1: and people tend to discover it too late. When you
• 7:42
  Speaker 1: owe nothing, nobody can force you to sell anything. Not
• 7:46
  Speaker 1: your house, not your investments, not at the worst possible moment.
• 7:51
  Speaker 1: That freedom never shows up in a return figure. It
• 7:54
  Speaker 1: only shows up when things go wrong. So here is
• 7:56
  Speaker 1: the verdict on the second claim. Being debt-free is a trap.
• 8:01
  Speaker 1: It is half a truth dressed up as a whole one.
• 8:03
  Speaker 1: The true half is that fixed-rate debt quietly shrinks under inflation.
• 8:07
  Speaker 2: And Nora is already enjoying that through her mortgage.
• 8:10
  Speaker 1: The missing half is that the debt being sold to
• 8:13
  Speaker 1: her is not fixed, is not cheap, and comes with
• 8:16
  Speaker 1: a lender who gets a say in what she owns.
• 8:18
  Speaker 1: Hold on to that last part, because the third claim
• 8:21
  Speaker 1: is where the numbers stop being uncomfortable and start being dangerous.
• 8:27
  Speaker 1: The third claim is the payoff of the whole argument.
• 8:30
  Speaker 1: Borrow against your home and put the money to work
• 8:33
  Speaker 1: before inflation takes it. Here it is the way it
• 8:36
  Speaker 1: is usually described. First, Nora opens a home equity line
• 8:39
  Speaker 1: of credit and draws $ 50, 000 against her house. The house
• 8:43
  Speaker 1: is still hers. In this story, it keeps quietly holding
• 8:47
  Speaker 1: its value. Second, she puts that $ 50, 000 into an asset
• 8:51
  Speaker 1: that is supposed to rise faster than prices. In the
• 8:54
  Speaker 1: most popular version of this plan, that asset is Bitcoin. Third,
• 8:58
  Speaker 1: she borrows again, this time against the Bitcoin itself, using
• 9:01
  Speaker 1: a crypto-backed loan, $ 25, 000, which is half of what the
• 9:04
  Speaker 1: Bitcoin is worth. Fourth, that $ 25, 000 goes into something that
• 9:11
  Speaker 1: produces income. A small rental, a stake in a business,
• 9:15
  Speaker 1: a side venture. The income is supposed to cover the debt.
• 9:19
  Speaker 1: On paper, it is elegant. Nora now controls three assets
• 9:24
  Speaker 1: instead of one, and inflation, supposedly, is working for her
• 9:28
  Speaker 1: instead of against her.
• 9:29
  Speaker 2: Now let us run it the way a lender would.
• 9:31
  Speaker 1: Start with the line of credit, because this is the
• 9:34
  Speaker 1: detail almost nobody mentions.
• 9:36
  Speaker 2: It is variable.
• 9:37
  Speaker 1: Before the September hike, Prime was 6.75%, and Nora's rate
• 9:42
  Speaker 1: would have been 7.25%. The day after the hike, the
• 9:46
  Speaker 1: largest banks in the country raised Prime to 7%, and
• 9:49
  Speaker 1: Nora's rate became 7.5%. On $ 50, 000, paying interest only, that
• 9:51
  Speaker 1: moves her monthly bill from $ 302.
• 9:53
  Speaker 2: 08 to $ 312.
• 9:53
  Speaker 1: 05. to be straight with you about that number.
• 10:03
  Speaker 2: It is about $ 10 a month.
• 10:06
  Speaker 1: On its own, the September hike is not what breaks
• 10:08
  Speaker 1: this plan, but it tells you which way the ground
• 10:11
  Speaker 1: is tilting. Most Federal Reserve officials expect at least one
• 10:14
  Speaker 1: more increase this year. One more hike takes Nora to 7.75%,
• 10:19
  Speaker 1: and $ 322. 92 a month.
• 10:19
  Speaker 2: Two more takes her to 8%, and $ 333.
• 10:20
  Speaker 1: 33. And every step raises the bar. Just to cover
• 10:23
  Speaker 1: the interest today, the borrowed money needs to earn 7.5%
• 10:25
  Speaker 1: a year before it has made Nora a single cent.
• 10:27
  Speaker 2: After one more hike, 7.75%. That is the slow risk.
• 10:31
  Speaker 1: Now for the fast one. The loan against the Bitcoin
• 10:33
  Speaker 1: works differently. The lender watches the value of the Bitcoin
• 10:50
  Speaker 1: constantly and compares it to what Nora owes. That comparison
• 10:54
  Speaker 1: is called the loan-to-value ratio. Nora starts at 50%. She
• 10:59
  Speaker 1: owes $ 25, 000 against $ 50, 000 of Bitcoin. Here is a typical
• 11:04
  Speaker 1: setup for how these loans are policed. If the ratio
• 11:06
  Speaker 1: climbs to 80%, Nora gets a margin call. She has
• 11:10
  Speaker 1: to add more collateral or pay down the loan, and
• 11:13
  Speaker 1: she has to do it fast. If the ratio climbs
• 11:15
  Speaker 1: to 90%, the lender does not wait for her. It
• 11:19
  Speaker 1: sells the Bitcoin to get its own money back. Terms
• 11:22
  Speaker 1: differ from lender to lender, but the principle is the
• 11:25
  Speaker 1: same everywhere. Regulators have warned for years that when collateral
• 11:29
  Speaker 1: falls far enough, the lender can sell it and the
• 11:31
  Speaker 1: borrower does not get to choose the moment. So how
• 11:34
  Speaker 1: far does Bitcoin have to fall before that happens? For
• 11:37
  Speaker 1: the margin call, 37.5%. For the forced sale, 44.4%. That
• 11:43
  Speaker 1: can sound like a big drop. So here is the context.
