Home Buying, Interest Rates, Investing, IRA, Podcast, Retirement, Roth IRA, Stock Market, Stocks
November 05, 2022
Listen to Podcast Episode:
This Suze School covers more about Series I Bonds, and since many people are still confused about Treasury bills, bonds and notes, we get a refresher.
Suze: November 5, 2022. Welcome everybody, Suze O here... to another edition of the Women & Money podcast as well as everyone... and I do mean everyone, smart enough to listen. Today is Suze School and we are going to talk about Series I bonds again. I know. But something you probably don't know about them.
Suze: So Series I bonds. We're going to talk about Treasury bill bonds and notes since all of you are still so confused about that topic, and time allowing, we will also talk about real estate and the interest rate on mortgages and my thoughts about that. And of course, my favorite topic,
Suze: Devon and energy stocks and where is the price of oil going.
Suze: Let's start with Series I bonds. As all of you know on November 1 of this year, this Series I bond rate was set for the next six months from November 1 until May 1st 2023. And that rate was set at 6.48%.
Suze: But I bonds are made up of two interest rates, the variable interest rate that varies with inflation, and all of us have experienced that now. We watched it go from November of 2021 when it was set at 7.12%, to then May of
Suze: 2022 where it was set at 9.62%, to now where it is set at 6.48, as of November 2022. It has varied every six months, according to inflation. But what most of you have probably never experienced,
Suze: is the fixed rate portion
Suze: of the I bonds. And the fixed rate portion of I bonds is the interest rate that is fixed for the life of that bond. And that rate for November of 2022, happens to be .40%.
Suze: And that will be fixed for the life of that bond. Now.
Suze: What you need to understand, and not get confused about, is if you bought a bond before November 1st of 2022, you bought it let's say in October to lock in the 9.62% interest rate annualized. When those six months of that 9.62% is up,
Suze: you will get for the next six months, 6.48% annualized, but you will not participate in the .40% fixed rate. You will only get that
Suze: if you purchase a new I bond starting in 2023. So let's just say January comes about, and now you can purchase I bonds all over again, and you purchase an I bond then, you will get the 6.48% annualized rate. That changes all the time.
Suze: But it will continue to have the fixed interest rate of .40% for the life of the bond. Giving you an interest rate of the combination of the two of 6.489%.
Suze: That is how it is going to work. So I hope I made that clear. Don't think you're gonna get that extra 0.40% when your bond rolls over to the new interest rate that you purchased before November 2022. You will only get that .40% fixed if you bought it November 1st or later.
Suze: Got that? Good. Now the question is going to be, given that that's true,
Suze: should you continue to buy I bonds? I have to tell you, at this particular point I think you should.
Suze: Because that is still a better rate than you can get anywhere. As time goes on, we'll re-evaluate that, and I'll tell you what I think. Are you better off buying TIPS? Are you better off buying just straight Treasuries? What's the best thing for you to do? But at this point, in my opinion, for really safe money.
Suze: Safe money that not necessarily that you want to lock up for the next 20 years, but that you want to lock up for maybe the next 2 - 3 years or so. I still think in the series I bond is the way to go. So that's what you need to know about that. Many of you have written me and said Suze remember you said that you bought I bonds back in November
Suze: of 2001, or something like that whenever I bought them back then, and that you had a fixed rate of 3%, which I still do, what that means just so you know, is that I have been getting when the interest rate was at 9.62% annualized, I was getting like 12.62% at that time because of the fixed rate.
Suze: If fixed rates ever happen to on I bonds, go back up again 1, 2 or 3%, now we have a whole another thing happening there. But just so you know, for now the fixed portion is at .40%, and it will stay with that bond forever. Okay?
Suze: Alright. Treasuries. Let's just talk about Treasuries. Why this topic is so confusing is beyond me. You keep writing me and you keep saying Suze, can you just explain the difference between bills, notes and bonds?
Suze: And what is the difference between a Treasury, and a certificate of deposit, or anything else that we can buy that gives a fixed interest rate? Right. One more time.
