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Category: Everyday Economics

Learn how macroeconomics and microeconomics concepts apply to our daily lives and to make informed decisions.

  • Do you have FOMO when you invest?

    Everyone experiences FOMO, which is the Fear of Missing Out on various aspects of life, but it’s crucial to resist it when making investment decisions. In today’s post, we will learn why I made that statement.

    FOMO stands for “Fear of Missing Out.” It’s when people feel anxious or worried about missing out on something exciting or profitable.

    Imagine you’re on a road trip. You have a map that guides you to your destination. Sure, you might see some cool attractions along the way, but if you keep changing your route every time you see something shiny, you’ll never reach your destination!

    Similarly, in investing, your long-term plan is like your map. It helps you stay on track and reach your financial goals. While it’s tempting to jump into investments just because everyone else is doing it, you need to stick to your plan.

    When we make decisions solely based on FOMO, it can lead to impulsive choices that might not align with our goals. So, remember, while it’s okay to feel FOMO, it’s essential to have strong willpower and stick to your long-term plans.

    You can do that by practicing this phrase called “NO GO to FOMO”.

    “NO GO to FOMO” means saying no to impulsive decisions driven by FOMO.

    Instead of making quick decisions because everyone else is doing it, this phrase reminds investors to think carefully before acting. If your friends are all buying a certain stock because they think it will make them rich quickly. But you’re not sure if it’s a good investment for you, so you don’t blindly follow everyone.

    “NO GO to FOMO” reminds you to take your time, do your research, and only invest when you’re confident that it’s the right choice for you.

    Various investment opportunities like digital assets, meme stocks, and NFTs are gaining popularity because many influencers often promote these. The SEC emphasizes caution against FOMO, reminding investors not to follow others blindly.

    Investors should not base their decisions solely on recommendations from influencers and should resist the temptation to follow trends blindly.         

    Do you react to market swings?

    Reacting to market swings due to FOMO can be harmful to financial stability due to these reasons:

    1. When people react to market swings because of FOMO, they often make decisions without thinking them through. They might buy stock or sell them just because everyone else is doing it and they get afraid of missing out on profits.
    2. But the truth is, reacting impulsively like this can actually hurt your financial stability in the long run. Market swings are normal, and they don’t always reflect the true value of investments. Reacting to them based on FOMO can lead to buying high and selling low, which is the opposite of what you want to do as an investor.
    3. It can also cause you to miss out on real opportunities because you’re too focused on what everyone else is doing.


    Building a diversified investment portfolio can lessen risks that come with market volatility

    Diversification means spreading your investments across different types of assets, like stocks (which are like shares of companies), bonds (which are like loans you give to companies or governments), real estate (which is a property like a house or land), cash in checking and savings account and commodities (like gold, silver, oil, etc).

    Diversification within asset classes and avoiding timing the market are essential strategies to protect your investments. You can diversify within each type of investment too. For example, if you’re investing in stocks, you might choose different companies and industries. This you can easily do by buying ETFs or Index funds.  I have made several posts on that so you can check those out by searching these two terms.

    Also, it’s important not to try to time the market (which means predicting when to buy and sell investments based on what you think the market will do). Instead, focus on the long-term and stay diversified.

    What Should You Fear Missing Out On? **

    The first thing should be not planning for your future and setting Long-Term Goals

    You need to start prioritizing financial planning if you haven’t done already. This means setting long-term goals, like buying a house, saving for your children’s education, or planning for retirement. Having a clear plan helps you stay focused and make smart decisions with your money.

    The second thing is Not Paying Off High-Interest Debt like credit card loans

    Paying off high-interest debt should also be a priority. It’s like getting a guaranteed return on your investment because you’re saving money on those high-interest payments. So, please include paying off credit card debt or other high-interest loans in your financial plan.

    3rd is Not taking advantage of the Power of Compounding

    Start saving early and consistently. The power of compounding means your money grows over time, and the earlier you start, the more you benefit. Even small, regular contributions can add up significantly over the years and I will show you this through this calculator. Where you can see how by just investing $100 every month, you can make a lot of money in the future, if I just change the time horizon, see how exponentially your money can grow, with interest payments becoming the biggest factor of your total returns, as the years pass.

    The fourth mistake or what you should FOMO is Not taking advantage of free money through Employer-Sponsored Retirement Plans

    Don’t miss out on participating in employer-sponsored retirement plans like a 401(k), especially if your employer offers matching contributions. This is like free money and can lead to significant returns over time. This will ensure you have a secure retirement financially.

    So, remember to prioritize financial planning, pay off high-interest debt, start saving early, and take advantage of employer-sponsored retirement plans to ensure a brighter financial future.

    Successful investing requires discipline, patience, and a long-term perspective, not reacting impulsively because of FOMO.

  • The easiest way to earn passive income

    The easiest way to earn some passive income without doing any work is when you move your savings into a high-yield savings account from your traditional savings account at some big banks.

    A high-yield savings account also known as a high-interest savings account gives you a much higher interest rate compared to a traditional bank savings account.

    Because these banks are mostly online, they save on overhead expenses and pass that savings to their customers. Most HYSAs are online, but you can find high-yield options in some regular banks too like Barclays, Marcus by Goldman Sachs, Amex, etc. We will go over these in a moment.

    Why you shouldn’t save at traditional savings accounts?

    Traditional big banks like Bank of America, Chase, Wells Fargo, and Citibank pay AMLOST 0% interest on your savings, which means you lose money by keeping your savings there.

    Their annual percentage yield or APY or interest rate is as low as 0.01%. This rate is so low compared to the inflation rate, that you end up losing money instead of gaining any return by keeping your money in a traditional savings account.

    How is HYSA better?

    So, the best way to have a guaranteed return that can match the inflation rate is to put your money in a high-yield savings account.

    When we get a higher interest rate on our savings, our savings grow faster with time. It’s the ultimate set-it-and-forget-it way to make your money work for you, without any risk.

    Most of these banks are FDIC insured, which means you will have protection by the US government for deposits up to $250, 000. If you save more than that, you should go with more than one bank as the insurance covers up to 250,000 from each bank failure.

    The best part about savings in high-yield accounts is that they are not risky, like stocks or other business-like investments. they are a safe and steady way to watch your money grow.

