The chief financial analyst for Bankrate discusses the state of the economy and the outlook for interest rates, as well as the many savings products that are available today.
Our guest on the podcast today is Greg McBride. Greg is chief financial analyst for Bankrate.com, where he has worked for more than 25 years. He received his bachelor’s in finance from the University of Florida. He is also a CFA charterholder.
Background
State of the Economy/Outlook for Interest Rates
“Survey: Despite a Resilient Economy, Experts Still See a Near 1-in-2 Chance of a Recession,” by Sarah Foster, bankrate.com, Jan. 3, 2024.
“Bankrate’s Interest Rate Forecast for 2024: Mortgages, Credit Cards and More Will Stay Pricey, Even if the Fed Cuts Rates,” by Sarah Foster, bankrate.com, Jan. 2, 2024.
“Credit Card Debt Is at a Record High as Fed Raises Rates Again,” by Cora Lewis, apnews.com, March 22, 2023.
“Take These 12 Steps as the Federal Reserve Keeps Interest Rates High,” by Sarah Foster, bankrate.com, May 1, 2024.
Saving
“Survey: Two-Thirds of Savers Still Earn a Savings Account APY of Less Than 4%,” by Karen Bennett, bankrate.com, March 27, 2024.
“How the Federal Reserve Impacts Savings Account Interest Rates,” by Karen Bennett, bankrate.com, May 1, 2024.
“CD Ladder: What It Is and How to Build One,” by Rene Bennett, bankrate.com, Feb. 27, 2024.
“Why Now Might Be a Good Time to Consider Longer-Term CDs,” by Matthew Goldberg, bankrate.com, April 2, 2024.
“How to Start (and Build) an Emergency Fund,” by Karen Bennett, bankrate.com, Feb. 29, 2024.
“The Best Places to Keep Your Emergency Fund,” by Greg McBride, bankrate.com, Feb. 27, 2024.
“Greg McBride’s 2023 Guide: How to Prioritize Emergency Savings, Retirement Savings and Debt Repayment,” by Greg McBride, bankrate.com, Feb. 28, 2023.
“Is My Money Safe? What You Need to Know About Bank Failures,” by Adriana Morga, apnews.com, April 28, 2023.
“Pros and Cons of a Money Market Account,” by Greg McBride, bankrate.com, March 26, 2024.
Mortgages, Homebuying, and Auto Loans
“Forecast: Mortgage Rates to Gradually Decline in 2024,” by Jeff Ostrowski, bankrate.com, Jan. 2, 2024.
“What the Fed’s Moves Mean for Mortgages, Credit Cards and More,” by Tara Siegel Bernard, nytimes.com, March 20, 2024.
“Housing Market Predictions for 2024,” by Ruben Caginalp, bankrate.com, April 4, 2024.
“Auto Loan Forecast for 2024: Rates Should Ease for Good-Credit Borrowers,” by Rebecca Betterton, bankrate.com, Jan. 2, 2024.
Other
Rose Foundation’s Consumer Financial Education Fund
Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar.
Benz: Our guest on the podcast today is Greg McBride. Greg is chief financial analyst for Bankrate.com, where he has worked for more than 25 years. He received his bachelor’s in finance from the University of Florida. He is also a CFA charterholder.
Greg, welcome to The Long View.
Greg McBride: It’s great to be here. Thanks so much for having me.
Benz: Well, we’re really happy to have you here too. We want to start by discussing Bankrate generally and the role you play as its chief financial analyst. What’s a typical day like for you?
McBride: I guess the good news is there really isn’t a typical. There’s a lot of variety, which is what makes it interesting and makes it fun. But now it’s everything from crunching numbers on data that we’ve gathered or polling that has been done on our behalf, to responding to media inquiries or just seeing what’s going on with the latest economic releases. For example, whether it’s inflation reports, or the jobs report, or a speech by one of the Fed governors. That can not only be impactful to markets, but it can also generate media inquiries. So those are the types of things that we keep up to date on every day.
Arnott: Can you tell us a little bit more about the key areas that are within Bankrate’s purview? Is it mainly bank products for savers and borrowers?
McBride: Namely, yes. As the name implies, Bankrate, that’s really how the company got its start—serving bank products across the spectrum, everything from the savings side over to mortgages, loans, and credit cards. Our website does go beyond that. So, we do have other sections of the site that are geared toward things like getting insurance. For example, if you go to through our mortgage channel, you can also go and get home insurance through that channel. You can get auto insurance through our auto channel. When you’re looking at auto loan rates, the next step there is you can research auto insurance options. So, we are expanding beyond that. But the real base core, if you will, has been bank financial products. But we’re increasingly trying to cover sideline-to-sideline personal finance.
