AFTER MANY YEARS OF LOW rates, the U.S. Federal Reserve raised the federal funds rate nine consecutive times in the last three years, including four times in 2018 alone. Furthermore, the Federal Reserve forecasts two more increases for 2019. Short-term interest rates track the current federal funds rate closely, so they go up and down in sync. Long-term rates, on the other hand, represent expected future interest rates, and are only loosely in sync with the federal funds rate.
Higher interest rates mean different things depending on your financial situation and the kind of debt and investments you have. No matter what your financial situation is, read on to better understand what higher interest rates may mean for you – and the steps you can take to prepare your finances for a rise in rates.
Pay off Credit Cards
Credit card debt is a short-term loan, so credit card interest rates are generally in sync with federal funds rate but at a higher level. Rising interest rates mean that any credit card debt will cost you more every month, so keep credit card debt to a minimum and pay it off as soon as possible.
Refinance
If you have debt at variable rates, such as a floating rate mortgage, then it may be better to lock in interest rates by refinancing and converting that floating-rate mortgage to a fixed-rate mortgage. This is important if you expect interest rates to keep rising, and you have not already locked in a low rate on your home mortgage. If you refinance at a long-term fixed rate, you can lock in your mortgage payment at current levels.
Buy Big Now
If you are planning to borrow to make a big purchase, such as house or car, and expect interest rates to continue rising, it may be worth making the big purchase sooner rather than later. Any debt you incur can be locked at current interest rates.
Save
Stashing your savings in personal savings accounts and certificates of deposit is a way for you to lend short-term money to the bank, so the interest earnings on your savings accounts and CDs rises in sync with interest rates. Therefore, in a period of rising interest rates, you will earn more on the money you have stashed in a savings account or CD. If you want to further benefit from the forecast rate increases in 2019, consider buying a short-term CD, such as one with a six-month term. Also, remember to keep minimal funds in non-interest bearing accounts such as personal checking accounts. Rising interest rates are great for savers, but take care to place your money where it will get the maximum benefit.
Invest
As interest rates rise, so do yields and expected returns from all other kinds of investments. CDs pay more, corporate bonds yield more, and stock dividend yields tend to rise. The return from all kinds of investments tends to be higher when interest rates are higher. For example, historical data show that the S&P 500 index has risen in 12 out of the 15 instances of rising rates since 1950, according to a report from SunTrust Advisory Services. So a period of rising interest rates may be a good time to invest.
Shop Around
It always pays to shop around, whether for the lowest interest rate on your credit card debt, the lowest rate mortgage or even for the highest-rate savings account. As interest rates rise, it becomes even more worthwhile to shop around, as there is a greater financial impact from obtaining a better rate.
Watch for Inflation
One of the reasons the Federal Reserve increases interest rates is to head off expected inflation. Therefore, inflation expectations are likely to be higher in a period of rising interest rates. You can plan for inflation and protect yourself from it in many ways. For example, by purchasing Treasury Inflation Protected Securities, commonly called TIPS, which are bonds whose interest rates are indexed to inflation.
Plan
Use all the above information to plan and organize appropriate actions to best handle a rising interest rate environment. For example, you can adjust your budget per changes in your expected interest earnings and credit card payments.
Seek Professional Guidance
Understanding all the information, opportunities and consequences of rising interest rates can be overwhelming. Before taking action and making big financial decisions, consult a financial professional. A certified financial planner or a qualified financial advisor can help you with important financial decisions. The internet is good for getting a basic understanding of financial topics but is not a substitute for a good financial advisor. Your advisor’s fees may be well worth it, especially when your financial future and large sums of money are involved.
Don’t Worry
Once you use all of the information here, consult a qualified financial professional and get organized with a plan, your worries will be lessened. You will find that you can actually do your best to maximize the benefits from rising interest rates and minimize the costs of higher rates.