    Since the rate hikes by the Federal Reserve rate, APYs of high-yield savings accounts have been going on the rise, so this is a great time to put your savings in a high-yield savings account. Even though their rates can change a bit, based on the Fed’s decision about overall interest rates in the economy,  their rates are still much higher compared to traditional savings accounts.

    The options I am going to share have annual percentage yields, or APYs, from 4.3%-5.3%, which is way more than the national average rate of 0.47% at traditional savings accounts and in particular, at large national banks, which give you rates as low as 0.01%

    Currently, rates at the best high-yield accounts earn around 5.5% APY. This information is current as of Jan. 28, 2024.

    Here’s a list of some of the top FDIC-insured High-Yield Savings Accounts (HYSA) for January 2024. The table includes information on fees, APY (Annual Percentage Yield), and minimum balance requirements. Each of these has a user-friendly app and Easy-to-use online and mobile banking features.

    Please note that the specific fees and APY can change, so make sure to check the respective bank’s website for the most accurate and up-to-date information. All this information I compiled is latest as of Jan 28, 2024.

    What to look for when picking a High-Yield Savings Account?

    1. Interest Rate (APY): Aim for the highest APY – it’s the key to growing your savings quickly.
    2. Fees: Choose an account with no monthly fees or extra charges. We want all that money in your pocket!
    3. Minimum Balance: Look for accounts with no minimum balance requirement. Whether your savings are big or small, you start earning interest right away.
    4. Security: Make sure the bank is FDIC-insured to keep your money safe. Check out online reviews for that extra peace of mind.
    5. Perks: Some HYSAs come with cool perks like welcome bonuses or nifty budgeting tools. Keep an eye out for those extra goodies!
    6. Accessibility: Easy-to-use online and mobile banking features are a must. We want you to stay in control without any hassle. I have most of my savings in Ally Bank and I will show you exactly how much difference if I were to keep my savings in a big brick-and-mortar bank like Bank of America or Chase. You can go to their website and see how it compares to leading banks when you deposit money there. So if I have $12000 saved there, after one year I will get $522 at 4.35% interest. The good thing about this is that they have savings buckets. Like digital envelopes, where you keep your cash for whatever you want to do). You can use them to track your progress. Ally Bank has become sort of the gold standard of online banks, and for good reason. It has consistently high-interest rates and is easy to use. Ally also offers checking accounts, money market accounts, and CDs.

    Which bank am I using?

    I have most of my savings in Ally Bank and I will show you exactly how much difference if I were to keep my savings in a big brick-and-mortar bank like Bank of America or Chase. You can go to their website and see how it compares to leading banks when you deposit money there. So if I have $12000 saved there, after one year I will get $522 at 4.35% interest. The good thing about this is that they have savings buckets. Like digital envelopes, where you keep your cash for whatever you want to do). You can use them to track your progress. Ally Bank has become sort of the gold standard of online banks, and for good reason. It has consistently high-interest rates and is easy to use. Ally also offers checking accounts, money market accounts, and CDs.

    So I think I gave you enough options and reasons to convince your mind. So don’t wait any further and grow your money securely and easily, so you can get to your savings goals faster than you thought. Whether you are saving for a vacation, a wedding, a down payment for your house, or buying a car, you will not regret this decision.

  • Get rich with these secrets

    Have you ever wondered how some people become incredibly wealthy?

    Well, in this post, I’m going to share with you some habits that I have adopted that are helping me achieve financial freedom earlier than I thought possible.

    But don’t worry, this won’t be your typical boring financial advice because we’re going to have some fun with my real-life examples.

    Before we get into it, I want to say that it is never too late to adopt these habits to become financially free. Even with a Master’s degree in economics and having worked in financial litigation for many years, I never learned about money management. I got married early and my husband handled our household finances and I never really cared to learn.

    But in recent years, I started learning about personal finance and this field fascinated me so much that I decided to start my YouTube channel around it.

    Secret #1: Live below your means and create an emergency fund

    First off, the most important habit that I have followed for many years is to live below my means. I always try to cut unnecessary expenses and understand the difference between needs and wants.

    After creating an emergency fund account in a high-yield savings account that will easily cover 12 months of my family’s expenditure, I started investing my extra savings in various types of assets. I use Ally Bank, but this is another post where you can see other high-yield savings account options. High-yield savings accounts give more interest rates than traditional banks.

    What I do is I follow something called paying yourself first. So as soon as I get my paycheck, I put 20% of it directly into my savings account or investment account. You can create an automatic transfer so that 20% is already taken out and it doesn’t go into your checking account where you can spend it.

    Secret #2: Start investing as soon as possible

    Once you have created enough savings to cover 6-12 months of expenditure, start focusing on growing your wealth.

    So yes, you need to prioritize investing your money wisely. This is the easiest way to grow your wealth. Because when we leave our money invested for a long term in something like an ETF OR index fund or real estate, it grows many folds as time passes. If you don’t have the money to invest in real estate, you can start with REITs.

    Secret #3: Set clear financial goals and divide them so they are achievable

    Now I want to talk about the power of setting clear financial goals. By knowing exactly what you want to achieve, you can focus your efforts and make smarter decisions.

    I make a habit of setting my goals every year. I create a list of the important things I really want to achieve. To make it manageable, I focus on only 2 or 3 goals every three months. I find that having too many goals at once can be distracting.

    I write down my goals in a place I see every day, like one app that I use is called Asana (it is a productivity app), but you can use whatever tool you like. The key is to take control of your time and find a system that suits you.

    Every morning, I check my Asana tasks and ask myself which ones bring me closer to my goals. I prioritize and tackle those tasks first. It might seem odd, but it’s about planning your time around your goals, not just fitting in time to work on them. After handling daily tasks and chores, I focus on connecting my daily activities to my goals. This helps me turn big goals into small, achievable steps each day.

    So if you have a job and earn x amount of money yearly, you can calculate how long it will take you to achieve financial freedom where you don’t have to work actively and can enjoy your life, and live comfortably off of passive income.

    So if you are still in your 20s, you will probably start by working for a company. Now you have to think about how do you get promoted faster. Will this involve working harder or do you have to learn a new skill to get a promotion fast?

    At the same time, you should start thinking about more ways to earn money. You need to think of ways to build passive income, like investment income and through side hustles or starting your own business. Write these somewhere.

    When you are young and don’t have family or kids, you have more time to devote to your career.

