What is the impact of rising interest rates on your finances
Preserving Your Buyin Power During Inflation: Finding Your Way Using Your Savings Banks in the Largest Banks
While there may be plenty of downside in the form of higher borrowing costs for consumers, one positive outcome is that your savings may actually start earning a little money after years of barely-there interest.
“Interest rates have increased at the fastest pace in 40 years,” said Greg McBride, chief financial analyst at Bankrate.com. Mortgage rates have skyrocketed to 20-year highs, Home Equity lines of credit are at the highest in 14 years, and car loan rates are at 11-year highs. Savers are seeing the best yields since 2008 – if they’re willing to shop around.”
If you’ve been stashing cash at big banks that have been paying next to nothing in interest for savings accounts and certificates of deposit, don’t expect that to change much, McBride said.
Thanks to the big players’ paltry rates, the national average savings rate is still just 0.16%, up from 0.06% in January, according to Bankrate.com’s October 26 weekly survey of large institutions.
If you’re carrying credit card debt, expect to see a hike in the rate you pay within a few statements. When the fed funds rate goes up, various lending rates that banks charge their customers tend to follow.
There are some CDs with rates of 5.15 or more which are well above the national average.
Given today’s high rates of inflation, Series I savings bonds may be attractive because they’re designed to preserve the buying power of your money. They are paying 6.89% at the moment.
But that rate will only be in effect for six months and only if you buy an I Bond by the end of April 2023, after which the rate is scheduled to adjust. The rate on the I Bond will go down if inflation goes down.
There are some limitations: You can only invest a maximum of $10,000 a year. You can’t redeem your bond in the first year. And if you cash out between years two and five, you will forfeit the previous three months of interest.
Nevertheless, they preserve the buying power of your $10,000 if you don’t need to touch it for at least five years, and that’s not nothing. It is of particular benefit to people who are planning to retire in the next five to 10 years that they will serve as an annual investment they can use if needed in their first few years of retirement.
If inflation proves sticky despite higher interest rates, you might also consider putting some money into Treasury Inflation-Protected Securities (TIPS), said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. Unlike Series I Bonds, TIPS are marketable Treasurys – meaning they can be sold before term. They pay a fixed amount of interest that’s dependent on the adjusted principal. That rate is always fixed at auction and never falls below 0.125%. At the most recent auction in October, for instance, the 5-year TIPS had an interest rate of 1.625%.
An Overview of Freddie Mac’s Fixed-Rate Mortgage Rate: Do You Need to Pay a Balance Transfer Fee or a yearly Fee?
A recent interest rate hike will most acutely impact consumers who do not pay off credit cards in full through higher minimum monthly payments, said a vice president of US research at TransUnion.
If you will have to pay a balance transfer fee or yearly fee, you should know what the penalties are for late or missed payments. The best strategy is always to pay off as much of your existing balance as possible — on time every month — before the zero-rate period ends. Otherwise, any remaining balance will be subject to a new interest rate that could be higher than you had before, if rates continue to rise.
If you don’t know if you have to pay a balance transfer fee or pay an annual fee, then you can’t make a payment. The best strategy is always to pay off as much of your existing balance as possible – on time every month – before the zero-rate period ends. Otherwise, any remaining balance will be subject to a new interest rate that could be higher than you had before if rates continue to rise.
The average personal loan rate was more than 10 percent as of March 8. The best rate is dependent on your credit score and income. Bankrate encourages borrowers to ask a few lenders for quotes before applying for a loan.
Freddie Mac shows the 30-year fixed-rate mortgage averaged 7.08% for the week ending October 27. That is more than it was a year ago.
Buying a House or a Car: When Home Equity Rates Start to Go Down, and When Should You Hedge Your Bets?
It’s important to know thatrushing into the purchase of a big-ticket item, like a house or car that doesn’t fit in your budget, is a recipe for trouble, regardless of what interest rates do in the future.
The variable rate on a home equity line of credit or a fixed rate on a home equity loan will rise because their formulas are directly tied to the Fed’s rates. The average home equity loan was 8% as of March 15th, up from 6.19% a year ago. HELOC rates, meanwhile, are currently averaging 7.76%, much higher than the 3.96% average a year ago, according to Bankrate.
In terms of inflation, Ma noted, the costs of services – which make up a big part of the Consumer Price Index – is the thing to watch. “The big question now is how sticky the services side of inflation proves to be. The job market is still strong, even though wage pressure has likely peaked, and that could keep wage growth elevated, for some time to come.
