S4-8: Rising Interest Rates, Velocity Banking & HELOCs

Family Finance Mom Q&A: Updates & Inspiration

Meghan, known as the Family Finance Mom, held a live Q&A session where she thanked viewers for their understanding for delaying LIVE Q&A by a day due to a sick child, and she shared updates about her work on a special project. She invited long-time viewers to share their financial journeys and how the community has helped them, promising to keep their information anonymous and use it to inspire and educate other women.

Nonfarm Payrolls

Meghan clarified a question about non-farm payrolls, explaining their origin, importance, and reasons for being tracked separately from farm payrolls.

Debt and Rising Interest Rates

Meghan discussed the current economy and recommended minimizing variable-cost debt due to rising interest rates. She highlighted the high interest rates on credit cards, which currently amount to more than 20% per year, but advised against closing credit cards as it can negatively impact credit scores.

Instead, she suggested aggressively paying off variable-rate debt balances.

Related Post: What Every Borrower Should Know about Why Interest Rates Change

Velocity Banking

Meghan also explained the concept of velocity banking, which uses debt to pay off debt, but warned that it might not be effective in the current environment due to rising interest rates. Most typically, it's borrowing funds via a HELOC to make large lump sum payments on your mortgage, to minimize interest paid on your mortgage long-term. However, in the current higher interest rate environment, with most people having very low-interest rate mortgages, the math doesn't work.

HELOCs

She further clarified the concept of a Home Equity Line of Credit (HELOC) and advised that it should be used for investments that preserve or increase the value of the home. Meghan emphasized that debt can be good or bad depending on its intended use.

Incentivizing Companies to Minimize Profits

Meghan discussed the idea of incentivizing companies to minimize their profits as a solution to inflation. She explained that inflation increases profits (and revenues and costs), but not necessarily profit margins. She emphasized that a private company's mission is to maximize profitability for its stakeholders, including shareholders and employees. Meghan argued that in a free market, the government cannot dictate that companies should minimize profits. Free market competition is what keeps profits in check.

The government can, however, and does incentivize companies in their investments and allocations of funds, as seen with the Biden Administration's recent incentives for developers to convert commercial real estate into residential housing. Meghan clarified the ways in which the government incentivizes the private sector, often directing investments towards areas in the country's best interest such as the Green New Deal and infrastructure bill. She also highlighted the consequences for a company that minimizes its profits in the free market.

Fed's Interest Rate Decision and Future Plans

Meghan discussed the Federal Reserve's recent decision to hold its interest rates constant during its regularly scheduled FOMC meeting. She explained that this decision does not necessarily imply what the Fed may do in the future, and that it is continuing to evaluate the lagging impact of its previous rate increases on the economy.

Meghan also emphasized that the Fed is looking at various economic indicators, like economic growth and the labor market, to make future decisions. She also mentioned that despite the Fed's pause on rate hikes, longer-term interest rates have continued to rise, which has implications for borrowing costs.

Don't Forget to Share Your Finance Stories!

Meghan closed the meeting by asking for listener's stories about how the show has improved their family's finances.