3 Things 10-7-24
Thing One
Know Your Coverage
In response to a question asked by a married couple about why their bank was still hounding them to make their monthly mortgage payment after a storm destroyed it, Maurie Backman (writing for AP Moneywise) noted the following:
“…When you take out a mortgage, you commit to paying that loan back until its balance is whittled down to $0. This obligation exists whether your home is livable or not. Similarly, it exists whether your home is standing or not.
Of course, the risk of not paying a mortgage is having your home foreclosed on. If your home is no longer standing, you may be inclined to just default on your mortgage and let your bank take your non-existent home away. But one consequence to foreclosure is extensive credit score damage.
A foreclosure typically stays on your credit report for seven years. During that time, you might struggle to not only get a new mortgage but borrow money in general. And since landlords tend to perform credit checks on prospective tenants, you may struggle to rent a home following a foreclosure.
Similarly, you’re still on the hook for homeowners’ association (HOA) fees if your home is destroyed. Blowing those off could eventually lead your HOA to foreclose on your home, causing the same credit score damage as a bank-driven foreclosure…
…While homeowners insurance policies may cover storm damage, some natural events are often excluded. Flood damage is generally not covered under a regular policy unless there's a separate flood rider added on. Similarly, earth movement events like earthquakes and landslides are usually excluded from standard homeowners’ insurance policies…”
Mr. Backman went on to explain that the risk of being impacted by excluded events like the ones mentioned above can be mitigated by purchasing DIC (Difference In Conditions) insurance which provides expanded coverage for some perils not covered by standard insurance policies.
While it certainly costs more in premium, DIC coverage may be worth considering if you have property in an area prone to catastrophic events.
There are likely people in North Carolina (in the Chimney Rock and Asheville) areas where flooding and landslides accompanied the 100-plus mph winds, who have become painfully aware that their standard policies won’t cover their loses.
Just something to think about.
Thing Two
Cash and Cash-Equivalent Yields Are Dropping
The commonly held wisdom on what to do with cash that is not invested in the market is that when interest rates on savings are low, “cash is trash” because inflation is too much of a drag on principle. For the last couple of years though, cash has not been trash. But that may not continue to be the case if the Federal Reserve stays the course on its plans for dropping interest rates.
To be clear, traditional savings accounts have been trash. According to Yahoo Finance, the national average savings account rate stands at a paltry 0.46% today and it was a measly 0.07% two years ago, prior to the Federal Reserve increasing its benchmark rate eleven times.
But for those who have been in cash-equivalent vehicles like money market accounts – at least for the last twelve months – cash has not been trash as those accounts have earned around 5.3% (that's the 7-day yield before expenses).
If you’re curious as to why money market accounts pay higher interest rates than savings accounts it’s because the cash in money market funds is invested in low-risk, short-term assets, such as certificates of deposit (CDs), government securities, and commercial paper while the cash in savings accounts is used to fund much riskier credit cards and consumer loans.
But whether you’re in a traditional savings account, a money market fund, or a high yield savings account (many of which have returns similar to a money market fund), the tide is slowly turning. In fact, the popular Schwab money market fund SWVXX, which is used by many investors as default cash position, is down to 4.74% now (Fidelity’s FDRXX fund is 4.63%). That’s still quite a long way from the .47% average savings interest rate mentioned above but it’s already down significantly from roughly 5.2% less than a month ago and is likely heading lower.
Prior to the September jobs report, which was unexpectedly robust and saw unemployment tick downward, the Federal Reserve signaled they’d be cutting rates at the next several meetings to match falling inflation and to help what they were seeing as a slowing economy. If the jobs report hasn't thrown a wrench in those plans, cash and cash-equivalent interest rates will continue to fall and, at some point, cash (including cash-equivalents) will be trash again. But we’re not there yet, so if you’ve got cash in regular savings accounts you should still think about moving it to a high yield savings account or a money market. If you do the latter, be sure to check the fees as all money market funds aren’t created equal.
Thing Three
Just A Thought
"Governments never learn. Only people learn." - Milton Friedman
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