• 11:47
  Speaker 1: From its peak in November 2021 to its low in
• 11:50
  Speaker 1: November 2022, Bitcoin fell 77.3%. That is far more than
• 11:57
  Speaker 1: the fall that triggers the.
• 11:58
  Speaker 2: Sale in this plan.
• 11:59
  Speaker 1: Now watch what happens to Nora when a fall like
• 12:02
  Speaker 1: that comes. The lender sells the Bitcoin at the liquidation point.
• 12:06
  Speaker 1: After it takes back its $ 25, 000, Nora is left with $ 2, 777.
• 12:07
  Speaker 2: 78.
• 12:14
  Speaker 1: That is all that remains of the $ 50, 000 she borrowed
• 12:17
  Speaker 1: against her house. She still has the income asset, the $ 25, 000 stake.
• 12:22
  Speaker 2: Assuming it survived the same downturn untouched.
• 12:26
  Speaker 1: Add them together and everything she has to show for
• 12:28
  Speaker 1: the plan comes to $ 27, 777. 78. And the line of credit
• 12:30
  Speaker 1: is still there. All $ 50, 000 of it. It did not
• 12:31
  Speaker 1: shrink when the Bitcoin was sold. it is still charging
• 12:41
  Speaker 1: interest at a rate that moves with the Federal Reserve.
• 12:44
  Speaker 1: And it is secured against the one thing Nora cannot
• 12:47
  Speaker 1: afford to lose. Nora is $ 22, 222 behind, before a single
• 12:53
  Speaker 1: interest payment has even been counted.
• 12:55
  Speaker 2: And that gap is not sitting.
• 12:56
  Speaker 1: In a brokerage account she can walk away from. It
• 12:59
  Speaker 1: is sitting on her house. The plan does not fail
• 13:01
  Speaker 1: because Bitcoin is a bad asset, or the business idea
• 13:04
  Speaker 1: is a bad one. It fails because it stacks two
• 13:06
  Speaker 1: kinds of borrowing that break in different ways. One breaks
• 13:10
  Speaker 1: slowly as rates rise. The other breaks all at once,
• 13:13
  Speaker 1: in a crash. And underneath both sits the home. A
• 13:17
  Speaker 1: home equity line of credit is a loan secured by
• 13:20
  Speaker 1: the home. If the payments become impossible, the lender's claim
• 13:23
  Speaker 1: is on the house. So the verdict on the third
• 13:26
  Speaker 1: claim is the one I promised at the start. Followed
• 13:29
  Speaker 1: exactly as described, it can cost you your house. It
• 13:33
  Speaker 1: does not have to end that way. Bitcoin might rise.
• 13:37
  Speaker 1: The business might thrive. But a plan that only works
• 13:40
  Speaker 1: if nothing goes wrong is not protection from inflation. It
• 13:43
  Speaker 1: is a bet, and the stake is the roof over
• 13:45
  Speaker 1: your head. So where does that leave Nora, holding $ 40, 000
• 13:51
  Speaker 1: that is losing ground in an ordinary account? Not with
• 13:55
  Speaker 1: a magic answer. Here is the honest position. Right now,
• 13:59
  Speaker 1: at a 22% tax rate, no safe place to keep
• 14:02
  Speaker 1: cash keeps up with inflation after tax. Not the best
• 14:06
  Speaker 1: savings account on offer. Not the savings bonds built for inflation.
• 14:11
  Speaker 1: Anyone who tells you otherwise has forgotten the tax bill.
• 14:15
  Speaker 1: So the goal for cash is not to win. It
• 14:18
  Speaker 1: is to lose as little as possible while keeping the
• 14:21
  Speaker 1: one job cash is uniquely good at, which is being
• 14:23
  Speaker 1: there on the day something goes wrong. First, the part
• 14:27
  Speaker 1: of her savings that is a genuine emergency reserve stays
• 14:31
  Speaker 1: in cash, but not in an ordinary account. Moving it
• 14:35
  Speaker 1: from the national average rate to the best high yield
• 14:37
  Speaker 1: rate turns a real loss of about $ 1, 204 a year
• 14:43
  Speaker 1: into a real loss of about $ 48. Her money is
• 14:47
  Speaker 1: just as safe and just as reachable. Only its address changed,
• 14:51
  Speaker 1: and almost all of that loss disappears. Second, some of
• 14:55
  Speaker 1: the cash she will not need quickly could go into I-bonds.
• 14:58
  Speaker 1: They are built to track inflation. They are exempt from
• 15:01
  Speaker 1: state income tax. and they came closest to even of
• 15:05
  Speaker 1: anything we tested. They come with limits. The money cannot
• 15:09
  Speaker 1: come out straight away after buying and cashing out early
• 15:12
  Speaker 1: costs some interest.