In today's radio broadcast, Matt and I discuss two major topics: I-Bonds and Pledged Asset Line of Credit.
I-Bonds are issued by the US Government directly on TreasuryDirect.gov. While you can only purchase $10k in a single year, the current yield is over 7%! This could be a good place to park part of your emergency savings and get a good return, however be aware of the fine print which includes:
On the flipside, if you are looking to borrow money, you might qualify for a loan against your investable portfolio. If you have accounts at brokerages such as E*Trade or Charles Schwab, they offer a line of credit with low rates. This is very similar to a Home Equity Line of Credit (HELOC) as an interest-only loan. You can potentially negotiate these rates if you give them a call (or perhaps threaten to take your money to another brokerage🤫).
These are two tools in the kit that might apply to your financial situation.
At very low rates. I discussed both of these today with Matt Robeson on his on-air radio show. I hope you enjoy it.[:
[00:00:45] Mike: Financial planning for entrepreneurs and tech professionals.[:
Sometimes Mike's podcast bleeds into my podcast. Like I said, it's all very meta, very confusing. Speaking of things that are very confusing, we have a general theme. We're going to record two shows today and I'd say the general theme is, so you've got some money in your pocket. What are you going to do with it?
Now, Mike, you came up. To me with a couple of ideas, a couple of tools in your toolkit, potentially that I had never heard of. And I listened to you and talk to you every week. So I feel like I've heard everything at this point, but I clearly haven't. So what are these new ideas that maybe people haven't heard of that are investment options for them?
What's the first one you want to[:
Certain things come and go as well and new products or ideas can make sense depending on the environment. So the two things I wanted to talk about today that I've rerun across, they've been around for a little while. Our I bonds and a line of credit against your pledged assets or
your securities. So two different ideas,[:
[00:02:34] Mike: Yeah. Matt in today's environment say you have some emergency funds, right? You got 10, 20, 30,000 in your savings account, just in case, a pandemic comes along and something goes sideways on you.[:
Come up with a new emergency because I blew through that one about 18 months ago.[:
[00:02:56] Matt: I can answer this one because the answer is zero. And the reason for that is that I have listened to financial planners who have told me, like you, here's a certain amount that you should keep in checking for. And it's five months, six months.
So that's what I do. And that is earning me.[:
[00:03:19] Matt: Yeah, I would like that. Please.[:
And you will get that 7%.[:
[00:04:03] Mike: the catch. All[:
Our savings account. Maybe it earns you like half a percent, 1%, but it's immediately available. What about[:
So you can only do $10,000, but that's why I highlighted your emergency fund could be. Could be a good place for this. So you're capped at $10,000 per year. All right. The other downside is yes. You're not going to get that rate of return if you pull the money out soon. So to guarantee getting a rate of return, like currently the 7% you need to hold it for five years.[:
[00:05:00] Mike: Now hold on a sec though. Hold on a sec. If you have to pull it out. Okay. You will only lose the last three months of interest. That's the. So it's not really a massive penalty. You will lose three months worth. So say in, two years from now, you have an emergency, you need that $10,000 back.
You'll just lose the last three months of interest.[:
And what you're saying is I could have. Up to $10,000 of that, put it in an I bond and I functionally have access to it because it's not like I lose anything off the top. I just lose some of my potential gain in interest if I need to tap that emergency money. And by the way, the whole point of it is it's for an emergency.
I'm really hoping I'm not going to have to use it. So I put it in and I get 7%, but only after five years.[:
All right. So really pretty small penalty for having that. And I think you need to hold it for a year. I was just trying to look that up as well. There's a couple other gotchas I'm going to about to tell you. All right. But you have got the general idea, right? In your emergency fund. You could take $10,000 by this I bond.
You're hoping to not use it in the next couple of years. And you will currently today start making 7% annually on.[:
So after five years you would be up to about 13,000 bucks, right?[:
[00:07:32] Matt: Oh,[:
In the last 10 years, right now, you can imagine it's part of, it's an influx. All right. Piece to the calculation. So we all know we're in transitory and putting that in air quotes, transitory inflationary environment. Inflation is a little bit high or higher than we've seen in a long time. So the return on these I bonds is also high.
That's why we're currently at 7%. If you look back, it's fluctuated between one to 2% over say the last 10 years. That's why I'm bringing it up now, because in the past we knew about these, but they weren't stellar. Oh, this is I'm going to run out and buy a ton of these things. They were yielding, about what you could get in other places.
But now the yield is really gone up. That 7% is way higher than you can get another places I suspect it will come back down. So they recalculate it every six months or whatever I bond you hold, it gets recalculated. You get the interest for that six months, that 7%, if you buy them today, all the way through, I think April is when they're going to recalculate and .
It might stay at 7%. Am I go 5%? Am I go up to 8%? I don't know what it's going to do. I don't think it's going to go all the way down to one or two, but it will, it might do that over a few years.[:
quote Barack Obama. That's pretty good.[:
Let's say, I say, let's say you earn 4% annualized, 5% annualized. 7% is pretty good, but I think the inverse is true as well as is what you're saying. Let's say it does fluctuate back down to 1%, 2%. At 1%, look, you're still making 400 bucks. Over the course of five years at 2%, you're making like 800 bucks.
