In Fed Rate Cut, Bad News for Savers we discussed how the Federal Reserve’s interest rate cuts affects all Americans, but what happens if they keep cutting interest rates all the way to 0% (a.k.a. zero interest rate bound)?

Just since last September, Ben Bernanke and the Federal Reserve have cut the short-term interest rate from 5.25% to 2.25. Bloomberg calls this, “The most aggressive easing in two decades.” These rate cuts are an effort to stimulate the economy and make borrowing money easier for consumers.

But has the Fed reached a point where the rate cuts are no longer effective?

Bernanke believes that the Great Depression could have been avoided if the Fed cut rates faster and more aggressively, so economists are expecting him to keep cutting. However, there is not much more to go before we hit bottom, and nominal interest rates cannot go below zero percent.

So What Happens if the Fed Goes to a Zero-Interest-Rate Policy?

It is unlikely that the Fed will cut rates all the way to 0%, but don’t eliminate that as an option. Japan has mostly had a zero-interest-rate policy since 1999, and there is a lot we can learn from them.

Once the U.S. is zero bound, the Central Bank can no longer stimulate the economy with further interest rate cuts. As a result, they will have to turn to “non-standard” efforts, such as infusing more cash into the economy.

For those hoping mortgage rates will lower, that is not necessarily the case. In fact, so far the opposite has been true. Recently, as rates have been cut, mortgage rates have actually risen.

Rate cuts below the level of inflation will not benefit consumers. Why? The issue is that banks are not willing to lend money at a rate lower than inflation. In other words if the Fed cuts rates to 2% and the inflation rate is 4%, banks would actually lose money on loans due to inflation.

What will likely happen as we approach zero bound is the U.S. will experience a liquidity trap. Spending will be low because money is tight, and people and businesses won’t invest because there is no gain. Therefore the economy will remain stagnant as people keep money stashed away in savings rather than invested. As a result a recession will occur and banks will be unwilling to lend money.

Millionaire Money Habit: As the American economy continues to struggle and the interest rates continue to decrease, keep in mind that your savings account is not the best place for your money. It may be a safe ground, but just as banks will not lend money below inflation rates, you should have the same attitude with your money. -RT

When Jeremy at Generation X Finance wrote The 401k Debit Card: Probably One of the Worst Ideas Ever, I couldn’t have agreed with him more.

What is the 401k Debit Card?

Obtaining a loan against your 401k is nothing new, but in the past it was a bit more difficult and the repayment terms were stricter. Now with the 401k debit card you have a dangerously easy to use program that makes damaging your retirement savings a cinch.

The 401k debit card works just like a bank check card, and allows you to withdraw cash from an ATM or make impulsive buys anywhere that accepts major credit cards.

How Does the 401k Debit Card Work?

If your employer offers a 401k debit card, you simply apply for a loan against your 401k, and deposit the funds into a ReservePlus account. You then receive a debit card which can be used freely.

Rather than having money automatically deducted from your paycheck to repay the loan, which are the terms with a traditional 401k loan, you are sent a bill in the mail and are responsible for paying back the loan. This, of course, raises the risk of not making payments on time. The consequences of defaulting on your loan: heavy tax and early withdrawal penalties for cashing out your 401k.

Why is the 401k Debit Card a Bad Idea?

Particularly during tough economic times like we are now experiencing, and the gloomy outlook of future Social Security payments, under funding retirement planning is a national crisis. The 401k debit card encourages unnecessary borrowing of money that should not be touched until retirement and creates more risk of having to pay hefty fees.

By using retirement money for everyday purchases, or anything other than investing, you are reducing the amount of money and the lifestyle you could enjoy during retirement. This could mean having to work longer and not being able to retire when you plan to, or having to scale back in order to live within your means.

When is the 401k Debit Card a Good Idea?

It is unlikely that the average person would ever have a situation where they would be advised to use a 401k debit card. The only time it would ever make sense to even consider is as a last case scenario for repaying a debt that would otherwise require you to file bankruptcy.

Millionaire Money Habit: Your retirement contributions should not be toyed with. The only changes that should be considered to your 401k funds before retirement is the addition of more money, not taking money out. -RT

A lot of people claim that credit cards are bad, but I want to share with you what I make in cash back rewards from using credit cards.

This is one of my favorite times of the year. For the past five years, I’ve logged into my American Express account in March to pay my bill and I noticed I owe several hundred dollars less than I spent. That’s because it’s my anniversary date for when I opened an AMEX Blue Cash credit card. That means it’s time for them to pay me for all of the money I earned from using my credit card.

How much do I earn? This year I earned about $450 in cash back rewards, about a hundred dollars more than last year.

How Do I Make so Much Money with AMEX Blue Cash Back Rewards?

I literally use my American Express whenever and wherever possible to take advantage of the cash back rewards program. In Can You Break This Debit Card for a Dollar Please?, I mentioned that I try to avoid carrying cash on me as much as possible. As a result, I use my AMEX Blue Cash card for all of my purchases: gas, groceries, clothes, eating out, everything.

Once my credit card charges reach $6,500, I start earning up to 5% on everything I purchase. That’s not $6,500 in a single month, that’s the total of all months combined. This also does not mean you have to carry a $6,500 balance. In fact, I have paid off my credit card bills in full for the past 6+ years.

I also have automatic bill-pay set up for every bill I receive, so I earn cash back for paying my cable, phone, internet access and electric bill. And at the end of the month I pay off my credit card bill in full in order to take full advantage of my cash back rewards. That way this is truly free money since I do not pay any fees or credit card interest.

If you want to start taking advantage of AMEX Blue Cash Back Rewards, click the link to get your card now. But steer clear if you know you don’t have the discipline to pay off your card in full every month, or it will end up costing you more money in the end in interest payments.

Millionaire Money Habits: Millionaires harness the power of other people’s money. If you have the discipline to pay your credit card bills in full, take advantage of cash rewards programs to pay yourself for spending money.

The only way to truly take advantage of of cash back credit cards is to be absolutely sure that you pay off your balance in full every month. If you end up paying interest on your credit cards from carrying a balance, those finance charges will easily outweigh any benefits that you get from the card. Knowing how to use a credit card properly is the key to success.