Benz: We want to delve into the current outlook for interest rates, the Fed’s actions. It’s been a little bit vexing, I think, for a lot of people in your shoes. A lot of economists were expecting to see a weakening in the US economy, at least eventually, due to rising interest rates. We had that inverted yield curve, which has been a harbinger of recession in the past. But that hasn’t materialized. And in fact, we’ve had a couple of recent inflation reports that were hotter than expected. So maybe you can talk about that—how you’re thinking about the state of the economy today and the direction of interest rates in the future.
McBride: The economy has continued to surprise to the upside, both in terms of growth as well as employment. Last year, coming into 2023, it was pretty widespread, almost universal, the consensus that we were going to have a recession before the end of the year. It didn’t happen. In fact, the economy grew faster in 2023 than it did in 2022. And as we come into 2024, I think expectation is that things will slow, we’ll see slower growth, slower growth in the economy, slower growth in employment. But that mythical soft landing is more within reach than we would have expected or dreamed of 12 months ago. So, I think the odds of that soft landing, where the economy continues to grow but inflation gets down to 2%, the odds of that have improved every day. The odds of recession, I think, have really faded into the background. I think it’s too early for a victory lap. I wouldn’t say we’re completely out of the woods, but the odds, I think, are certainly in favor of the soft landing. We did a recent poll of economists and only about one in three expects a recession within the next 12 to 18 months, which is about half of what it was this time a year ago when two in three were saying so.
Arnott: Would you say that this has been an especially difficult period to read from an economic standpoint relative to other points in your career?
McBride: I don’t know. That’s a good question. Because there have been, I think, a number of different times where it’s been challenging. We’ve certainly seen things come out of left field. The economy was slowing in late 2019. The Fed was cutting rates, but nobody saw Covid coming and economic growth just completely falling off the cliff and then come roaring back. I think there’s been a lot of unique circumstances over the years that make it difficult. This is certainly one of them, but it by no means has a monopoly.
Benz: What’s your take on the inflation front? Would you say that the Fed can declare victory?
McBride: I think it’s a little early for that. I think things have certainly improved, but inflation is pretty stubborn at this point. It is not going to be a smooth ride down to 2%. It’s not necessarily going to come quickly. I do an annual interest-rate forecast at the beginning of every year. That’s something I start working on usually second half of December. At the time, I said that I expected inflation was going to be pretty stubborn and that the Fed was only going to end up cutting rates twice in 2024. At the time, widespread expectations in the markets were that the Fed was going to cut rates six times or even seven. That always struck me as fantasyland. Even the Fed at the time was saying three. The Fed is still saying three, but now those market expectations have really swung wildly to the point where it’s three or two, or sometimes you hear even some voices saying none this year, and that’s because of those inflation numbers that have been stubborn. We had a nice tailwind in the latter part of 2023 when gas prices were coming down. We don’t have that tailwind. So, as a result, we’ve seen the progress halted, and more recently, we’ve seen the oil prices start to work their way up. I think it’s going to take a couple of months to really see is that something that filters through even into core goods prices, and does that set back some of the progress that we had seen last year on inflation?
Arnott: With that kind of stubborn inflation and some uptick in energy prices, when do you think we will actually see the first rate cuts, and are you still expecting to see about two rate cuts in 2024?
McBride: I think we’re still on track for two. It’s probably not going to start as soon as investors might like. Initially, it was May, and now it was June, but I think even some of those June forecasts are starting to get pushed back. I think a lot will depend on what we get from the CPI reading, for example, next week. If that’s another bad number, those June expectations are going to go right out the window. So, it’s probably going to skew toward the second half of the year, but I still think we’re on track for two, but that’s contingent upon seeing some improvement in inflation, albeit uneven, but continued progress on that front, even if it comes slowly.
Benz: I wanted to ask about the strength of the consumer. It seems like consumer spending has been really quite strong despite high inflation, but as interest rates were going up in 2022 and 2023, there was widespread concern that consumers would start to pull back. I’m wondering if that has materialized when you look at the data. Are there any areas where you’re seeing that, yeah, consumer spending is softening a little bit?
McBride: What we see is really a K-shaped economy where the top 25% of households are doing fine. They’re continuing to spend, and that’s where a lot of discretionary spending is coming from. The top quarter of households contribute about 40% or so percent of the spending in the economy, sometimes a little bit more. On the other hand, 60% of households are living paycheck to paycheck, and that’s where inflation has really done a number, not only on their finances and their ability to make ends meet. You’ve seen savings balances go down, credit card balances going up, but also in confidence. So, there’s really two different things going on right there, and it’s one of those where it’s, if you look at the aggregate numbers, it’s looking at something from 35,000 feet, oh, it looks nice. Then when you’re on the ground, you’re like, ooh, not so nice.
I think it’s kind of the same thing in that if we look at the aggregate numbers, and yes, the consumers continue to spend and everything looks positive, but when you look into the data, you see that for a lot of those households, the spending is happening because stuff costs more, not because everything is super wonderful. We’re seeing credit card balances going up, nobody is financing purchases at 20% interest because everything is wonderful. That’s a pretty clear sign of the financial strain that they’re feeling. So, yes, spending has been really strong, but for 60% of households, there’s not a lot of discretionary happening in that spending. It’s out of necessity and the bulk of the experiential travel and those type of things tends to come at the upper end of the income and wealth spectrum.