    If you have a particular skill, you can monetize it using YouTube, selling a course online, or using platforms like Etsy to sell digital products. This may take a lot of initial effort but is so worth it

    For most self-made wealthy people, there is more than one source of income AND they monetize the skill they are good at.

    Secret #4: Manage your money wisely

    This is a BIG habit that sets millionaire apart from others, they know how to manage their money wisely. We have to limit unnecessary expenses that we can’t afford yet. So From budgeting to investing, it’s crucial to have a firm grip on your finances. I use an app called Mint which lets me track my expenses in different categories. I know what are the essentials in my life, my needs that I can’t live without, then I have to keep track of how much money I am spending on my different wants and how much I am saving and investing

    When we don’t give priority to budgeting and investing, and keep spending money, we tend to suffer later. When we start saving early and invest our money and make regular contributions to it, because of the power of compounding returns, our initial investment becomes so much more in the future years which we can’t even imagine.

    I wrote another post on this with examples, so that should give you some idea of why it is crucial to save and invest from an early age to achieve that financial freedom and your dream life.

    Secret #5: Surround yourself with like-minded people

    Additionally, what I do is I surround myself with like-minded individuals who inspire and motivate me.

    So, try and network and meet with like-minded individuals to build relationships. You can find these groups online. Sometimes, we meet people who can help us achieve our dreams fast.

    Secret #6: Work hard

    Next, I want to talk about the habit of relentless hard work and patience.

    Success doesn’t come overnight, and it certainly doesn’t come without putting in the effort.

    Many times we feel SOME people just got lucky, but everyone has a long journey and the amount of hard work successful people have to put in is not easily visible to others.

    I have degrees from very prestigious universities. When I was still a student in high school, I had a clear vision, that I needed to get good grades to get into a good college. From there, I consistently worked hard because I knew how competitive it was.

    I grew up in a middle-class family in India and getting good education was the only way for us to move ahead in life. Both my parents had government jobs and I saw how they prioritized savings over spending.

    From the beginning, I had a mindset that if I didn’t work hard, I wouldn’t be successful in my life. In India there are a lot of people and limited jobs, so everything becomes more competitive.

    After marriage, I moved to LA where my husband lived and my parents had to take A HUGE loan, so I could study at USC in LA, which is a private institution and has a big tuition cost.

    So for me, it was obvious, that I needed to find a good-paying job as soon as I graduated so I could pay off my student loans and earn a comfortable salary that could support me and my husband to fulfill OUR American dream.

    To get my first consulting job in LA, I worked hard to get a high GPA in economics (3.9) so I could get an interview opportunity. I was an international student and not many companies wanted to sponsor my visa.

    I knew had to stand out. So I put in a lot of hard work to get good grades and applied to different companies to get an internship. Even at my full-time consulting job, I continuously had to learn and improve my skills to stay valuable to the company. I learned programming and I got better at MS Excel, report writing, and presentation skills.

    Now with two kids, two YouTube channels, and another full-time job, I still have to work very hard, but at the end of the day, it is very rewarding. We have so much we can achieve, we just have to keep working towards it.

    Secret #7: Don’t be afraid of initial setbacks

    Also, don’t be scared of initial setbacks, It is very important to be persistent and don’t get discouraged by failure in the beginning.

    Even if you do not achieve success first, you will still learn from your efforts. In my case, if some of my videos don’t do well, they still teach me what didn’t resonate with my viewers. Even if I get some hate comments, I don’t give up and instead focus on how to get better at my videos and provide better content to my viewers.  

    I have faith that If I keep putting in the hard work and I continue to make small improvements in making quality videos, people will ultimately start relating to the message I want to convey. So yes, what I want to say is that even with initial setbacks,  there’s learning and your efforts will not get wasted.

    It is very important to stay focused on your vision and to believe in yourself. Success often comes to those who keep pushing forward, no matter what challenges they encounter.

    There was a time when my kids were young and I had to take a break from my job. But I never left learning and continued to find other opportunities to earn a side income even when I couldn’t get back to full-time job, I started working part-time with my in-laws on their clothing business. Even to date, I work on that.  I created an Etsy channel and learned so much about the fashion industry in America and the ethics of business and marketing, which was not part of my background.

    Another important habit that makes people rich is when they understand the importance of being proactive and start taking initiative.

    Please don’t wait for opportunities to come to you, actively seek them out and make things happen. We are living in the informational technology world and there are so many free resources out there for you to learn and get better at anything you want to.

    Now it is only up to you to take advantage of it. Sometimes we spend too much time planning and keep gathering information and don’t take action. You need to change that.

    Each one of us has some talent and we need to find that unfair advantage that sets us apart from many other people. and in the current times, it is much easier to make money using your talent where you can provide some unique value to benefit many other people.

    Right now I am working on creating an online economics course that will be for high school and college students. It is taking a lot of my time but when you work on your passions, it doesn’t feel like work anymore because you are enjoying it every single minute. So yes please take initiative and don’t wait for the perfect opportunity. It is better to start somewhere and learn along the way. If you keep watching inspirational videos but don’t take action, then there is no gain.

    Secret #8: Continous self-improvement and growth

    Another habit that’s helped me achieve financial freedom is continuous learning and personal growth.

    I have been continuously learning something new, whether it is for my job, for my clothing business, or my YouTube channel.

    From my job, I got really good in Excel, basic programming skills in understanding companies’ financials and report writing. This helped me start an economics and personal finance blog which ultimately led to me starting this YouTube channel.

    To make videos, I had to learn video editing skills. So Investing in yourself is just as important as investing in your financial portfolio.

    While a lot of information is free, sometimes you have to pay a small amount to learn a specific skill. Don’t be afraid to invest in yourself because in the long run, it will pay off.

    #Secret #9: Take calculated risks and invest in broad-based funds

    And speaking of investments, let’s discuss the habit of taking calculated risks. Most people think that investing in the stock market is a gamble, but actually, if you look at the data throughout history stock market in the form of SP500 has not performed badly over any 16 years. So one easy way to get rich that I follow is to leave my money invested in broad based index funds along with the 401k retirement account. Both me and my husband have our employer-sponsored retirement accounts along with other investments in index funds. The earlier you start the better it is for you.

    For investing in the stock market, you can start by investing in a broad-based ETF or index fund. I have a separate post, where I talked about 3 good index funds to invest in, so you can read it for all the information. Index funds and ETFs give you diversification and over the long term they have given an average yearly rate of return of 10%.

