= 27d567bc2d48d9f40e9ccc20ea370b15)
beoShaffer comments on 2015 Repository Reruns - Boring Advice Repository - Less Wrong Discussion
You are viewing a comment permalink. View the original post to see all comments and the full post content.
= 783df68a0f980790206b9ea87794c5b6)
Loading…= b715d02e85f7b3b4ae65ca3d3e450868)
Subscribe to RSS Feed
Powered by Reddit
= f037147d6e6c911a85753b9abdedda8d)
You are viewing a comment permalink. View the original post to see all comments and the full post content.
Comments (76)
Don't keep significant savings in accounts that don't bear interest for an extended amount of time.
That's a complicated issue. As a first-order approximation, there is a strong correlation between what you get paid and the risk you get to assume. At the moment the risk-free rate in the West is, essentially, zero.
Not sure I understand what you mean. Could you please explain this last sentence?
EDIT: Okay, I think I found the answer, but is that really that bad for an average person?
The risk-free rate is the market interest rate demanded for loans to an entity with the lowest possible credit risk. Usually that means a rich and stable government (e.g. the US federal government).
So what rate does the market demand for loans to Western governments? Let's take a look at, say, 1-year bond rates. In the US that's about 0.25% per year, in Germany that's negative 0.08% per year, in the UK about 0.34% per year, etc. All in all, that's pretty much zero.
Oh, thanks. My mind was at a completely different place when I was reading your comment. Recently I was thinking about how one could use this situation to borrow money on mortgage, then try a startup. Worst case, the startup fails, you return to a job and pay the money back to bank, but the interests are small, so it's not a big problem.
A part of what you wrote even seemed to fit into this context (by taking greater risk you could make more money, sure), but the last sentence interpreted in this context meant that as an employee you are unable to save money. Which felt... unlikely, so I asked. Glad I did.
Mortgage offset accounts are an excellent substitute, if you want the full liquidity of a bank-account with a very good "return"
I believe they are only a UK and an AU/NZ thing.
Having a home equity line of credit is the standard US equivalent.
Nope, a very different thing. In the mortgage offset accounts you effectively get paid your mortgage interest rate on your balance.
Suppose you have a $100k mortgage and you find yourself with $50k of extra cash that you would like to have available if needed.
Scenario 1: you repay $50k of mortgage but have a $50k HELOC. You are paying for $50k less of mortgage, but if you need the money back you can take it (and, until you pay it off again, pay more on the mortgage).
Scenario 2: you put $50k into your mortgage-offset account. You are paying for $50k less of mortgage, but if you need to use the money you can spend it (and, until the money's back in the account, pay more on the mortgage).
These do seem pretty close to equivalent, though I guess the HELOC involves more paperwork. I am in the UK and all I know about HELOCs is the term itself; am I misunderstanding how they work?
Ah, I see. Well, you get somewhat similar financial outcomes but you end up in very different positions.
As far as I understand mortgage offset accounts, the money in that account is yours. You are, effectively, a lender, and the mortgagor -- a creditor. In the HELOC situation when you pay down part of your mortgage, that money is gone. Instead you get a second loan (and a second lien on your house) and now you're the creditor while the bank is the lender. It is not your money.
Thinking about the situation in which your credit rating deteriorates and the bank pulls the line of credit should make the difference between the two scenarios clear.
I take it 'significant' here means more than half a year of regular income total. Half of that appears to be the recommended scratch money.
Significant depends on your personal circumstances, but anything more than half a year's income almost certainly qualifies. I've seen good arguments for keeping much than half a years income on hand, but they're controversial and aimed at people following the early retirement community's overall suite of advice, which allows them to make assumptions that don't hold for large chunks of the population.