Arnott: Within that 60% of households, are there any subsegments of consumers that look especially vulnerable or troubled to you right now? Is it mainly people who have a lot of credit card debt or student loans, for example?
McBride: The credit card debt, I think, is certainly a real problem. I mentioned that we’ve got record-high credit card balances at a time when credit card rates are at a record high, but more people are carrying balances for a longer period of time, and it happens when unemployment has been below 4% for two years in a row. That’s not usually a mix that you see, and I think that’s in and of itself a warning flag. So, yes, paycheck-to-paycheck households, particularly low- and moderate-income households, they have really been feeling the strain, but it’s not exclusive to that segment. For example, there are some, even what we would call higher-income households, that they’ve gone a little overboard with the spending, and they too are in that position where the income may not be keeping up with their spending and their expenses, and as a result, it’s dented savings and resulted in more debt.
Benz: Following up on the student loan question, Greg, I think when loans were on hiatus, student loan payments were on hiatus, I think there was this expectation that when they came back online that that would begin to punish those consumers. What do you see when you look at the data there?
McBride: I’m not sure we’re seeing the full effect yet because I think in a lot of cases, the payments haven’t resumed in the sense that either the borrowers are maybe still not making the full payment; maybe they’re getting into a new income-based payment program; maybe they just haven’t started paying them back yet, knowing that it’s not something that’s going to show up on their credit report right away. So, I don’t know that we’ve seen the full effect there, but it’s a budget-buster for many of those who do have student loan debt. Budgets have been really, really tight the past couple of years just because of the escalation of day-to-day necessities. Then you throw in that, oh, by the way, that $300 a month or $500 a month student loan payment that you were making a few years ago, you’ve got to start making that again. That’s certainly a recipe for financial distress, and I don’t know that that’s one that we’ve really seen the full effects of at this point.
Arnott: On the positive side, you’ve tweeted a couple of times about interest rates went through this rapid rise—took the elevator up in 2022 and 2023, but there’s an expectation that they’ll go down at a slower rate, take the staircase down more gradually. So, it seems like that would be pretty positive for both savers and investors. Is that your take?
McBride: Certainly, for savers. We’ve seen some of the best returns we’ve seen in more than 15 years on safe haven products, and that’s everything from high-yield savings accounts and money market deposit accounts to money funds, Treasuries. And I think that even in an environment where interest rates are working their way a little bit lower, you’re still going to be outburning inflation on those risk-free or safe haven investments. And to string two years in a row together where you can say that, is pretty rare feat. So, I think from the cash investors’ standpoint, the outlook continues to be very positive, that idea that rates coming down but coming down slowly is actually a benefit. Where that’s a hindrance is back to a lot of those borrowers we were talking about a moment ago, where rates aren’t going to fall fast enough to bail you out. If you’ve got credit card debt, you need to focus on attacking that debt aggressively, taking advantage of 0% balance transfer offers to really put the wind at your back and really put the hammer down on paying down the debt because rates aren’t going to fall fast enough to really make a difference and bail you out. You’re going to have to do the heavy lifting on that.
Benz: We have a whole bunch of questions about savings products, which are like the breakout sexy product of 2023 and 2024. But before we get into that, I just wanted to ask about the election in November and to what extent do you think the November election will factor into the Fed’s decision-making around interest-rate cuts? And maybe you can talk about what history tells us about that.
McBride: There’s a tremendous difference of opinion. The Fed says that they do their best to be apolitical and the looming election doesn’t impact what they have to do to be what’s best for the economy. But on the other hand, I think just the awareness of it, that in and of itself can have a subliminal effect. There is a Fed meeting in September and then the next one is right after the election, literally the same week. So, if they get to September and it’s kind of on the fence about, well, do we cut rates or not, it’d be pretty easy to punt until the next meeting, which comes after the election, and then voila, they didn’t have any impact on the election. But by punting, does that have some effect on the economy, again, because they were trying to avoid any appearance of influencing the election or having an impact there? So, a lot of that is how people perceive that I think is going to depend on the lens through which they’re viewing it. But at the end of the day, I think the Fed is ultimately going to make decisions that are based on what they’re seeing in the economic data, and the timing of the calendar is going to be a pretty distant secondary consideration.
Arnott: As Christine mentioned, this has been a great environment for savers. You can get yields of about 5.5% on the shortest end of the yield curve as we’re taping this at the very beginning of April. But one of your colleagues, Karen Bennett, recently wrote that the majority of savers are still in accounts that are yielding less than 4%, even though it’s really not that hard to get a better yield. So, what do you think is going on there?