    Secret #10: Follow the law of attraction

    The law of attraction is a powerful principle that states that like attracts like.

    When it comes to money, the law of attraction teaches us that our thoughts and beliefs directly influence our financial reality.

    By aligning our thoughts with abundance and wealth, we can attract more money into our lives.

    Start by visualizing yourself already having the money you desire, and living a life of financial freedom and abundance.

    Believe with conviction that you deserve to be wealthy and that money flows easily and effortlessly to you.

    Practice gratitude for the money you already have and celebrate even the small financial wins in your life.

    To manifest money using the Law of Attraction, it’s also important to take inspired action.

    Be open to opportunities, be proactive in seeking financial knowledge, and take steps towards your financial goals.

    Avoid dwelling on lack or scarcity, as this will only attract more of it into your life. Instead, focus on abundance, wealth, and financial success, and trust that the universe will provide.

    Remember that the Law of Attraction is not a magical solution overnight, but a powerful tool for shifting your mindset and beliefs. Consistency and perseverance are key to truly harnessing the power of the Law of Attraction when it comes to money.

    Stay committed to your financial goals, believe in your ability to achieve them, and keep taking steps forward. As you continue to align your thoughts, feelings, and actions with abundance, you’ll start to notice positive shifts in your financial reality.

    Recap:

    To recap, to become a millionaire, I started living below my means at the start. I prioritize wise investments, educated myself about finance, set clear goals, and built multiple streams of income.

    I like to surround myself with successful individuals because as I said your peers influence you. I like to stay disciplined and avoid impulsive buying.

    I also understand that success doesn’t come easy and there is a lot of hard work that goes behind it, so work hard, be patient, stay motivated, and take calculated risks and once you achieve that financial freedom don’t forget to give back to the needy who can benefit from your little financial help.

    I think you truly feel rich when you give back to society. Remembering to appreciate what you have and helping others along the way is very enriching.

    Doing only things that only “serve you” is a bit selfish. I believe if we are capable, we should help others who would benefit from our financial support. If god has blessed us with wealth, we should be grateful and help other hard-working people. I like to do charities and sponsor underprivileged children’s education so they can have a better future. This gives me a purpose and I feel truly happy doing that.

    So, these are some habits that have truly made me rich, and I know they can do the same for you!

  • To buy in full, finance or lease a car?

    Today, we will explore a common dilemma for car buyers: whether to buy, finance, or lease a car. We will also evaluate each of these options using some numbers so make sure to read this entire post so you have a better understanding of each option.

    Scenario 1: Buy in full

    Let’s start with buying a car in full using your own money. The advantage of buying in full is that you own the car outright. If you have the funds available, this can save you a lot of money in interest over time, and you’ll have complete ownership of the vehicle. However, buying in full might not always be the best option for some, as it requires a large upfront payment, which can possibly drain your savings. And especially if you need to preserve that cash for other things, like for emergencies or investments.

    Scenario 2: Financing

    Now, let’s look at the second option which is to finance your car through a loan. This option will have you make monthly payments over a set period of time. So you basically take out a car loan from a bank or a financial institution to pay for it over time.

    This can be a good option if you don’t have all the cash upfront but still want to own the car eventually. Just be mindful of the interest rate and the monthly payments to make sure they fit within your budget. Also, keep in mind that interest rates can vary based on the market and your credit score, which can affect the overall cost.

    Scenario 3: Leasing

    Lastly, we will evaluate leasing as the third option, which is like renting a car for a set period of time. Just like how you rent a house, when you lease a car, you basically rent it for typically 2 to 4 years. Leasing can be a great option if you want to drive a new car every few years without the hassle of selling or trading in your current one.

    However, keep in mind that you won’t own the car at the end of the lease term unless you decide to buy it at the end of the lease term for a set amount of money.

    Also, you should consider your mileage needs and any potential penalties for exceeding the agreed-upon limit, as those can add up quickly. So the pros of Leasing are that it requires lower monthly payments compared to financing or buying.

    It also allows you to drive a more luxurious vehicle than you might otherwise be able to afford. But as I said you don’t own the car and may face mileage restrictions and additional fees if you exceed that limit. So, If you like long road trips, leasing might not be right for you.

    Math-Math baby

    Now, Let’s compare the three scenarios using some actual numbers. For example, let’s say the car you want to buy costs $30,000.

    Scenario 1: If you decide to buy in full, you’ll have to pay the full $30,000 upfront. You won’t be paying any interest on it, but there is an opportunity cost of it that is you won’t be able to earn any interest if you were to invest that money somewhere else like in a CD or stock market.

    So if I need to decide this and the nominal interest rates are low (less than 3%), then buying in full may not be a good idea for me. This is because the opportunity cost of $30,000 is a lot. You could possibly earn a higher return of 7%-8% by investing in a broad-based index fund like these.

    Scenario 2: If you finance the car with a loan and a 4% interest rate over 60 months, your monthly payment would be $552. After 60 months, you’ll have paid a total of $33,120. This is greater than $30,000 but spread across 5 years.

    Scenario 3: Now, let’s look at leasing. If the lease is for 36 months and you pay $300 per month, the total cost would be $10,800. As you can see, leasing has a lower immediate cost, but you don’t own the car.

    Are there any additional costs?

    Insurance

    Besides the purchase price in Scenario 1, you need to consider insurance, which on average costs around $150 per month. Financing in Scenario 2 demands insurance coverage as well, with no significant difference from the previous scenario. Leasing in Scenario 3 also requires insurance, but it may be slightly higher due to lease requirements.

    Maintenance and repairs

    Routine maintenance and repairs must be factored in for all scenarios, with an average annual cost of $1,000 to $2,000. In Scenario 1, you have complete control over the quality and cost of maintenance, Financing in Scenario 2 offers no significant difference in terms of maintenance and repair expenses. while leasing in Scenario 3 often includes warranty coverage.

    Depreciation

    Depreciation plays a significant role in owning a car, with an average yearly depreciation cost of 30%. In Scenario 1, the vehicle’s depreciation impacts you directly, Financing in Scenario 2 shares a similar depreciation impact with ownership. whereas in Scenario 3, the leasing company absorbs this cost.

