buhvdesigns

Interest rates have a significant impact on your finances whenever you purchase an expensive item, such as a house or car. Interest rates have fluctuated a great deal over the past four decades as the ebb and flow of the economy has a direct impact on the prime interest rate.

History of the Prime Interest Rate

Individuals who have a perfect credit history qualify for what is known as the prime interest rate. Lenders calculate the prime interest rate by taking the federal funds rate and adding 3% to it. Most types of loans use the prime interest rate as their base. The prime interest rate hit an all-time high in 1980 when it was calculated at 21.5%. The all-time low was in 2008 when it was 3.25%.

Historic Interest Rates for Auto Loans

The most popular type of auto loans are 48-month and 60-month loans. The interest rate for 48-month auto loans peaked in 1981 when car buyers had to pay a 17.6% interest rate on their vehicle loan. The lowest interest rate was 4% in 2015. The highest amount of interest car buyers paid on their 60-month car loans was in 2007 when they were charged a whopping 7.82%. The lowest interest rate took place in 2014 and 2017. At the time the prime interest rate for 60-month car loans was 4%.

Why Historical Interest Rates Were Sky High in 1980

The overall economy is why the prime interest rate has fluctuated so much over the past four decades. When the economy is booming, the prime interest rate increases, however, when the economy slips towards a recession, interest rates decrease. This is because the Federal Reserve is trying to encourage people to spend money, which in turn is supposed to stimulate the economy out of a recession.

Investors couldn’t have asked for a better start to the 2019 calendar year. It was only a mere five months ago that the stock market was experiencing a nearly 20% correction from all-time highs and everything seemed doom and gloom. Fast forward to the present, and there seems to be an entirely different sentiment in the capital markets.

2018 was an unusual year in that the bond market was flat and stock markets across the globe were negative. Typically, bonds and stocks move in opposite directions of each other, which is why investors own both in a diversified portfolio. Stocks took a nosedive at the end of last year due to fear that the global economy was heading into a recession. Jerome Powell, Chairman of the Federal Reserve, came out at the end of last year and indicated that the Fed was going to be more patient in raising interest rates. Ever since these comments, risk assets such as stocks and high-yield bonds have taken off.

Market crashes are inevitable. They may not be predictable, but the fact is that the market will most likely crash at some point while you own stocks. The temptation to sell as soon as the market starts to trend downwards is huge. Many people will rid themselves of stocks at a loss, in the hope of avoiding a worse loss later.

Seeing any kind of a loss in the value of your investment can induce panic. This is called an “unrealized” loss and is a normal part of investing and there are many reasons not to sell during a downturn. Even when you have a large unrealized loss. The biggest one is that people who hold their stocks through a crash often experience a profit in the long term. Unless you are trying to make money quickly (and sometimes even then), selling during a downturn is a guaranteed loss.

Instead, you should keep your time horizon in mind. Many investors are saving for retirement. The reality these days is that retirement can last a few decades and chances are you will make money by holding. Financial writer Ben Carlson invented an imaginary awful investor, Bob, who made his first investment right before a huge crash in 1973, then again before the crashes in 1987, 2000, and 2007. After a lifetime of bad luck, Bob still decided to hold on to his investments without ever selling until he retired when he ended up with a 9% annualized return.

Returning home from an international vacation can leave us feeling saddened and missing the sunny skies, white beaches, or cultural city centers. It’s easy for our minds to start wondering “what if”…? What if I were to retire abroad? Would I be able to retire earlier? Would I be able to afford the healthcare? Will my Social Security benefit be enough to cover all my monthly expenses?

As the retirement savings crisis continues to increase, the number of Americans choosing to retire abroad also increases. According to the Social Security Administration, the number of Americans collecting their benefit while living outside of the U.S. is now almost at 700,000 people. This figure has continued to grow since the Great Recession. If all of the stars align, this could be an attractive and viable option for retiring Baby Boomers.

International Living has assembled a list of the “Best Countries to Retire”, which includes Mexico, Panama, Ecuador, Costa Rica, Colombia, Malaysia, Spain, Nicaragua, Portugal, and Malta. The list dives into the pros and cons of living (rather than simply vacationing) in each country. However, in reality, Americans who are retiring abroad are more likely to live in Canada, Japan, Germany, Mexico, and the U.K. The reasons for choosing a country vary widely amongst retiree.