McBride: We did this consumer poll and we found that two thirds of savers are earning less than 4%, and that’s in an environment where, as you noted, the yields well above 5% are very attainable. And those 5%-plus yields are literally available to everyone. We got a plethora of accounts listed on Bankrate.com, but more than a dozen that are earning more than 5% APY, are federally insured, are available nationwide and have minimal deposits of no more than $100. Literally available to everyone. And so why are two thirds of savers not taking advantage of that?
I think inertia is—it can work for you or against you. And if you just stick in with the same old bank account, same old savings account that you’ve had, you have not benefited from the sharpest run up in interest rates in 40 years. On the other hand, if you’re out there actively seeking better returns and putting your money where it’s going to be welcomed with open arms and higher returns, then you’re in that book where you’re earning 4.5%, 5% or more. And so, the only thing that’s really keeping anybody from earning 5%-plus is the person they see in the mirror. So, it is literally within reach of everyone. Everybody needs that rainy day fund. The ability to outearn inflation on that risk-free savings account, it’s a pretty rare circumstance to take advantage of while you can.
Benz: Just to take a step back, Greg, can you talk about why there is such a huge range of interest rates on offer for these bank-offered products that are basically fungible? Why the huge variation in the return that you’re able to earn?
McBride: What banks pay, whether it’s savings accounts or certificates of deposit, is ultimately a reflection of their desire for deposits. Market share equals pricing power. The banks that have the biggest market share, they’ve also got the most deposits. They don’t need to pay up to keep the deposits they have worked on and certainly not to bring in more. And their yields reflect that. Despite the sharpest increase in interest rates in 40 years, a lot of the big banks are still paying 0.01 on savings accounts, and that’s because they’ve got pricing power. They’ve got market share. They don’t need to pay up.
On the other hand, there are banks out there that they don’t have the thousands of branches and ATMs all over the country. They don’t have billboards all over town. They don’t have their name on the stadium. They can’t outmarket their big behemoth competitors. How can they compete and how can they bring in the deposits that they need? Pay a higher rate of return. And as a saver, we can exploit that difference. We’re not hostage to the 0.01% that the big banks are paying. We can send our savings to a place where it’s going to earn a higher rate of return. We’re going to be able to preserve the buying power of that money. But we don’t have to change anything about our day-to-day banking. We can link that back to the checking account you have at your current bank or credit union.
Arnott: Would it be fair to say that when you’re looking at the old-line brick-and-mortar banks that they might be relatively quick to ratchet down interest rates on their savings products when rates go down, but slower to adjust them upward?
McBride: Yeah, I’d say that’s generally the case. The deposit costs, that’s a cost center. And so, banks, they depend on that interest margin, the difference between what they pay on deposits and what they earn on loans. And so, when interest rates go up, they’re pretty quick to reprice the loans. They reprice deposits as needed when rates fall. It’s going to take a while for that loan book to reprice. So, what do they have greater control over is what they’re paying on deposits. And so, yes, they do tend to move those down at a much quicker rate, which is how some of those banks ended up at 0.01% in the first place.
Benz: I wanted to ask another, I think, pretty basic question. But we’re in this situation where bonds are yielding less than savings products today. In my investment career, I don’t remember that there’s been as long a stretch where this has been the case. Can you explain why this happens and maybe also help us size up this period relative to history that you’ve observed?
McBride: You mentioned the inverted yield curve at the top of the segment. And that’s got a lot to do with it in the sense that because of the expectation that interest rates are going to come down—how much and when still to be determined—but the expectation is that interest rates are going to come down. The longer you go out of the yield curve, the less you’re earning. That’s certainly true with Treasuries, but it’s also true in terms of CDs and a lot of bonds, for example, particularly on the investment-grade side. So, the very short-term yields still reflect an environment where the fed-funds rate is as high as 5.5%. But the expectation that it’s not going to stay that way forever is why you find longer-term instruments that have yields that are below that.
So, yes, you can put your money in a savings account earning over 5%, but once the Fed starts cutting rates, it’s probably not going to be earning 5%. It’s going to come down too. If you want safety and stability in terms of what you’re going to earn on a rate of return and you’re willing to commit your money for a period of time, yes, you can lock into a bond or a CD and do that, but the yield is going to be lower to reflect the expectation that by the time that matures, interest rates are expected to be considerably lower than what they’re at today.
Arnott: If you are expecting that the Fed will be lowering rates and you don’t need the liquidity, do you think that locking in a five-year CD with a rate of 4.6% or 4.7% is a smart option today versus staying on the shorter end of the yield curve?
