March 2020 is shaping to be one of the craziest months our country has experienced in quite a while. There is no doubt that these next few weeks will find their places in US History books that our children and grandchildren will study in the future.
With widespread quarantine efforts by the government and CDC, and the respective panic and hysteria exhibited by the American people; we’ve seen four big events affect us from an economic standpoint:
(1) Market volatility that has dropped us into Bear Market territory
(2) The government temporarily waiving interest on federal student loans
(3) President Trump declaring a National emergency - freeing up $50 billion in federal resources to combat coronavirus
And most recently...
(4) The Federal Reserve slashing interest rates to 0%
So what does the Fed slashing interest rates to 0% really mean for us as optometrists and other high earning professionals? Well it affects us in multiple facets, since many of us either have loans for our businesses, our homes and our education. Let’s dissect this in 3 steps.
Step 1) Why does the Fed change rates in the first place?
The Fed lowers rates in order to stimulate economic growth. When the Fed lowers its rate, this leads to lower financing costs across the board. In theory, lower financing costs allow for higher amounts of borrowing and investing. This makes sense with a current economic downturn due to restrictions and fear that has halted travel and many sites of commerce, due to virus concerns.
However the theory behind rate cuts can backfire. A low Fed rate can encourage excessive growth (because hey, money is cheap right now!). This can lead to inflation, since the Fed is “printing money” in a sense. This can lead to less purchasing power and can actually backfire.
Want an analogy?
Think of proparacaine. It’s an absolute miracle drop for optometrists. We can numb a patient’s eye in order to remove foreign bodies or even perform refractive surgery. But we can’t use it too much and we never send a patient home with it - because excessive use causes corneal melt. Too much of a good thing can cause a negative swing - it happens clinically, and fiscally.
"In theory, lower financing costs allow for higher amounts of borrowing and investing. This makes sense with a current economic downturn… However the theory behind rate cuts can backfire. A low Fed rate can encourage excessive growth (because hey, money is cheap right now!). This can lead to inflation, since the Fed is 'printing money'. "
Step 2) How does the Fed changing rates to 0% affect me?
Optometrists and other high earning professionals will see the rate change affect three facets that play a big factor in their personal and business lives (if they are business owners):
- Small Business Administration (SBA) Loans
- Mortgage Loans
- Student Loans
Essentially, lowered fed rates will equal lower rates obtained from banks and other financiers. The rate changes will take time to trickle down from the government to respective banks. Keep in mind that a 0% Fed Rate does not equal 0% rates for any of your loans. Banks need to make money and are the foundation of our US economic system. The rate cut exists as a stimulus and incentive for individuals to borrow or invest to mitigate an economic downturn.
Let’s take a deeper look at different types of loans. After three previous rate cuts in 2019, mortgage holders that will experience the most gain are those with adjustable-rate mortgages (ARMs), since they will get a direct discount on their mortgage bill.
Most Short-term and Variable rates are linked to:
- The London interbank offered rate (Libor) plus a margin, which is a number of percentage points, and
- The Prime rate
These rates follow suit with the federal funds rate, so rate cuts will mean extra money saved for those holding short term and variable loans.
For long term rates that include 30-year fixed-rate mortgages; these tend to move with long-term Treasury yields.
Want to learn more about student loans and the mechanics that govern them? Check out our Guide to Student Loans
Want to learn more about mortgage rates and the mechanics that govern them? Check out "5 Reasons Why You Might Want to Refinance Your Mortgage"
"The rate changes will take time to trickle down from the government to respective banks. Keep in mind that a 0% Fed Rate does not equal 0% rates for any of your loans. Banks need to make money and are the foundation of our US economic system….For Optometrists, it will impact our SBA, Mortgage and Student Loans"
Step 3) So what do I do?
If you don’t have any loans currently and don’t need any, then keep doing what you are doing! While one of the themes of ODs on Finance is debt aversion, this may be an optimal time to consider a loan for your business, a new business or a mortgage for either a house or commercial real estate.
If you are currently a loan holder - whether it be student loans, mortgage loans, or a business loan; it’s time to consider refinancing to save some money. Historically, this is a great chance to get a foot up on your finances, in regards to loans.
Now that you have all the info, it’s time to take a deep breath. Think about your finances and your financial goals and pair them with the current events that are taking place. Think about how all of these factors affect your well-being, as well as your family’s well-being, then make an educated decision.
If you are considering refinancing your student loans, make sure to check out our ODs on Finance Partner Rates. With the fed drop plus our negotiated cash back, you will be taking a great step towards financial freedom: Check out the latest Student Re-fi Rates
"If you are currently a loan holder - whether it be student loans, mortgage loans, or a business loan; it’s time to consider refinancing to save some money. Historically, this is a great chance to get a foot up on your finances, in regards to loans"