THE COST OF MONEY
7 WAYS TO DEAL WITH RISING INTEREST RATES
The cost of money is going up! When and how does this happen? Believe it or not, interest rates are usually increased when the economy is doing well. On June 13, 2018, the Federal Reserve raised interest rates for the second time this year. The first increase was in March from 1.5% to 1.75%. The second increase announced in June was from 1.75% to 2% and is expected to be raised at least 2 more times yet this year.
WHAT’S THE POINT?
The Federal Reserve known as “the Fed” can increase or decrease the amount of liquidity in the United States financial system by raising or lowering the federal funds rate. In 1977, Congress gave two primary tasks to the Fed:
- To keep the prices of things that Americans purchase stable and
- To create a labor-market environment that will provide jobs for everyone who wants to be employed.
Therefore one of the ways that the Fed makes this happen is to adjust interest rates depending on the state of the economy. If the Fed wants to stimulate the economy and encourage lending, borrowing and spending they cut interest rates. If the economy needs to be cooled down, the Fed will raise interest rates to make purchases less desirable.
WHAT ABOUT ME?
What does all this mean to you? Well, it depends on where you are financially. If you are a saver and/or investor a rising interest rate environment will benefit you. On the other hand, if you have consumer debt that is variable, an adjustable rate mortgage (ARM) or are interested in borrowing, rising interest rates mean you will be paying more for that debt. So it is important to understand interest rates and how they work. Now the question becomes what should be your strategy if interest rates continue to rise.
Here are 7 strategies help you navigate the rising interest rates.
PAY OFF DEBT
Pay off as much debt as you can. Do research to find the best strategies that will work for your situation. Credit card and loan debt are most likely to be affected by the rise in interest rates. It may be possible to transfer credit card balances to an interest-free credit card. Some cards offer an introductory period with no interests. This may give you time to pay the debt down more quickly.
You may already have a good start with saving. If so, make sure that your money is in the right place to really benefit you during this interest rate hike.
- SWITCH TO A FIXED RATE MORTGAGE
If you have an adjustable rate mortgage (ARM), you may not see too much of an increase in your payment yet. As interest rates continue to increase your budget can been thrown off course, especially if you are already on a tight budget. Try and switch to a fixed rate mortgage as soon as possible.
- LOOK AT SHORT TERM INVESTMENTS
You may be nervous about investing in a volatile economic climate. So, consider short-term investments that refer to a time period of less than 3 years. Examples of short-term investments are money markets, savings accounts, certificates of deposit, treasury bills and government bonds. These investments can mature into cash within a year and are considered liquid and easily accessible. Consult with a financial advisor.
- DIVERSIFY YOUR INVESTMENTS
You may have no debt, a nice amount of cash saved, a 401(k) and a great annual income which are all very safe. The disadvantage is you may be missing a wonderful opportunity if you don’t diversify your portfolio. Diversification means that you would not invest everything in one area such as only stocks or only real estate. Yes, you may be nervous about investing in an unpredictable economic climate therefore, diversification using an asset allocation strategy may benefit you. Depending on your risk tolerance a financial advisor can help you discover what will work in your best interest.
- BUY NOW
If you are in the market to buy a home or vehicle, don’t wait for the interest rate to go down. Ideally, we would like to make large purchases during a time when the interest rate is low. However, the interest rate is expected to continue to increase, at least this year, so consider buying now.
- STAY CALM AND DON’T MAKE DECISIONS BASED IN FEAR
Although the rise in the interest rate will cause volatility in the stock market, there is no need to fear. Don’t buy or sell out of fear. Stay calm, stick to a disciplined planned strategy and consult with your financial advisor.
WHAT’S THE REAL GOAL?
Keep your long-term financial goals in mind as you navigate through the increase in interest rates. What is good for one person, who may be your friend or family member, might not work in your best interest. Reaching financial goals is a personal journey in which timeless methods are used. Which methods you use really depends on your journey. We want to help you reach your goals. Timothy Roberts & Associates LLC is committed and dedicated to assisting you through your financial process.
We hope that this information has been helpful to you. Pass it along to your family and friends. Download our free ebook here entitled, Retire Happy: A Simple Guide to Your Next Big Adventure. Follow us on Facebook and LinkedIn. Use our website as a financial education tool at www.timothyrobertsllc.com . We are here for you! As always, stay tuned for next week’s issue of Global Money Solutions and remember…
Your Interest is our Only Interest!