McBride: The key ingredient there is, as you said, you don’t need the liquidity. Time horizon really has to be the determining factor. You can’t put yourself in a position where you’re chasing yield, and particularly now, yield curve is a burden. So, if you go longer term, you’re taking a lower yield than you could get on a shorter term. You don’t want to have to then cash out early and then give some of that yield back in the form of an early withdrawal penalty. So, time horizon is really now the determining factor of what maturity you pick. But yes, if you don’t need the liquidity, if you have the luxury of locking up your money for five years, I think the five-year CDs are very compelling right now, whether you’re a retiree that’s looking to set up future interest income, you have a specific expense at a particular time in the future, or you’re just looking to diversify an otherwise equity-heavy portfolio.
Benz: Sticking with CDs for a moment, we wanted to ask about laddering CDs. We talk to a lot of retirees, and they say that that’s something that they like to do to help supply their cash flow needs for the years ahead. What do you think about laddering a portfolio of CDs today, even though the yields on shorter-term CDs are higher than the longer-term ones?
McBride: Well, laddering in and of itself is kind of an all-weather strategy. The idea there is you’re diversifying among a range of maturity dates. So laddering is not how you’re necessarily going to optimize your interest earnings and get the absolute peak in the cycle that avoid the absolute bottom. Instead, what it’s designed to do is really smooth out those peaks and valleys and give you a more predictable stream of interest income, which is really what retirees are after. So, I think now is an awesome time to be setting up that ladder. It just the reality of it is, as those instruments mature in the years ahead, you’re likely to be reinvesting at lower rates of return. But by virtue of the ladder, you’re only ever reinvesting a portion of your money at a given point in time, not the whole ball of wax. And so that diversifies your exposure to falling interest rates from that standpoint.
Arnott: If I’m shopping around CDs, whether I’m trying to set up a CD ladder or just buying one CD for a set time period, should I just look for the highest rate and call it a day? Or are there other factors to consider as I’m deciding what type of CD I want to purchase?
McBride: Certainly, I think a couple of other factors you want to take into consideration, especially where else you may have money. For example, if you already have $200,000 in CDs at a particular bank, well, you don’t want to go out and put another $100,000 in there and put yourself over the Federal Deposit Insurance Corporation limits. And so, you have to certainly consider that. We mentioned the time horizon, that being a factor. But also, it’s a very competitive landscape. And so, you’re not necessarily tied to just one particular bank. If you want to get a competitive return, there are plenty to choose from. So, you see the one at the top of the list. Maybe you already have a few other CDs with them, and you don’t want to put more money with them, you can go to the next on the list. Maybe it’s a bank that you had a previous experience with, and you’re like, and I think I’ll try somebody else. You have that option. It’s a competitive field. There are plenty of other banks that are offering competitive returns. So, yeah, I think you can take other factors into consideration, but not feel like you’re sacrificing a lot in order to do so.
Benz: In addition to information on different CDs and their interest rates, Bankrate also has information on savings accounts, high-yield savings accounts, as well as money market accounts. Maybe you can help us with the terminology there. What’s the difference among those three account types?
McBride: Well, savings accounts and money market deposit accounts are, from a functionality perspective, kind of six of one, half a dozen of the other. They’re both designed to meet the same need, which is the need for immediate cash, not a transaction account that maybe you’re paying all your monthly bills out of, but you get an unexpected car repair bill or other unplanned expense, it’s the money that you tap into for that. A lot of the top-yielding accounts, you’ll see it’s a mix of savings accounts and money market deposit accounts. So, from a saver’s perspective, you’re really indifferent as to what nomenclature is attached. You want the Federal deposit insurance. You want to deal directly with the institution and know that your money is liquid. You can get to it when it’s needed and you’re earning a competitive rate of return.
CDs are a time deposit. So, they’re more akin to bonds, where you’re committing your money for a period of time, but you also know exactly what you’re going to earn for that period of time. And if you renege on your end of the deal, in other words, you cash out early, you’re going to pay an early withdrawal penalty. That’s typically the forfeiture of interest for some period of time. Now, the little-known fact about early withdrawal penalties a lot of people don’t realize is that if you cash out of a CD and you haven’t earned enough interest to satisfy that early withdrawal penalty, they can dig into the principal for the difference. So, now, the cost of misjudging your time horizon not only has erased your return, it’s also erased some of your principal. Well, the whole reason you put your money in a CD is to preserve the principal. So, it really comes back to that time horizon being the determining factor, whether or not you’re in the market for a CD and if so, which maturity is right for you.
Arnott: You mentioned the $250,000 limit for FDIC insurance and that being one of the reasons why you don’t want to have too many assets with one institution. There are also some firms now like Wealthfront, Betterment, and others who are offering much higher FDIC insurance limits, maybe up to $5 million or $8 million per depositor by working with a network of partner banks. Do you have any opinion on those types of programs or is there any risk under the surface with those programs?