    Resale value

    Resale value is another consideration. In Scenario 1, you can sell the car to recoup some costs. In Scenario 2, your car’s value decreases over time, but once the loan is paid off, you have equity in the vehicle. but in Scenario 3, you have no equity. At the end of the lease agreement in Scenario 3, you must return the car, with potentially additional fees for exceeding mileage or wear and tear.

    Conclusion

    So, when it comes to hidden costs, each scenario has its own factors to consider, such as insurance, maintenance, depreciation, and resale value. Ultimately, you should evaluate which option aligns with your budget, lifestyle, and long-term goals. If you value long-term ownership and have the means to buy in full, it may be your best option. On the other hand, if you prefer lower monthly payments and don’t mind not owning the car, leasing might be more suitable.

    Now that you have a better understanding of the pros and cons, hopefully, you can make an informed decision.

  • How does the Central bank control inflation?

    You may have heard in the news in the last year, that the Fed has been raising the interest rate. In this post, I will be explaining which is the “interest rate” and how the central bank of the U.S. (the Federal Reserve) does that to control inflation.

    After Jan 2022, there has been a steady rise in prices of many items, esp. fuel, housing rent, and food prices. If you want to understand what inflation is and how it is calculated, you can read my detailed article on inflation here.

    Inflation always happens when there is more demand than supply and when there is an expectation of inflation to continue. Producers raise the price of the goods and services in demand, to make more profit from them.

    The central bank of a country (the Federal Reserve in the US) intervenes when inflation is out of control or is significantly high compared to the target level. As this blog mostly focuses on the US Federal Reserve monetary tools, I use the terms the Fed and central bank interchangeably. However, central banks in other countries also use similar monetary tools.

    Is inflation always bad?

    In the US and many advanced countries, the target average rate of inflation is around 2% every year. This little bit of inflation rate is considered desirable, as it helps borrowers pay off their debt. When there is some inflation, borrowers will have to pay slightly less in purchasing power terms because their money is now worth less to the lenders, exactly by the rate of inflation.

    Additionally, it also motivates people to spend their money on goods and services instead of holding on to them, as their money will lose its value next year by the rate of inflation. So, we get our normal production and consumption, and the economy continues to run smoothly.

    What are the two goals of a central bank and how does it achieve it?

    The central bank uses monetary policy to keep inflation low and promote maximum employment. By maximum employment, we mean the highest level of employment that an economy can sustain while maintaining a stable inflation rate. In the US, these goals are referred to as the Fed’s dual mandate.

    You may ask how the Fed achieves its dual goals. Essentially, the Fed uses its monetary policy tools to start a chain reaction in the economy, each causing one another. In the US, the Fed’s chief body for monetary policymaking is called the Federal Open Market Commission (FOMC). FOMC meets eight times a year and looks at data on current economic conditions, like what is going up and what is going down and how the economy is likely to do in the future based on the data. Based on that information the FOMC makes monetary policy decisions.

    When inflation is high for a long period and unemployment is at a very low level, we call it an overheating economy. The central banks try to raise the interest rates to slow down the overheating economy. This is called contractionary or tight monetary policy.

    Tools of Monetary Policy

    Now, let’s look at the tools the Fed can use to bring inflation down to the stable 2% average rate. This is done in two steps:

    First, the Federal Open Market Committee (FOMC) will raise the target range for the Federal funds rate. This is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. This rate is not set by the Fed, instead, it is determined by the market forces of demand and supply between commercial banks.

    On any given date, there are many different transactions in the federal funds market and they settle at slightly different rates, the effective federal funds rate measures the median rate of these transactions.

    FOMC sets a target range for the federal funds rate. In other words, the majority of the banks’ transactions should fall within the target range. Banks with deficits can borrow money from other commercial banks. The next day those banks return the money with a little bit of interest.

    Now, the main task for the Fed is to use its monetary tools so that this federal funds rate goes up because this is the driving force for all the other interest rates in an economy.

    Interest on reserve balance is the main tool

    So, to steer the federal funds rate in the target range set by FOMC, the Fed uses interest on reserve balance as its primary monetary policy tool. The interest on reserve balances rate is the interest received by commercial banks on deposits that banks hold in their reserve balance account at a regional Federal Reserve Bank. This interest rate is a risk-free investment option for commercial banks. This, the interest on reserve balances rate is set by the Fed and is, therefore, an “administered rate,”.

    Interest on reserve balance: Banks can deposit the excess reserve with the Fed risk-free overnight, and earn interest just like you can do with a savings account.

    When the Fed sees the economy is overheating with high inflation and a tight labor market, it tries to slow down the economy by raising the interest on the reserve balance. With that, the banks will be more willing to deposit their reserves with the Fed, rather than lending to other banks in the federal funds market.

    A key point to note here is that the interest on reserve balances rate serves as a reservation rate or the floor rate for banks. This is the minimum interest banks would be willing to accept in order to lend to each other, rather than keeping it with the Fed. If the Fed raises this interest on the reserve balance, commercial banks must raise the Federal funds rate in order to attract other banks to lend to them.

    Another key concept that ensures that the federal funds rate does not fall far below the interest on reserve balances rate is called arbitrage. Arbitrage means simultaneous purchase and sale of funds (or goods) in order to profit from a difference in price.

    So, for example, if we assume the federal funds rate is 1.75 percent and the interest on reserve balances rate is slightly higher at 2.25 percent, banks will see that they can borrow funds in the federal funds market at a lower rate and earn higher interest by depositing those funds at the Fed. They will keep doing that until with the forces of demand and supply, the increase in demand for funds in the federal funds market will cause the federal funds rate to rise. It will keep rising until it reaches the interest on reserve balances rate so that banks no longer see the opportunity to profit by borrowing in the federal funds market and depositing it with the Fed. 

    As the Fed sets the interest on reserve balances rate directly, the Fed can steer the federal funds rate up or down by raising or lowering the level of the interest on reserve balances rate. In fact, this phenomenon of arbitrage makes interest on reserve balances a very effective tool for steering the federal funds rate direction.

    There are two other tools that the Fed can use to guide the federal funds rate

    1. By setting a floor with an overnight reverse repurchase rate,

    2. and by setting the ceiling using a discount window

    Let’s understand both of them.

    The Fed has an overnight reverse repurchase facility that is open to a broader set of financial institutions, as interest on reserve balances is available only to banks and a few other institutions. This facility allows these financial institutions to deposit their funds at a Federal Reserve Bank and earn the overnight reverse repurchase agreement rate offered by the Fed.