Suze: A Treasury is issued by the United States Government. And therefore it is guaranteed by the authority of the United States Government.
Suze: Number one.
Suze: Number two, the maximum that you can buy of a treasury of any kind is $10 million.
Suze: So in essence you have the authority of the United States Government backing up to a $10 million purchase of a Treasury bond that maybe you want to do another $10 million in a note, okay. That's backed by the authority of the United States government. Unlike a certificate of deposit,
Suze: that only carries a $250,000 FDIC or NCUA insurance on it. Now. I've done a podcast before where I talk about how you can get more insurance if you want by adding beneficiaries. But no way if you're going to invest large sums of money,
Suze: can you get up to $10 million dollars worth. So you need to know that.
Suze: The only difference between a bill, a note and a bond. The only difference is the length of maturity. That's it, people. There is no other difference. Bills are usually short term a year or under. Notes are about a year or two years, all the way up to 10 years. Bonds are 20 and 30 years.
Suze: The only difference. And when I talk about a two-year note or a five-year note, when you purchase one, the interest rate that you are getting at the time is given to you for the entire time until that note, bill, or bond matures.
Suze: That is the basic difference. A bill is bought at a discount.
Suze: So if they are giving you, let's just say a 4% interest rate, you might buy it for $980, and then when it matures you get $1000. Again, if you buy a bill note or bond through Treasurydirect.gov, the minimum purchase is $100.
Suze: However, you can buy them also through any brokerage firm out there, but if you do, the minimum is $1000. So bills are sold at a discount where you buy it for X, but it will mature. And whether it's 13 weeks or six months or whatever, at $1000. If you bought a Treasury note,
Suze: and let's just say the interest was 4%, you would buy it at $1000 if you bought it at a brokerage firm for instance. So that means you would get on $1000, you would get $40 a year of interest,
Suze: and that $40 would be divided into six month increments, so every six months you would get $20, and that $20 would go directly into your brokerage account.
Suze: It's really just that simple, everybody.
Suze: The reason why I've been wanting you to buy Treasuries, is because for instance on Friday,
Suze: the two-year treasury hit a 15 year high at 4.88%.
Suze: So if you had purchased it then it's a little bit lower right now, but if you had purchased it then,
Suze: you could have locked in 4.88% on your money, guaranteed by the United States Authority for two years.
Suze: Now I think that is a great interest rate for safe money.
Suze: The other thing though, I want you to understand, is this.
Suze: You can buy Treasuries
Suze: in a retirement account.
Suze: So let's just say you have a Roth IRA.
Suze: And you were able to buy that two-year Treasury in a Roth IRA.
Suze: You would be getting 4.88% on your money essentially tax free.
Suze: Now that is a big interest rate. I mean if you were in even let's just say the 25% tax bracket, which isn't a very big tax bracket for state and federal tax bracket, that's almost equivalent of you getting a 6.5% taxable yield.
Suze: That's a lot of money for safe money. So for those of you who for some reason are just like not understanding Treasuries, and you're afraid of the stock market going down, and you want your money to be safe and sound,
Suze: Especially the money that you have in retirement accounts, you want, maybe you're older, and you want your retirement money to be absolutely safe and sound.
Suze: I don't know. I think Treasuries are absolutely for you
Suze: the way to go. Maybe you're going to retire in two years. Maybe you're gonna need this money in two or three years for you to live on, and you don't want to risk any money whatsoever. What is so wrong with you putting your money in a two or three-year Treasury note?
Suze: For those of you, maybe, you want to do what I called a Treasury ladder. Where you buy 13 week treasury bills, maybe six month treasury bills, maybe a one year treasury bill, and you go out maybe five years, maybe you put $10,000 in each one.
Suze: So that as interest rates go up, you have money maturing, and maybe you can lock in a higher interest rate. Now I haven't wanted you, and I still don't want you, to go out really long in Treasuries. Meaning I don't want you right now to be buying a 10-year treasury note, or a 20 or 30 year treasury bond. Because I am still of the belief
Suze: and I hope I'm not wrong. But I'm still of the belief that they could go up to 5, 5.5%. And then. Then I want you to buy 20 and 30 year Treasury bonds. And why is that everybody? Once again, as interest rates go down, the value of bonds go up.
