You’ve heard the saying, “what goes up, must come down.” This is true of interest rates, which means that interest rates must also go back up now that they’ve dropped down. We’re just coming out of a period of historically low interest rates, and the economy is strong. When that happens, the Federal Reserve usually elects to raise interest rates simply because people can afford it, and putting money back into interest rates helps maintain a good economy.
However, rising interest rates don’t always equal more out of your pocket. In fact, higher interest rates can actually help you on your journey to financial success. Here are a few ways that consumers can prepare for — and benefit from — rising interest rates.
- PAY OFF DEBT – Since it costs more money to carry debt when interest rates are high, now is the time to do whatever you can to reduce the amount of debt you have. Pay off any debts such as credit cards or loans that may have variable interest rates, such as an adjustable rate mortgage (ARM). So make sure you’re not about to pay more money for that steak dinner (plus interest) than you originally planned.
- REFINANCE – Before interest rates rise again, you may want to refinance your home or auto loan now rather than later if you were already planning on doing so. Additionally, if you bought your home before the period of historically low interest rates and haven’t yet refinanced, you may not be getting the best deal out there. Shop around and see if you can do better.
- DIVERSIFY – If you have a stash of cash, no debt, one 401k, and a solid income, you’re missing a huge opportunity by not diversifying your portfolio. If you tend to be a more fiscally conservative person and don’t want to take too many risks, make sure you consult a financial advisor in order to determine which investments may be right for you.
- INVEST – No matter what you choose to invest in, whether its stocks, bonds, business, real estate, or anything else, now is a good time to take some measured financial risks in order to help you make your money work for you. If you aren’t already invested in the stock market in some way, now may be a good time to do so. Public pensions are already invested there, so if you work for the government or have any kind of retirement account, you may already be benefiting from a solid stock market and rising interest rates. If you’re nervous about investing in this climate, consider only short-term investments that don’t lock you in for a decade at a time. Short-term investments can also yield more return in a shorter amount of time, allowing you to move on and invest in larger things, such as additional real estate.
- SAVE – If you’re a good saver, then rising interest rates are great for you, because it also means the return on your savings will be greater. Try some of the rest of the tips on this list to maximize your savings and make your money work for you.
- SHORT TERM/LONG TERM CD – If you prefer to invest in low-risk ventures, a CD will make you money that you know you won’t lose from. If you are able to invest in one, do it.
Regardless of when it happens, the Federal Reserve will start increasing the federal funds rate. Once this happens, all other interest rates will rise and usher in a new world of opportunities and dangers for all of us. What are your plans?
Post written by FTWCCU employee, Kathy Morris.