    Thus, the overnight reverse repurchase agreement rate does the same thing as the interest on reserve balances rate does by acting as a reservation rate for these financial institutions. If this rate is higher than the federal funds rate, then by pressure of demand and supply, the Federal funds rate starts going up until there is no profit from arbitrage. The overnight reverse repurchase agreement facility is a supplementary tool because the rate the Fed sets for it helps set a floor for the federal funds rate.

    So when it raises the overnight reverse repurchase rate, the Federal funds rate tends to move up as well.

    The discount rate is the rate banks have to pay to the Fed for borrowing money from the Fed through the Fed’s discount window. Banks are more likely to borrow from each other (at the federal funds rate) only if it is lower or equal to the discount rate that they have to pay to borrow from the Fed. Thus, the discount rate acts as a ceiling for the federal funds rate. Also, it is set higher than the interest on reserve balances rate and the overnight reverse repurchase agreement rate.

    Lastly, there is another tool that used to be the Fed’s primary tool to control the money supply in the economy before the 2008 financial crisis. This is called open market operations where the Fed would buy or sell t-bonds. Now, with ample reserves in the banking system, the Fed only uses this as a supplemental tool to help maintain ample levels of reserves. The Fed can buy or sell government securities in the open market to increase or decrease these reserves in the banks account with the Fed.

    In a nutshell, when the Fed wants to control inflation, it would set a higher range for the Federal funds rate. To achieve this target, it would increase the interest on reserve balances rate as the main monetary policy tool. It can also use additional tools by raising overnight reverse repurchase agreement rate, and discount rate. All this will ensure the federal funds rate stays within the high target range set by the FOMC.

    Why does the Federal fund rate matter?

    Since the federal funds rate affects all the other interest rates in the economy, all the other interest rates go up as well. At high interest rates, households will borrow less money to buy big-ticket items they want. This will cause a reduction in spending by households. This will cause overall savings to increase because now they are getting higher interest rate to save money in a bank.

    Once household demand is reduced, firms will reduce their investments. They will also reduce their workforce and demand fewer workers. This will reduce employment levels also and cause the inflated prices to return to the target of 2%.

    The now-raised federal fund rate would cause other market interest rates like mortgage, auto, and other interest rates that banks charge from households and businesses to rise as well. The increased cost of borrowing will reduce spending across all sectors of the economy, lowering excess demand and bringing prices back to normal.

    The Fed will do the exact reverse of this process when the economy is in a recession when the inflation is below the 2% target rate and there is high unemployment. It will lower the Federal funds rate target range by lowering interest on the reserve balance. It can also use additional help from lowering interest on overnight reverse repurchase agreement rates, and discount rates to give a boost to the economy.

    How effective are these tools in reality?

    All these monetary policy tools only work when inflation is caused by demand-pull factors. However, if it is due to cost-push factors, this measure may cause more harm than good. Cost-push factors include supply shocks when the supply of the products is hampered. There could be many reasons for a reduction in supply such as increased cost of raw material and other inputs, and natural calamities. Trade restrictions such as sanctions imposed on a country can also cause supply disruptions.

    Also, there is a direct link between reducing inflation and reducing overall economic growth. Even though central banks aim for a soft landing when they raise interest rates to bring down inflation, sometimes it doesn’t go as planned.

    In economics, a soft landing means a moderate economic slowdown following a period of growth. In the past, the Fed in the US has had a mixed record in achieving a soft landing when it raised interest rates.

    In addition, inflation expectations continue to play a key role in how people react to the contractionary monetary policy. If people continue to believe the prices to go up, they will tend to make the purchases now, rather than in the future when the worth of their money can get further low.

    The board of governors at the Fed, as well as various economists that work there, take into consideration all these factors and keep a watch on the trend. They can alter the monetary policy according to the direction of its performance.

  • What are the Fed’s new monetary policy tools?

    Today we’re going to talk about a really important topic: what are the main tools that the Federal Reserve uses to influence the economy and how does it do it?

    We will also learn the tools that the Fed uses in its new monetary policy and how they are different from their old way. Don’t worry if you’re not familiar with economics, because I am going to break it down step by step.

    So, first things first, what is the Federal Reserve? Well, it’s the central bank of the United States and to put it simply, The Federal Reserve (the Fed) is like a bank for the U.S. government.


    If you look at the Federal Reserve website, it says “One of the most important functions of the Fed is to promote economic stability using monetary policy. The Fed’s goals for monetary policy, as defined by Congress, are to promote maximum employment and price stability.” This means the highest level of employment that the US economy can sustain while maintaining a stable inflation rate of around 2%.

    So how does the Fed control the economy?

    The Fed has some tools to control the economy, these are monetary policy tools. Imagine the economy is like a car. If it’s going too fast and might crash, then the Fed can step on the brakes. If it’s too slow, they can press the gas pedal.

    The FOMC is the money boss

    So let’s understand how the Fed works, The Federal Open Market Committee, or the FOMC is like the money boss of the Federal Reserve. They meet in Washington, D.C., eight times a year to talk about the economy. They look at economic data and statistics, talk to economists, and decide how much interest banks should charge each other.

    This interest is called the federal funds rate. Fed funds rate is the banks’ overnight lending and borrowing rate from each other. This rate matters because it affects how much regular people pay for things like houses and cars. If it’s high, things are a bit more expensive. If it’s low, things are more affordable.

    Let’s understand it step by step, Banks have a place where they put some of their money, called the Federal Reserve. They earn interest on it. Sometimes, one bank has extra money and another needs some to do their everyday stuff. So, the bank with extra money can lend it to the one that needs it. The important part is that the interest rate for this lending is not decided by the big boss or the Fed but by the banks themselves. They agree on a fair rate and it is thus market-determined.

    So how does the Fed steer this key interest rate in the target range set up by FOMC?

    The Fed uses its two administered rates – the first is the interest on reserve balance and the second is the rate on reverse purchase agreement. These are their main monetary tools to control the Federal funds rate in the current times.

    According to the Fed’s chair, Jeremy Powell, “The Federal Reserve sets two overnight interest rates: the interest rate paid on banks’ reserve balances and the rate on our reverse repurchase agreements. We use these two administered rates to keep a market-determined rate, the federal funds rate, within a target range set by the FOMC.”