McBride: A lot of banks in fairness offer those options too, and some of those have been around for decades, some of these programs that banks use, and that allows them to be able to accommodate that high-net-worth client who—they bring a lot of money in the door, they can for the purposes of Federal deposit insurance, farm that out to their network of banks. But the customer gets the convenience of dealing with their preferred financial institution—we’ll deal with one bank, not 30 different banks. But for purposes of Federal deposit insurance, that may be chopped up into little pieces and farmed out to all those banks just so they stay under the Federal deposit insurance limit at all those banks. So, yeah, I think as we all got a reminder of about a year ago at this time with the failure of Silicon Valley Bank, among others, is there’s no sense having money in a bank that’s uninsured. You’re not being compensated for that risk. Federal deposit insurance is paid for by the banks, not by you. So, utilize it, make sure whenever money you’ve got on deposit with a bank, or a credit union is fully covered by Federal deposit insurance. And there are a lot of different ways to do that, many of which are involved still dealing with just one bank because they offer these programs that allow them to expand the amount of insurance coverage they offer to their clients.
Benz: In a related vein, money market mutual funds, of course, are not FDIC-insured. There’s no guarantee of principal stability there, and we saw that in stark display during the great financial crisis. But it seems like one workaround would be to just invest in a money market mutual fund that invests in Treasury bonds, where you have a really good likelihood of being made whole. So, what do you think about that idea as a workaround for people with, for whatever reason, a lot of cash assets who don’t want to monkey around with bank FDIC protections?
McBride: I think money funds are certainly a fine supplement to what you have. For example, the money that you’ve got in your brokerage account that you want to be able to put to work at a moment’s notice if the market has a bad day or a bad week, money fund is the place to have that money that’s instantly available at the point you want to invest. So, I don’t think this is necessarily all or nothing. Particularly for higher-net-worth clients, they like the idea of having some diversification in terms of where their different accounts are. Just that way, they don’t ever feel like they’re locked out of their money. And so, you may very realistically have a money fund or two with different brokerage accounts, but then also have a high-yield savings account that is for your emergency fund or money market deposit account that’s for a specific cash need that you have coming up in the next couple of months.
Arnott: We’ve been talking a lot about cash and different types of accounts that people can use to hold cash. And definitely, if you look at a 5%, 5.5% yield, that is pretty attractive. But do you think there could be a risk that some investors are overallocating to cash right now?
McBride: That’s a great question. Like I said, we’ve seen some of the best yields on cash that we’ve seen in more than 15 years. I think for most consumers, the problem is they don’t have enough cash. They’re anemically low on things like emergency savings. But for those that are higher-mass affluent, higher-net-worth households, yeah, I do think that there is a risk, particularly in times of market volatility. You look at 2022, both the bond market and stock market suffered losses that year and fairly steep ones. And at the time, interest rates were on the rise. So, I think there’s a lot of money that probably gravitated toward cash at that point in time that maybe hasn’t made its way back into those other asset classes, even though we’ve seen a nice rebound, particularly on the equity side with the market going on to set new record highs. So, yeah, I do think there’s a risk of having too much in safer haven investments. And as we’ve seen time and time again, the tendency to chase performance where just money came out of stocks and bonds when the prices were falling and went into cash, and the money is only going to come back out of cash and into stocks and bonds now that asset values are fully recovered, and you get to pay full price. That bad habit that investors have of chasing performance and in the process getting the timing all wrong.
Benz: We’ve been talking about how this has been such a boon to savers, but we also wanted to talk about borrowers, the other side of the ledger. It’s not been such a happy situation for people in the market for new mortgages, for example. There’s that old saying that you should date the rate and marry the house. And so, I’m wondering if you can talk about whether you think that’s good advice for homebuyers in a market like the current one, that should they just focus on finding a house that they like and can afford and assume that they’ll be able to refinance at some later date? How should they approach it?
McBride: I wouldn’t use the word assume, but I would say certainly prepare for the opportunity to refinance. So, yeah, I think by and large, that’s very apropos right now. And it’s why I’m not a fan of necessarily paying discount points in this environment to buy down your rate. You part with a lot of cash to buy down your rate just a little bit. And often, it will take you five or six years to earn that back. Well, there’s a fair chance rates will drop a little bit in the next five or six years to the point where you’d refinance. You take out a loan today at 7%. If rates fell to 6.25%, you’d be all over it to refinance.
So, I’m not a fan of paying the discount points right now because I don’t necessarily think you’re going to get the return on investment. Likelihood is much higher that you get enough of the drop-in rates to be able to refinance. And I think for a lot of homebuyers and homeowners that have taken out loans with rates of 7% or even 8% like we saw last fall, that if interest rates were to fall over a prolonged period of time, that you could find yourself as a serial refinancer, that you basically, refinancing every time rates drop 75 or 100 basis points, doing it again and again. And who knows if that will happen and how low rates will go. But I do think that you will see ample refinancing opportunities come about over the next few years that certainly warrant that. So, I would certainly say be prepared. I would assume don’t sacrifice affordability. Make sure this is a payment you can live with. If things don’t materialize, and rates don’t fall, you’re the one that’s on the hook for the payments. But if things play out as expected, we do think mortgage rates are going to fall and you want to be prepared to take advantage of that.