As for geopolitics, he added, “The market seems to have put geopolitical concerns in Europe on the back-burner, but as winter looms there is a risk that the energy warfare could escalate again.”
Financial service companies can do well in a rising rate environment because, among other things, they can make more money on loans. But if there’s an economic slowdown, a bank’s overall loan volume could go down.
In terms of real estate, Ma said, “the sharply higher interest and mortgage rates are challenging…and that headwind could persist for a few more quarters or even longer.”
He is positive about value stocks that have performed well this year. He expects that out performance to continue going forward on a long term basis.
Broadly speaking, Ma suggests making sure your overall portfolio is diversified across equities. The idea is to hedge your bets, since some of those areas will come out ahead, but not all of them will.
That said, if you’re planning to invest in a specific stock, consider the company’s pricing power and how consistent the demand is likely to be for their product, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.
Investing with Bonds and Municipal Bonds: Moving to Online Savings Accounts to Predict the Next Fed-Late Mortgage Rates
“There’s a pretty good opportunity in short-term bonds, which are severely dislocated,” Flynn said. “For those in higher income tax brackets a similar opportunity exists in tax-free municipal bonds.”
Other assets that may perform well include floating rate instruments from companies that need to raise cash. The Fed hikes its rates, so the floating rate goes up whenever it happens.
If you want to send children to college or retire in five to 10 years, Williams says you should invest in bonds and CDs since they are more attractive now. Gradually increase your bond allocation, that’s his suggestion. That reduces the overall risk of your portfolio and provides greater stability for the income that your portfolio can throw off.
How come you don’t get a better rate on your bank savings? If your hard-earned money is just sitting in an account at a big-name bank earning bunk (still), you can do much better by moving it to an online bank’s high-yield savings account.
As to where mortgage rates go next, look to inflation. If inflation keeps dropping and moving closer to the Fed’s 2% target, then mortgage rates are expected to drift lower too. They are not expected to go back to 3%.
The average rate on a 15-year home equity loan is 7.86%, while the average rate on a HELOC is 7.65%, according to Bankrate.
Investing in Bonds, Stocks, and Bonds: What Have We Learned in the Last Ten-Year Fed?
“The outlook for equity and fixed income returns has improved, and a balanced approach [in your portfolio] makes sense,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
Any cash you have sitting on the sidelines might be put into the equity and fixed income markets in regular intervals over the next six to 12 months, he suggested.
Commodities, meanwhile, have come down in price. He said that they are still a good hedge because of the uncertainties in energy markets and the consumption of industrial metals to facilitate energy transition.
Last year, as the Fed was aggressively raising rates, Flynn was advising clients to move more money into shorter-term bonds since — compared to long-term bonds — their prices had fallen more and their yields had risen more.
If you want a low-risk option, seek out a low-cost investment grade bond fund that primarily invests in bonds with a maturity duration that meets your time horizon (e.g., short term of 1 to 3 years, intermediate term of 5 to 10 years, or long term). Flynn said you could choose a flexible or strategic income fund if you can stomach a little more risk.
Muni prices have dropped significantly and, while they have started to improve, yields have risen overall and many states are in better financial shape than they were pre-pandemic, Flynn noted.
After two weeks of financial turmoil, the Federal Reserve decided on Wednesday to raise its key interest rate for the ninth time in a year, in hopes of refuting inflation.
That increase — which comes after US regulators undertook a number of confidence-boosting efforts to backstop banks and ensure liquidity — will have an effect on consumers’ savings, loans, credit cards and investments.
You can be assured of the safety of your deposits if the bank runs into troubles, just make sure you pick one that is insured by the FDIC.
Optimal Long-Term Investment Strategies to Prevent and Prevent Bankruptcy: The Case of the High-Credit Card Rate
Currently, the average credit card rate remains at a record high of 20.04% as of March 15, well above the 16.3% average at the start of 2022, according to Bankrate.
Whether they rise or fall from here, securing a home loan may become tougher since banks, wanting to bolster their defenses against potential adverse events like a run on deposits, may want to take fewer risks and preserve more cash. One way to make borrowing requirements more stringent is to.
If you have a long-term investment plan in place, stick with it, he recommends. It’s a good time to set one up if you don’t have one. That includes saving regularly in your 401(k) and investing in a diversified portfolio with exposure to US and foreign equities plus bonds.
According to Tony Roth, the chief investment officer of the investment company, an investor could consider taking advantage of the higher returns on bonds by reallocating 2% to 3% out of stocks and into high-quality corporate bonds with durations of no more.
If you’re in a top tax area, you may be able to invest through tax-free municipal bonds or a short-term muni money market fund.
