Rising Interest Rates: Your Best Financial Moves Now

So far this year, the Federal Reserve has raised interest rates three times for a total of 1.75%. The Fed is widely expected to raise rates as much as 0.75% in their July meeting plus more rate hikes are likely throughout the year. Why? They are trying to avoid runaway inflation by tamping down the demand for goods and services. The most recent inflation numbers are 8.6%. What is most problematic is the rate of inflation for the most sought-after products:

• Gas-at-the-pump prices have risen 43% in the past 12 months.
• Grocery store prices have risen an average of 10.8%.
• Egg prices have risen 44% since last year.
• Bread prices are up over 40% since this time last year.

Rising prices have obviously hit us all directly in our pocketbooks. Rising interest combined with high inflation rates can create a heavy one-two punch depending on your personal finances

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How Rising Interest Rates Negatively Impact You: 

Credit cards. If you have credit card debt, every time they raise rates you are likely to see a corresponding interest rate increase within a couple of payment cycles. How much will these rising rates cost you? With a $10,000 balance, a .25% rate hike will cost you $25 per year in additional interest. So, with a 2% rate hike, your interest costs will rise $200. However, the real negative impact is the total interest charges you are paying. With average credit card interest at 20%, interest cost for a $10,000 balance is $2,000. 

Home Equity Lines of Credit (HELOC). Like credit card loans, the interest you pay on a HELOC will quickly rise as the Fed rates increase. 

Mortgage rates. Mortgage rates are on the move. This time last year, a 30-year fixed mortgage was 2.96%. Today, the 30-year rate has risen to 6.28%. The effect has been to tap the brakes on one of the strongest housing markets in recent history. As a comparison, a $400,000 30-year mortgage at 2.96% would require a monthly payment of $1,674. At 6.28%, your payment would be $2,458 per month …and interest rates are expected to keep rising.

Stock market. In general, fast-rising rates used to brake-pedal the economy will spook investors who will, in turn, begin selling stocks. Since the first of this year, the stock market has moved into bear market territory (-20%+).

How Rising Interest Rates Benefit You:

Savers can benefit from rising rates. Money market accounts and CDs will see rising rates. In the past 12 months, money market accounts have risen from approximately 0.25% to around 0.75%. The one-year CD is up to about 2.00%. However, the much higher inflation rate is working against savers.

What To Do Now:

1. Use savings to reduce variable interest rate debt. If you have money sitting in a savings account, consider using it to pay down/off consumer debt such as credit cards and HELOC. Also, shop for lower rates. For credit cards, visit www.bankrate.com. For HELOCs, contact your banker or other local banks. Since you continue to need emergency reserves, you’ll use your HELOC and credit cards as your backup until you can rebuild reserves once your variable interest rate debt is paid off.
2. Continue to invest in stocks. Continue to invest in your 401(k) and do not be scared out of the stock market, especially if you are more than five to ten years from retiring. The stock market will recover (it always does), and you will benefit from buying at lower prices.
3. Stay put in your home. If you already have a lower interest rate fixed mortgage, rising rates will not affect you. However, you may want to wait out your next home move until the next lower interest rate cycle returns…and it will return.
4. Buy I Bonds. I Bonds pay interest rates that are tied directly to inflation. You can invest a maximum of $10,000 per year and you must hold the bonds for a minimum of one year before redeeming them. Keep in mind that there is an interest rate penalty if you cash out before 5 years. Currently, they are paying 9.62%…not bad for a U.S. Government-backed bond. For more information, CLICK HERE. An inflation-protected alternative to I Bonds is Treasury Inflation-Protected Securities (TIPS).

Navigating the high interest rates and keeping control of your budget can be daunting. Not to mention trying to make sure you are putting enough money away for your future to count towards a comfortable retirement. If you need guidance, be sure to consult with a certified financial planner.