Suze: As interest rates go up, the value of bonds go down.
Suze: Now somewhere here within 20, or 23, 24 the latest, we hopefully will see that the Fed funds rate and interest rates have tapped out. They’re as high as they're going to go for now. Not sure are they, are are they not, time will tell.
Suze: But when that happens, maybe they'll stay there for a year or two, maybe it'll stay high, but eventually they will start to come down. And when interest rates start to come down,
Suze: then the value as I just said of bonds go up.
Suze: Bonds that have longer term maturities go up and down more than bonds that have shorter term maturities. Now I've said this over and over again,
Suze: but too many people are writing in so I thought I will do it one more time. But the main thing that I want to stress here is that yeah, you can absolutely buy Treasuries with money that you have outside of retirement accounts. Absolutely you can do that.
Suze: But a lot of you have been taking your money from where? From your 401K plans, because either you have retired or you're going to retire, you have been doing an IRA rollover with that money,
Suze: and then you have started to convert little by little into a Roth IRA.
Suze: Especially for those of you in a Roth IRA where this money in a Treasury,
Suze: the interest rate on the treasury could seriously end up being absolutely tax-free to you. It might be something you really, really consider.
Suze: Have I made sense to you now? I hope so. Because I'm telling you right now, I don't care how many of you continue to write in and ask about it. I am not addressing this again, until the time comes when I want you to buy ten-year notes or 20, or 30 year Treasury bonds.
Suze: Okay? So you should write the date of this podcast down.
Suze: November 5th, 2022.
Suze: Because if you write in, all I'm going to write back to you is November 5th 2022, take a listen.
Suze: Next, let's talk about real estate.
Suze: Now. Real estate is starting to soften. Absolutely. And the reason that it's starting to soften right now in prices, is because there is more and more inventory that is coming on the market. And the reason that there is more inventory on the market, is because it is taking longer for homes to sell.
Suze: So what's interesting for instance. If you're in these places such as Nashville or Raleigh North Carolina, or Phoenix Arizona where the real estate market was absolutely so hot I can't even tell you, the inventory in those three places has actually increased by anywhere from 145% to 174%.
Suze: And when you have more inventory,
Suze: and less demand for that inventory,
Suze: then prices have to come down to entice people to want to buy that inventory. Because now people have more choices, they have more time. They're taking their time, because mortgage rates are at 7.3%. They are not so anxious to want to buy a piece of property with interest rates at 7.3%.
Suze: So the only way that you can equalize that out, is to bring the price of real estate down.
Suze: And that is the exact effect that the Feds have wanted to have on real estate. A big factor of inflation is they want those prices to come down
Suze: so that inflation can also come down. When inflation comes down, then a lot of their problems are solved. But until prices on real estate, on rent, on food come down, the feds have problems. And that is why they are going to continue to raise the Fed funds rate
Suze: until mortgages are so high that all of you are like, I am absolutely not going to buy a home. Like you know if you just look at the difference, if let's just say you bought a $500,000 home.
Suze: And you bought it a while ago, you put 20% down, $100,000. And your mortgage interest rate was 3.5% for 30 years. Your monthly mortgage would have been $1,796.
Suze: Even if the prices of real estate came down 20%. You bought a home for $400,000, you put 20% down.
Suze: And that's only $80,000 now versus $100,000 when it was at $500,000, and so now you have a $320,000 mortgage,
Suze: that $320,000 mortgage at 7.5% is $2,237.
Suze: That's a whole lot more. That's almost $441 more for a house, that is $100,000 less.
Suze: So they have to get prices of homes to come down, so that they can then lower mortgage rates, so that all of you start to buy all over again. So until that happens,
Suze: you all should be really careful. You're asking, is now a good time to buy a home?
