In the continued effort by the central bank to control excessive inflation, Federal Reserve Chairman Jerome Powell made it apparent on Friday that interest rates were expected to rise further.
During his keynote speech at the Fed’s annual Jackson Hole Economic Symposium, Powell stated that the Fed intended to utilize its policymaking “tools decisively to bring demand and supply into better balance. The overnight lending rate of the US central bank has already increased four times since March, to a range of 2.25% to 2.50%. And when the Fed governors convene the following month, it is anticipated to raise rates once more.
As a result, consumers will once more need to decide where to invest their funds for the highest return and how to cut down on borrowing fees. Here are a few strategies for managing your finances so that you can profit from higher interest rates while avoiding their drawbacks.
Credit Cards: Cut the bite as much as possible
Different loan rates that banks provide their customers with typically increase in response to increases in the overnight bank lending rate sometimes referred to as the fed funds rate.
So within a few statements, you can anticipate a rise in your credit card rates.
According to Bankrate.com, the average credit card rate is now 17.85%, up from 16.3% at the beginning of the year.
The best advice is to move any balances you have remaining on credit cards, which sometimes have high variable interest rates, to a card with a zero percent introductory APR that locks in for 12 to 21 months. That protects you from [future] rate increases and gives you a clear path to finally pay off your debt, according to McBride. “Having less debt and more savings can help you better handle higher interest rates, which will be important if the economy weakens.”
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Just make sure to find out what fees, if any, you will have to pay (such as an annual charge or a fee for transferring balances) and what the consequences will be if you make a payment late or forget to make one during the zero-rate period. The ideal course of action is to pay off as much of your outstanding balance as you can before the zero-rate period expires and to do so on schedule each month. Otherwise, any outstanding debt will be subject to a new interest rate that, if rates rise further, might be higher than the one you had previously.
Get a personal loan with a reasonably cheap fixed rate if you don’t move to a card with a zero-rate balance.
Home Loans: Lock in fixed rates now
Mortgage rates have been rising over the past year, jumping more than two percentage points since January.
The 30-year fixed-rate mortgage averaged 5.55% in the week ending August 25, up from 5.13% the week before, according to Freddie Mac. That is almost double where it was this time last year (2.87%), and notably higher than where it started this year (3.22%).
And mortgage rates may climb even further. So if you’re close to buying a home or refinancing one, lock in the lowest fixed rate available to you as soon as possible.
Given that, “if a significant purchase is not right for you, don’t rush into it just because interest rates could rise. No matter what happens to interest rates in the future, rushing into the purchase of a large-ticket item like a house or car that doesn’t fit in your budget is a prescription for problems, “said Lacy Rogers, a certified financial advisor located in Texas.
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Ask your lender if it’s feasible to fix the rate on your remaining debt, essentially turning it into a fixed-rate home equity loan if you currently own a home and have a variable-rate home equity line of credit that you partially utilized for a home repair project. Imagine you only utilized $20,000 of your $50,000 credit line for the renovation. You would request that the $20,000 be charged at a set rate.
If that’s not doable, McBride advised thinking about paying off the debt by obtaining a HELOC from another lender at a lower promotional rate.
Bank Savings: Compare Prices
Do not anticipate your savings account or certificate of deposit interest rate to increase simply because the Fed is hiking rates, according to McBride, if you have been stashing money at large banks that have been paying almost no interest on savings accounts and certificates of deposit. The reason for this is that the major banks don’t have to worry about luring in new clients because they are drowning in deposits.
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According to Bankrate.com’s August 24 weekly survey of institutions, the average bank savings rate has increased from 0.06% in January to barely 0.13% as a result of the top players’ pitiful rates. A one-year CD now has an average rate of 0.61%, up from 0.14% at the beginning of the year.
According to McBride, internet banks and credit unions are attempting to increase their deposit base in order to support their booming lending operations. They are therefore providing far higher rates and have been raising them as benchmark rates rise.
So compare prices. Some online accounts pay more than 2% right now. However, if you decide to switch, make sure to only use online financial institutions that are federally insured.
Other Strategies for High-Yield savings
Series I savings bonds may be appealing given the high rates of inflation in today’s economy because they’re made to keep your money’s purchasing power intact. Currently, they pay 9.62%.
However, that rate will only be available if you purchase an I-Bond by the end of October when it is expected to change, and it will only last for six months. The rate on the I-Bond will decrease as inflation does.
There are a few restrictions. The annual investment cap is $10,000. The first year is not redeemable. Additionally, you will lose the preceding three months of interest if you cash out between years two and five. I-Bonds, in other words, is not a substitute for your savings account, according to McBride.
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However, if you don’t need to touch your $10,000 for at least five years, they still maintain their purchasing power, which is not insignificant. As a secure annual investment that may be accessed if necessary in the first few years of retirement, it may also be of great benefit to those who aim to retire in the next five to ten years.
You can also think about investing some money in Treasury Inflation-Protected Securities (TIPS) if inflation continues to be persistent despite rising interest rates, suggested Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
Stocks: Aim for extensive exposure and pricing power.
It is difficult to predict which industry, asset class, or firm would perform well in a rising rate environment because of the complex mix of factors at play in the markets today, Ma added.
“There are geopolitical issues as well as rates going up and inflation. Additionally, there is a slowdown that could, or might not result in a recession. It’s a rare combination of several elements that is unusual, “he stated.
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So, for instance, financial services firms often prosper in an environment of rising rates because, among other things, they can increase their loan revenue. However, if there is a downturn, a bank’s total amount of loans may decrease.
Ma advises ensuring that your portfolio is well diversified across equities, with some exposure to commodities, real estate, and perhaps even a tiny bit of precious metals.
Consider diversifying your portfolio among industries that have historically performed well in rising-rate and inflationary times, he advised.
Since some of those places will prosper but not all of them will, the objective is to spread your bets.
To that end, if you intend to invest in a certain stock, think about the company’s pricing power and how steady the demand for its goods is likely to be. For instance, increased rates often don’t benefit technology enterprises. According to Doug Flynn, a certified financial planner and co-founder of Flynn Zito Capital Management, these prices may increase with inflation because cloud and software service providers charge customers on a subscription basis.
Bonds: Take a short position
If you already own bonds, the prices of such bonds will decrease when interest rates rise. However, if you’re in the market to buy bonds, you can profit from that trend, particularly if you buy short-term bonds, defined as those with maturities of one to three years, as long-term bond prices have declined more than typical. Typically, they descend together.
Flynn claimed that given how badly dislocated short-term bonds are, there is a good opportunity. Tax-free municipal bonds offer a similar possibility for people in higher income tax bands.
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He pointed out that muni prices have dramatically decreased, yields have increased, and many states are in better financial health now than they were before the outbreak.
According to Flynn, other investments that could do well are so-called floating rate instruments from businesses that need to raise money. The floating rate will increase anytime the Fed raises rates because it is linked to a short-term benchmark rate, such as the fed funds rate.
But if you aren’t familiar with bond investing, it would be wiser for you to put your money in a fund that focuses on maximizing returns in a rising rate environment using floating rate instruments and other bond income tactics. Flynn advises searching for a strategic income, flexible income, or income ETF that will hold a variety of various bond types.
“I don’t see a lot of these choices in 401(k)s,” he said. But you can always ask your 401(k) provider to include the option in your employer’s plan.
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