That's more than zero, I think is the, I[:
So you could take some of that emergency that 20, 30,000 that's literally sitting in cash. You could put 10,000 there. Get a better rate of return. Guaranteed by the us government not to go down in value. So you're not losing any value and in a year or two, if you can get a better rate in your savings account than I bonds are giving you, just give up the last three months of interest and you can, make a different decision, then[:
And you spent, even if you took half an hour, And you're going to make 400 bucks out of it, that imputes again to you getting paid $800 an hour.
There's a lot of things I would do for $800 an hour. Hey look, speaking of quick things to do, you promised two tools to add to the toolkit and don't want to move too quickly off of iPods, but I want to make sure. we get in the second one.
What does that[:
[00:11:30] Matt: That's[:
Seems it seems like a pretty awesome opportunity. All right. The second thing I wanted to bring up is if you need to borrow money. So on the other side of the equation, if you need to borrow money, what are the options out there right now, Matt, that you could look to? Yeah, I need to borrow 50 or a hundred thousand to do renovations or purchase that boat.
I always wanted, what are options for you to borrow that?[:
would be one option. I could Pass the hat I have an extensive,[:
[00:12:11] Matt: I have an extensive family[:
[00:12:14] Matt: We'll look there. They're mostly not rich to be clear.[:
[00:12:18] Matt: I, when I started dating my wife, she was at the time anyway, through one thing or another, I ended up asking her if Just per chance she happened to be fabulously wealthy.
I just wanted to check. I married her. The answer was no, the answer was no, but I just wanted to be sure. I'm not sure I want to be fabulously[:
do not do what Matt[:
I do have many in-laws so I guess, a[:
[00:12:47] Matt: the bank.[:
So you have a Schwab account and you might even have a solo 401k there. You might have your individual retirement. Yeah. There that self-manage and you might have a, just a brokerage taxable account where you play around with some individual stocks or, you have that emergency fund we were just talking about, you can use that.
So you've got a hundred thousand dollars there. They will give you a loan off of that and say, oh, you've got an asset here. It's worth a hundred thousand dollars. We'll give you a loan for 20,000, 30,000. It's a line of. All right. And so you can, you and the line of credit means once you've applied and you have that you might have a checkbook or digital or whatever it is, you don't borrow anything right away.
You have up, it's like your credit card. You have up to $50,000 that you can write again, that you can borrow. And then as you need it, you just go ahead and write a check for 12,000 and now the interest starts accruing. So these are called pledged asset lines or a line of credit. And the reason I bring it up is for a couple of things.
One, it's something that people don't think about in terms Hey, I need a little bit of a bridge loan. I need to span this gap. I've got a big thing I got to buy now and I can pay it off pretty quickly. And you don't really think about using this. And also the interest rates are pretty low.
And so that's something to really consider when you're looking at needing to borrow some money.[:
So they never pay taxes. And instead they take out loans at a lower interest rate than the interest they're earning on their assets so they can get wealthier and have hundreds of millions of dollars to spend. You're saying. There is a version of this. There's a Festivus for the rest of us when it comes to getting a line of credit and actually the interest rate isn't that bad.[:
Okay. So if you have over a million dollars, it might be one to two to 3%. If you only have $50,000, it might be six, seven, 8%.[:
[00:15:57] Mike: But here's the other thing, too, that this is an area you can shop around.[:
[00:16:02] Mike: So Schwab has this. E-Trade has this, I believe fidelity has it I haven't looked at all the different brokerages, but you can shop around and call up your brokerage and say, Hey, what kind of rate.
And they might tell you something like that's just on their website or they can call the other place and say, Hey, if I move over my 300,000 between my IROs and my brokerage account and this, what kind of rate could I get on the line? And of course that other institution would say, oh, we'd love to help you manage your money here at our institution.
We will give you a rate of, X. And so this is something that you can put in a little bit of legwork and try to negotiate that rate. Now, these rates do fluctuate. There's different components to them. Again, similar to the Ibonds, . They can go up and down. There's fixed parts and fluctuating parts, but yeah, you can negotiate that rate.
And the other thing I'll mention, I said, retirement, they might say, oh, you have 500,000 here. We'll give you this kind of rate. And they will potentially use your retirement accounts in that part of the calculation. But in terms of borrowing, you only be able to borrow a percent of your broker taxable brokerage account.
They probably won't let you borrow against the balance in your retirement accounts.[:
[00:17:24] Mike: Yeah, you're still paying that interest rate. So you definitely have to look at your own personal situation. The reason I bring it up is, again, like I said, most people don't realize that they could do this. And when you're talking about. Three 4% there. That's similar to a, he lock. Okay. So a lot of people are know about, oh, I can, use my home equity line of credit and go to the local bank, open up one of these things.
You could do the same with your brokerage account and it's, it can be an easy as a couple clicks of the button. It's actually a way easier than getting a he lock. So again, it's just an, it's a possibility and when interest rates are really this little. It could make sense in terms of, Hey, I need, again, I need to borrow for a certain amount of time or, I'm going to pay, I have this plan.
I'm going to pay it back in two years. I just need access. So it's another place you[:
Thanks so much for being with us.[:
Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at email@example.com. Until next time thanks for tuning in