Arnott: With that widespread expectation that rates will fall eventually, are you seeing more people taking out adjustable-rate mortgages?
McBride: Not really. And there was, I think, a little tendency of the media to over-report this about a year ago, when the percentage of applicants that were applying for adjustable-rate mortgages reached a multiyear high of 9%, which, if my math is correct, that means that about 10 out of 11 borrowers was not taking adjustable-rate mortgage. But yet, somehow, the surge and popularity of adjustable-rate mortgages became newsworthy. So, I think a little bit was overstated—it had been 6%. It went up to 9%. But it was still really, really low. And even now, it’s still very, very low. The fixed-rate mortgage, and specifically the 30-year fixed, is the dominant product, and with good reason. It’s the best gauge of affordability. There are plenty of areas of life to take risk. Your house is not one of them.
Benz: I realize it’s kind of tangential to your work. But I wanted to ask about that National Association of Realtors settlement over agent commissions. There’s been a lot of discussion about the impact that that will have on buying and selling homes and the cost of buying and selling homes and the home market. Can you talk about that, especially the consumer implications?
McBride: I think the design or the ideas that over time, it’s going to reduce transaction costs, particularly for sellers. And that’s certainly a good thing. The US has some of the highest transaction costs for real estate of any place in the world. And somebody can sell $300,000 worth of stock for literally pennies. But you go to sell a $300,000 house and you get back 8% or 9% in terms of various transaction costs. So, yeah, something’s got to change there.
I’m curious to see how this unfolds. And I think it’s going to evolve over time. But I do worry if there might be the unintended consequence of buyers, particularly first-time buyers, find themselves perhaps a little orphaned in the environment in the sense that all the money is on the sales agent side. The more you gravitate to that side, all of a sudden, the first-time buyer who needs some guidance, maybe they don’t have as many people willing to take them around. Or you have buyers that they flat out can’t afford to pay out of pocket for the cost that it would take to retain a buyer’s agent. So, they either go it alone or maybe they go with the à la carte model. I think you’ll see more and more of that popping up as well, where I can drive myself around and look at houses, but what I really need is somebody who can look over the paperwork and those kinds of things, so paying a specific price for specific services that cover particular aspects of the process.
Arnott: Another decision that people are faced with when they’re buying a house is whether they should use a mortgage broker. Can you talk about the pros and cons of using one?
McBride: I’m just a big fan of casting a wide net. Not everybody charges the same price. You want to get the best deal for your money. And that means shopping around. And you certainly start with your own financial institution. But casting that wide net means doing a search, looking more broadly. That could be utilizing a mortgage broker. It could be using a site like Bankrate.com to compare among various mortgage lenders. The point being, cast a wide net and make sure that you can get the best deal that you can actually qualify for. Just go with the first one you see or the guy you know—you don’t have the context. Maybe you are getting a great deal. But unless you’ve been able to compare that to something else, you really don’t know if that’s the best deal you could get. So, I’m just a big fan of casting a wide net. Included in that net are mortgage brokers, traditional mortgage banks, credit unions. Casting that wide net is how you’re going to get the full scope of the marketplace.
Benz: I wanted to ask about auto loans. Those interest rates have shot up a lot. And the terms are also really long, like seven years, eight years. Can you talk about what people should know if they’re in the market for a car and they have to finance it?
McBride: This is one I think doesn’t get nearly enough attention. When you look at the strain that household budgets are feeling, oftentimes the reason for that is sitting in the driveway. Auto payments are budget busters. And particularly with the escalation of sticker prices and Americans’ preference for ever larger and more expensive vehicles, you’re seeing more and more amounts financed stretched over longer periods of time. And as you noted on top of that, interest rates have gone up pretty dramatically over the past couple of years. And so, you’re seeing an increasing number of borrowers who are taking payments at $700 or $800 a month for one vehicle. And many households have more than one vehicle. So, how much of that monthly budget is getting poured into car payments? It’s a depreciating asset.
So, yeah, not a great time for buyers. And if so, do what you can to minimize the amount you’re financing and the period of time you’re financing it over. The goal is to get yourself to a point where you’ve got life without car payments. Because then, instead of pouring $700 or $800 a month into payments, now that $700 or $800 a month can go into savings, building up a little bit of a nest egg that you can use to pay cash for the next vehicle, or at least make a big dent in the amount that you have to finance. Unfortunately, a lot of people are on the wrong side of that, where they’re rolling negative equity into each new purchase. And so, over time, the amount they’ve owed has grown larger and larger and larger. So, it’s not just the vehicle that’s getting larger and larger. Over time, it’s the amount that’s owed, it goes up every time they trade a vehicle in, roll over the negative equity to buy an even pricier vehicle.
