You may have been noticing that banks have been offering relatively high interest rates on short term CDs, and that’s because of the inverted yield curve. But what risks are involved and what risks should you consider when looking into purchasing a CD.
Let’s start at the beginning. What the heck is an inverted yield curve and what effect does it have on our economy? Typically banks or investment firms will offer higher interest rates for a longer duration, whether it’s a CD or a bond.
You’re leaving your money with the bank longer, they’re going to have more time to capitalize and invest that money. You should be rewarded adequately for the commitment of leaving your money with the bank for that extended period of time.
However, with an inverted yield curve, short term rates are actually a lot higher than the long term rates. And what does that mean?
Well, it’s basically the bank saying, “Hey, we feel comfortable committing to this higher interest rate for the short period of time based on the economic outlook. However, past this amount of time down into the future, we don’t feel so sure that the interest rates are still going to be this high. We’re not going to offer you as high of a rate of return”.
But what are they actually doing? By advertising these high interest rates for short term products, they’re able to lure in the consumer to tie up their money with the bank while the interest rates are high.
Now, here’s the problem. Let’s say things are good for the next six months, but you have a nine month CD and after six months, the economy tanks. So what’s the Fed going to do? They’re going to lower interest rates. Why? Because they want to get more liquidity back into the economy.
And now here’s the problem. When you get to renew your nine month CD, let’s say the rates are half of what you’re currently getting. So you’re sort of getting tricked to tie up your money for a short period of time so that the bank doesn’t have to be stuck paying a higher interest rate for a longer period of time.
Basically, they’re saying we don’t think the economy is very stable and it’s not stable for a long period of time. We don’t know what’s around the corner and neither do we as consumers. So they’re protecting themselves. But what are you doing to protect yourselves, to make sure that your wealth isn’t dependent on the economy, whether it’s in the market or in a CD?
You see, the system is set up to benefit the banks and the financial institutions at our detriment. We as individuals or small businesses pay the price for all of the security that the financial institutions want to embed in the system for themselves. And think of the massive marketing and indoctrination that’s going on from these financial institutions that’s teaching us to do things the way that benefits them and again, to our detriment.
According to a 2022 study conducted by Northwestern Mutual, only 35% of Americans actually are working with a financial advisor. So if you are one of the 65% of Americans who aren’t and you’re doing it yourself, you could be at a severe detriment when you put all of these factors together.
The easiest way to get someone to do something that’s not in their best interest is to make them believe that it is in their best interest. And a lot of times, unfortunately, that’s what these financial institutions do.
And I’m sure you’re out there saying, “Well, come on, there’s no way. How do they do that?” Well, let me give you an example.
Let’s say you want to buy a house and the interest rate for a 30 year mortgage is six and a half percent. And you sit there and you say, “Boy, that’s a very high interest rate.” And you go to the banker and say, “You know what? Our family has been a customer of this bank for over 25 years. We deserve a better interest rate.”
And they say, “Well, Mr. Smith, here’s what we’re going to do for you. We’re going to give it to you our way. If you take a 15 year mortgage, we’re only going to charge you 6%.” And you sit there and say, “I did it. I negotiated them to a much better interest rate.” No, you did it. You gave them more and more of your monthly cash flow. And that’s what it’s all about.
You see, when you focus on being in control of your money, the decisions that you make with your money become much, much more clear and you are now in greater control of more and more of your money.
They’re able to distract us with interest rates. Is at a high interest rate. Is it a low interest rate? Can I get a better interest rate across the street? Well, that doesn’t really matter. Not too much, at least, because what really matters is how much money you’re giving up control of every single month. Because the more you give up control of your money, the less money you have to save to invest, to reach your goals with as it gets more and more tied up.
If the bank made the same amount of money on every loan, how many choices do you think you would really have? One. So the very fact that the bank offers multiple interest rates and multiple mortgages for various durations indicates that they’re making more on some mortgages and less on others.
Wouldn’t it be great information to find out where they make more money and then stay away from that choice?
So here’s the point. We talked about interest rates. We talked about an inverted yield curve. We talked about how financial institutions get us to do things that are in their best interest by making it appear that it’s actually in our best interest.
The bottom line is this. If you want to get off the hamster wheel, if you want to stop being controlled by the financial institutions and our government, we have a solution for you. Check out our process laid out clearly in our Four Steps to Financial Freedom webinar found right on our homepage.
And remember, it’s not how much money you make. It’s how much money you keep that really matters.