What’s Poppin’,

This is the Master Money Newsletter, your daily dose of money caffeine - we get you hyped, energized, and ready to conquer the week. Oh yeah, and stack some cash too.

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Here’s what we have on deck today:

📗 Read: Why The Market Goes Bonkers When They Adjust Interest Rates

📺 Watch: The Best Index Funds to Buy This Year!

🎙️ Listen: 5 Ways to Buy Real Estate With Low to No Money Down!​

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Index Fund Pro is on sale for one more day!

This is our course that teaches you how to invest in index funds and ETFs. The Promo Code is IndexJuly20 and you get 20% off! 🧠Check it out here​

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📈 Why The Market Goes Bonkers When the Fed Adjusts Rates

Who says Bonkers?

Lately, I have been receiving questions about the impact of the Fed on the market.

Today, I am going to explain to you in plain English why the market moves when the Fed decides to raise (or lower) interest rates.

Why on God’s green earth should you care?

We as long-term investors don’t care about the day-to-day fluctuations. We care about keeping our hard-earned dollars invested. We know that the odds are in our favor if we stay invested.

To stay invested you must have a financial education. Otherwise, your emotions will blind your judgment.

All investors are emotional. It’s human nature. Knowledge is what allows us to stay calm cool, and invested.

Here is how rising interest rates can impact the market.

1. Cost of Borrowing:

So, picture this. Most companies have this habit – they borrow money. It's like their version of a coffee addiction.

When the Fed hikes up interest rates, it's like the price of coffee skyrocketing. Suddenly, everything's more expensive, especially growing a business. Remember the shock of seeing the monthly repayment on a $500,000 mortgage?

Yeah, companies feel that but on a monster scale. And when they’re shelling out more cash? That hits their profits and, yep, our stock prices.

2. Consumer Spending:

Here's another curveball. When borrowing gets pricier for us regular folks, that dream car or house? It starts to look a little less dreamy.

And if we aren’t buying, some sectors in the market will be imapcted.

But here’s the fun part – if the Fed wants to get the party started again, they drop those rates, making everyone feel a little more spendy.

3. Comparative Returns:

When interest rates rise, the returns on safer investments like bonds can become more attractive compared to the riskier stock market. In the 80’s and 90’s bonds were all the rage.

In fact, the original version of Your Money or Your Life (a FI staple) written in the 90’s recommended bonds over stocks.

I personally move emergency fund cash to bonds when they become attractive enough. But, I never stray from my long-term investment plan of investing is low-cost index funds and real estate.

4. Valuation Models:

Not my favorite way to evaluate your investments but many of the big players consider it.

Many valuation models, like the Discounted Cash Flow (DCF) model, use the interest rate as a discount rate. When interest rates go up, the present value of future earnings goes down, leading to potentially lower stock valuations.

This is usually when institutions, fund managers, etc. may consider making moves.

This is also why they typically don’t outperform the index because they have knee-jerk reactions.

5. Currency Value:

Higher interest rates can attract foreign capital and increase the demand for a country's currency, leading to currency appreciation.

A stronger currency can reduce the international competitiveness of domestically produced goods, which might affect companies that rely heavily on exports.

Final Thoughts

Knowing why certain economic events impact is important. It’s also important to not react based on these indicators.

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🎤 Oops They Did It Again

The Federal Reserve decided to bump up its key interest rate to 5.5%, which is the highest it's been in 22 years.

They did this to tackle the ongoing issue of inflation in the U.S. Even though prices have been dropping for a year, they spiked by 3% last June.

Jerome Powell, the head of the Fed, is hopeful this move won't lead to a recession, and he even hinted they might raise rates again if needed.

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🗞️ What’s Happenin’ In Money This Week

Global Debt Dilemma 🌍

The BBC report examines the escalating global debt situation, emphasizing its potential implications for future economic growth and stability. As countries have borrowed extensively to counter the economic impacts of the pandemic, there are growing concerns about how these debts will be serviced, especially if interest rates rise. Developing nations, in particular, face challenges in managing their debt burdens.

401(k) Insights 📈

This CNBC article sheds light on what higher earners need to know about 401(k) catch-up contributions. As individuals approach retirement age, there are provisions that allow for increased contributions to their 401(k) accounts. For those over 50, this can mean an additional $6,500 per year. However, high earners face specific nuances, and the article offers insights into making the most of these contributions while navigating potential pitfalls.

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​10x Is Easier Than 2x: How World-Class Entrepreneurs Achieve More by Doing Less​

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​5 Ways to Buy Real Estate With Low to No Money Down!​

​Everything you Need to Know About Your Student Loans (and How to Prepare to Start Paying Them Off!)​

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Youtube

​The Best Index Funds to Buy This Year! (Vanguard, Fidelity, and Charles Schwab!)​

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