Arnott: It’s interesting. We’ve talked to a couple of other people on the podcast who have pointed out that, especially for people who maybe grew up in poorer families and are just starting to make more money, that a really nice car is a very tangible sign of wealth and a way of maybe showing their friends, neighbors, even themselves that they’re doing well. And it seems like that is one of the reasons why a lot of people might tend to overspend on cars in particular.
McBride: Completely agree. Unfortunately, it is seen as a status symbol, but it will eventually be a rust bucket. On the other hand, homes tend to appreciate in value. So, if you’re looking for a status symbol, at least pick one that’s going to appreciate over time, not one that’s going to depreciate.
Benz: So, picking up on Amy’s question, you’ve been involved in credit counseling—providing credit counseling, I should say. Do you have any tips for people who have had issues with racking up credit card balances or other types of debt?
McBride: I think the first thing—and I’m glad you brought this up—the first thing really is just knowing that there is help out there. There are options out there. You’ve mentioned my involvement in nonprofit credit counseling, I served on different boards in that industry for about a dozen years. And I did so on a volunteer capacity because I saw firsthand the great work that they do for people. And so, if you’re having problems with debt, if your balances are going up rather than down, if you’re having trouble making the payments, you’re not in this alone. One of the steps you could take, particularly if you feel like you just can’t get a handle on this, is to work with a nonprofit credit counseling agency. They can really work with you to help with things like budgeting. They can even negotiate with your creditors to negotiate lower interest rates, put you on a repayment plan—the end goal to get you out of that debt altogether and get you on a pathway toward financial stability. So, knowing that those options are out there, the great work that they do for people, that’s the thing that I shout from the mountain tops.
Arnott: So, also on the nonprofit side, you’re a member of the board of the Rose Foundation’s Consumer Education Fund, and you’ve been an advocate for financial literacy. Why do you think financial literacy is still generally pretty poor?
McBride: It is still generally pretty poor. No doubt about that. We don’t teach it enough in schools. We don’t teach it early enough. There’s not necessarily enough positive role-modeling in the sense that a lot of the parents don’t have a handle on their finances. So, how could they possibly model good habits for their kids? So, the cycle then repeats itself.
I don’t know that there’s a one single magic bullet here, but certainly making it a higher priority in the education system and over an extended period of time, and then putting people in those positions to teach it that have experience in the field, that can impart those positive habits on the part of students. One of the things I did a number of years ago was I did some guest lecturing at Rutgers University, and they had a class that was in part dedicated to financial literacy, and it was always oversubscribed every semester. So, again, it just shows the demand is out there. People know that they don’t know enough, and they want to know more, and yet, I think collectively, at least from an education system standpoint, I think we kind of let them down.
Benz: Wondering, Greg, you’ve been doing this a long time. Can you talk about what you think is one of the most underrated or underdiscussed aspects of personal finance?
McBride: Successful saving is all about the habit. There’s really not a whole lot of magic to it. Particularly when you’re young and your earnings are low, the sooner you can get in the habit of saving 10% to 15% of your income, the better, because that habit will then stay with you for years to come. As your earnings grow, so too will your savings. What’s unlikely to happen, what’s not going to happen is you’re going to get to a certain age and all of a sudden, flip a switch and become a great saver. But yet, all the time, you hear people say, well, I’ll start saving as soon as I get the debt paid off. Well, I’ll start saving as soon as I get that next raise. Those milestones come and go, and guess what, the savings never really gets started.
So, I’m just a big fan of establishing that habit of saving right from the get-go, from that very first paycheck. And the sooner you can do that, the better, because it will stay with you for years to come, time being your greatest ally from the standpoint of building wealth. Every dollar you put away into a tax-advantaged retirement account when you’re in your 20s, could be $15 or $20 by the time you retire. And so, that power of compounding is, it’s really compelling. But you’ve got to get in the game to be able to participate.
Arnott: We’ve been hearing a lot about this new trend of so-called loud budgeting, where people are trying to be much more open about their finances. And maybe if they can’t go to an expensive restaurant with their friends, they’ll explain why that is and the fact that they’re trying to be more responsible with their finances. Do you think that that’s a positive thing?
McBride: If it works, I’m all for it. I think whatever works for people, there’s not necessarily a right or a wrong way to do it. You’ve just got to find what works for you. It’s comforting to see that just this peer pressure I think has led people down a path of overspending and keeping up with the Joneses and trying to keep up with appearances. It’s nice to see the pendulum swing the other way and create a safe place where, hey, being mindful of your dollars, cutting back, doing without, it’s OK. And in fact, in our group, it’s cool. So, I think in that respect, it’s a very positive development.
Benz: Well, Greg, we’ve loved hearing your insights today. Thank you so much for taking time out of your schedule to be with us.
McBride: Oh, thank you both very much for having me. It’s been a pleasure.
Arnott: Thanks again, Greg.
Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
You can follow me on social media @Christine_Benz on X or at Christine Benz on LinkedIn.
Arnott: And at Amy Arnott on LinkedIn.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.
Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
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