    When the FOMC wants the fed funds rate to go up, the Fed moves the interest on the reserve balance up. This rate sets the lowest interest rate banks are willing to accept when lending out their money to anyone else. Since banks can also earn this interest by depositing their money at the Federal Reserve and keeping money with the Fed is a safe way to earn money, banks prefer to do this rather than lend it at a lower rate to another bank.

    This acts as a floor for the Federal funds rate, which means the banks will not accept any lower interest rate than this to lend money to one another for a short term.

    Another important concept to understand here is called “arbitrage,” which is like making a profit by buying low and selling high. So let’s say the federal funds rate is 5.5%, and the Fed pays 6% for deposits to be kept at Fed, banks can borrow at 5.5% from other banks and then deposit at 6% to make a profit.

    This pushes the federal funds rate up until it’s close to the interest on reserve balances rate (6%). Similar to the interest on reserve balance which is mainly for commercial banks, the Fed also has other tools, like the “Overnight Reverse Repurchase Agreement Facility,” which is the interest other broader financial institutions can earn by keeping money at the Fed. Thus, it serves the same purpose as the interest on reserve balance and sets a floor for the federal funds rate, which means the federal funds rate won’t go below this.

    The other tool the Fed uses is the Discount Window. Because banks will not likely borrow at a higher rate than they can borrow from the Fed, this acts as a ceiling. It is set higher than the interest on reserve balances rate and the overnight reverse repurchase agreement rate.

    So these are two tools that the Fed is now using in the ample reserves case.

    The Fed’s tools before the 2008 crisis

    The Fed used to use this tool called Open Market Operations as its primary tool, where it bought treasury securities to pump money into the economy. However, after the 2008 financial crisis, it has ample reserves that it only buys government securities to make sure the reserves remain ample in the banking system. So, it uses open market operations only as a supplement tool.

    So how does the FOMC decide on the target interest rate?

    Economic data on inflation and unemployment helps the FOMC decide its target interest rate. Over the years, FOMC has been changing this Federal funds rate target range up and down to help the economy. Think of it like a volume knob on your music player.

    When the economy was in trouble after the 2008 financial crisis, the Fed turned the volume to almost zero to help it get better in 2015.

    Then, when the COVID-19 pandemic happened, they quickly turned the volume back down to almost zero to help the economy during that tough time.

    Most recently, since last June 2022, the Fed has been raising the interest rate to control inflation. As of today, the target range for the Federal funds rate is between 5.25 to 5.50%.

    So, you can think of the Fed as a DJ for the economy, adjusting the volume to keep things running smoothly.

  • Money Mistakes to avoid in your 20s

    In this post, we’re going to talk about the top 5 money mistakes you should avoid in your 20s, and I will also share what you should do instead😁. So, let’s dive right in.

    1. Not saving enough. It’s important to start building an emergency fund as early as possible. many people in their 20s would rather spend all their income, and take loans than save for an emergency fund.

    2. Overspending on unnecessary luxuries. A lot of people, especially those in their 20s try to keep up with their rich peers and end up spending beyond their capacity on designer handbags, luxury cars, etc, more than what they can afford. So Try to prioritize your expenses and avoid going into debt for non-essential items. add data

    3. Not investing in your future. At the very least, you should contribute to a retirement account or start an investment portfolio. This can be done through your employer if they provide 401 K, I have a separate video explaining this so that you can check it out here.

    4. Neglecting to budget. Creating a budget will help you track your expenses and ensure you’re living within your means. There are many apps you can use to budget, I personally use Mint and I made another video where I give several other options, so feel free to download one of those Apps and see how this helps you stick to a budget.

    But, If you don’t like to do that through an app, you can also track your expenses using a spreadsheet. The basic idea is not to neglect to budget.

    5. Relying too heavily on credit cards. While credit cards can be convenient, make sure you pay off your balance in full each month to avoid high interest charges. As of the second quarter of 2023, The U.S. credit card debt has exceeded $1 trillion, marking an all-time high. In 2021, approximately 60% of people had credit card debt.

    Remember, it’s essential to learn from these mistakes to set yourself up for financial success.

    So, what should you do instead?

    Start by setting specific financial goals, such as saving a certain amount each month or paying off your student loans early.

    Educate yourself about personal finance through books, podcasts, or my YouTube videos, 😀 there are so many online resources available free of cost.

    You can even consider seeking advice from a financial advisor if you are interested in developing a personalized plan for your financial future.

    Another very useful tip is to automate your savings by setting up automatic transfers from your checking to your savings account each month.

    Cut back on unnecessary expenses, such as eating out or subscribing to multiple streaming services.

    I can’t emphasize enough, that if you are carrying any credit card debt, please pay off that high-interest debt first, so you can save money in the long run.

    I will totally recommend opening a high-yield savings account to earn more interest on your money. Capital One and Ally Bank are the two online banks I use. As of today, Ally Bank gives you a 4.5% to 5% interest rate on a CD, much higher than traditional banks. Also, CapitalOne is paying a 4.3% interest rate. These can change with the Fed’s decisions so don’t delay and open a high-yield savings account to earn more interest.

    Increase your income through side hustles or by pursuing professional growth opportunities.

    Finally, surround yourself with like-minded individuals who share your financial goals and can provide support and accountability.

    That’s a wrap for today’s post! Don’t forget to hit that like button and subscribe to my YouTube channel for more money-saving tips. Don’t wait to take control of your financial future, start taking action now!

  • Top 5 Budgeting Apps to manage your finances

    Are you struggling to manage your finances?
    Then don’t worry, because in today’s post, I’m going to share with you the top 5 budgeting apps that will revolutionize how you handle your money.

    Mint

    First up, we have Mint, the holy grail of budgeting apps, the first app and the most popular one on tracking money and personal finance. Mint has a user-friendly interface and features.


    Mint allows you to effortlessly track your expenses and set financial goals. It syncs with your accounts, categorizes your spending, and sends you real-time alerts when you’re going overboard. Plus, it’s completely free!

    YNAB

    Next, we have YNAB, which stands for You Need a Budget.
    This app is perfect for those who want to take control of their spending habits. It helps you allocate funds to different categories, ensuring you stay on track.


    You Need A Budget, lives up to its name. It’s all about giving every dollar a job. By setting specific goals, you’ll quickly see where your money’s going and where it should be going. It’s like having a personal finance coach in your pocket.