Suze: I have to tell you, it's really hard pressed to say yes at this moment in time. And the only reason isn't because mortgage rates aren't so high at 7.5% because there was a time when 6, 7, 8% as I've said before, isn't that abnormal. But because homes have appreciated so much, it is abnormal.
Suze: So you might just want to think about that. Or if you go in to the real estate market, make an offer that it makes sense. That you offer like 25 or 30% under what they are currently asking. Because then, at these interest rates, maybe you'll be paying the same is if you bought a higher priced home at 3.5%.
Suze: But these are really, really high rates given the appreciation of real estate. So let's just see what happens, and I would not be rushing to buy a home right now. As far as rents go,
Suze: rents are starting to come down. It's almost like the homeowners who thought that I can keep charging more and more and more because the prices of real estate are going up and up and up, even now, you're starting to see some reductions in rents.
Suze: So that is kind of a good sign. You know what's funny though, is depending on where you live, because in places like Milwaukee and Chicago, the inventories are down by 10%. People are still really buying homes there.
Suze: So it really depends on the price of the home,
Suze: and what that mortgage payment would be at 7.5%.
Suze: So just something again for you to think about. Last week when the market went down big on Wednesday, so did a stock by the name of Devon.
Suze: Oh, my energy stock that I love so much. And that stock actually went down 13% in one day. At one point it was down 16 or 17% in one day. And I'm sure a lot of you thought I need to sell. Oh my God, look, it's going back down again. Remember I told you, that you buy stocks like that for the dividend.
Suze: The reason that Devon went down is because they cut their dividend from a dollar 55 a share to a dollar 35 a share. It's still essentially at $70 a share, it went back up again the next day and on Friday, by the way.
Suze: It's still approximately at a dollar 35 a share, it's going to be around in 8% dividend at this price. Still a fabulous dividend.
Suze: When a company cuts its dividend, it doesn't necessarily mean that the company is in trouble. Because its reports were fabulous. It means that there possibly preparing because everybody is starting to come down on energy companies, to really step up and start to drill more, start to do more, start to pass more of their profits down in prices,
Suze: so that you don't have to pay as much in gasoline costs.
Suze: So I still love Devon and I don't have a problem with it whatsoever. For those of you who are wondering. What you do need to be prepared for however,
Suze: is do not be shocked to see once again the price of gasoline go up significantly when you go in for a refill. We’re now at almost $92 a barrel, up a big four or 5% from where it was just the other day.
Suze: So you have to be prepared for that. Now, when that starts to happen again, here we go with inflation.
Suze: Inflation rather than going down, may very well start to go up. When you see the Mississippi River dry up, and all of those container ships not being able to ship their cargo via the Mississippi River, there goes the price again of the food that's delivered on those ships.
Suze: So do not be surprised if you see us going into a situation where gasoline is more expensive again, food costs are more expensive again, we also have a situation where China is almost being forced to open up again, and when they open up again, you are going to see things like energy,
Suze: all those things start to go up again.
Suze: You're also going to see this winter, Ukraine and Europe, having a very hard time with energy. So do not abandon your energy stocks at this point in time.
Suze: I think that brings us to the end of this Suze School.
Suze: Now there is one more thing that I want to bring you all up to date on. You know I'm a Gemini. You know how KT always says, Suze always changes her mind. And I do. So I'm going to make one more change
Suze: that I said I might make, and in the end here I'm going to make. What is that change, Suze O? Remember how the podcast always dropped on Thursday and Sunday mornings, and then somehow I got this idea, well let's drop it on Wednesday and Saturday nights.
Suze: But it doesn't seem to be fitting into our schedule. It's not quite working for me. So therefore, starting next Sunday, we are going to go back to our original schedule, of dropping
Suze: a podcast on Sunday mornings, and Thursday mornings. So I just thought I would tell you that. Alright, everybody, there's only one thing that I want you to remember when it comes to your money and it is this. I want you all to be smart, strong, secure. Just that simple. Really, just that simple. Now you stay safe. Bye, bye everybody.
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