    POCKETGUARD

    Now, let’s talk about PocketGuard.
    If you’re someone who hates the idea of budgeting, this app is for you. It syncs with your bank accounts and automatically categorizes your transactions. You’ll be able to see exactly how much you have available to spend at any given moment.

    It tracks your bills, and subscriptions, and even finds hidden fees. Imagine how much you’ll save when you finally cancel that forgotten gym membership or streaming service you don’t use anymore!

    WALLY

    Moving on to Wally, a sleek and user-friendly budgeting app. What sets Wally apart is its ability to scan receipts and track your expenses effortlessly. So there is no need for manual entry!

    PERSONAL CAPITAL

    Finally, we have Personal Capital, a comprehensive finance tracking app.
    With Personal Capital, you can manage your budget, and investments, and even plan for retirement. It’s like having a personal finance advisor right in your pocket.

    Personal Capital is perfect for those of you thinking about the long game. It not only tracks your spending but also monitors your investments and retirement accounts. Seeing your net worth grow? That’s the kind of motivation we all need! right?

    Conclusion

    So, there you have it – the top 5 budgeting apps to supercharge your financial journey. Remember, it’s never too late to take control of your money. Start today and watch your financial goals become a reality.

    If you found this post helpful, don’t forget to give it a thumbs up and subscribe to my Youtube channel to watch the video on the same.

    Which one are you excited to try? Let me know in the comments below! And if you have any other budgeting app recommendations, please also share that in the comments.

  • How government intervention is needed for social benefit?

    Today, we’re diving into the fascinating world of economics to discuss a crucial concept that often goes unnoticed but has a profound impact on our daily lives – externalities.

    What are externalities?

    Before we delve into examples, let’s define what externalities are. In economics, externalities refer to the unintended consequences of economic activities that affect individuals or entities not directly involved in the transaction. These external effects can be positive or negative, and they often lead to a divergence between private and social costs or benefits.

    Some Examples of Positive Externalities

    1. Education

    To better understand positive externalities, let’s take the example of education. When an individual pursues education, they gain knowledge and skills that benefit them personally. However, education also has positive externalities that extend beyond the individual. When educated people enter the workforce, they contribute to the economy’s productivity, innovation, and overall growth.

    2. Vaccination

    Another example is when the Government provides Vaccination. In the most recent case of the COVID-19 pandemic, people who got vaccines were less likely to get extremely sick or spread the virus to others.

    Similarly, any vaccination for other infectious illnesses provides health benefits not just to the person receiving the vaccine but also to the entire community of people he or she comes in contact with.

    Negative Externality

    Now, let’s shift our focus to negative externalities, using the example of pollution.

    When a factory produces goods, it incurs private costs like labor and raw materials. However, it may also release harmful pollutants into the air or water, causing damage to the environment and people nearby.

    Impact of Externalities

    Externalities can significantly impact market efficiency. When externalities are present, markets may fail to achieve an optimal allocation of resources, leading to overproduction or underproduction of goods and services.

    How can government intervention solve the problem?

    Governments can step in to correct the market failure caused by positive externalities. For example, they may provide subsidies to educational institutions or offer tax breaks to individuals pursuing education. This encourages more people to invest in education, leading to a better-educated workforce and more prosperous society.

    Similarly, to address negative externalities like pollution, governments may impose regulations, taxes, or fines on polluting industries. By internalizing the external costs into the production process, these measures encourage businesses to adopt cleaner and more environmentally friendly practices.

    Conclusion

    Externalities are all around us, influencing our decisions and shaping our economy in both positive and negative ways.

  • The rice export ban by India will have a major impact on the World

    Hi all, today, I am going to dive into some breaking news that’s sending ripples across the world’s food markets.

    There’s a rice ban in play by the Indian government, and it’s set to have some major consequences.

    Brace yourselves because this ban is no small deal. It’s projected to reduce the world’s rice shipments by almost half, leaving many wondering what this means for inflation and food prices worldwide.

    What is causing the ban?

    So, you might be asking, “Why the ban in the first place?” Well, here’s the deal –

    Last week, the Indian government put a ban on the export of non-Basmati rice varieties.

    Retail prices for white rice have been on the rise in India, and it’s got the Indian government on high alert.

    In just one month, white rice prices shot up by 3%; over the past year, they increased by a whopping 11.5%. Ouch!

    But here’s the kicker: Devastating monsoons, on which Indian agriculture relies heavily, are the main reason affecting this price surge.

    The unpredictable weather has wreaked havoc on rice production in India, creating concerns about food supplies in India and beyond.

    And that’s why the Indian government had to make some tough decisions.

    Key points showing the impact

    Now Let’s break down some key points to get a clearer picture of the impact:

    1. A rice ban of this magnitude will affect about half of the world’s rice exports – that’s a huge chunk!
    1. India is a major player in the global rice market, accounting for a whopping 40% of all rice exports. So, when India makes a move, the world will notice.
    1. Here’s a staggering statistic: rice is a staple food for over 3 billion people worldwide. Yes, you heard that right, 3 billion! That’s roughly 40% of the entire world’s population relying on rice as a dietary staple.

    NRI community in the US is hoarding rice further increasing the price and shortage

    In the US, the ban on non-Basmati rice exports from India is causing quite a stir. This is especially among the Telugu community living here. People are rushing to stock up on rice, fearing a potential shortage and higher prices.

    Indian grocery stores in major cities like Texas, LA, Michigan, and New Jersey are seeing long queues and a surge in demand for rice.

    Why all the fuss over rice? Well, a 9kg bag of rice is being sold at a massive PRICE OF 27 dollars due to the export ban, which is contributing to the worries.

    These grocery stores have even implemented restrictions, allowing only one rice bag per customer to manage the situation.

    Why is this panic buying happening?

    The panic buying might be twofold:

    First, there’s concern about the scarcity of fine variety rice like Sona Mahsuri, which is much sought-after.

    And secondly, with the ban in place, there’s a possibility of rice prices skyrocketing.

    According to a leading economic news source in India, Economictimes, several countries, including Benin, Nepal, Bangladesh, China, Cote D’Ivoire, and others, heavily rely on non-basmati rice imports from India. With this recent ban, it’s projected that world rice shipments will be cut almost in half, raising fears of global inflation in food markets.

    So, guys, this rice ban is causing quite a stir in the world’s food markets  With half of the world’s rice shipments set to be impacted and India being a significant player in the global rice trade, we can’t underestimate the potential consequences.