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Last week the Federal Reserve raised its key short-term interest rate to a range between .75% and 1%, the first increase this year and the highest it has been since the Fed lowered rates in response to the financial crisis of 2008.
Why does it matter?
This rate determines the interest rate at which the banks themselves borrow short term. The increase in the banks’ rate is then passed on to their borrowers, through climbing interest rates on things like credit-card debt, car loans, home equity loans and mortgages.
This means borrowers may already be feeling a small, but still noteworthy pinch, when it comes to interest on their loans.
No need to panic though: it doesn’t need to mean turbulent waters ahead. Taking a look at whether your own financial goals and strategies need to be adjusted will help you stay on track for your own future.
How will the hike affect you?
The relationship between the economy and interest rates is so complex that even experts sometimes find it daunting. That said, there are a few key action items to consider when interest rates start to rise:
1. Refinancing options for existing loans
It might be time to consider refinancing to lock into current rates before they begin increasing, including rates on your mortgage, home equity loan, and car loans. Make sure you know which of your loans are adjustable or floating, and discuss with your advisor on what your options are to potentially minimize any increasing costs.
2. Your debt payoff strategy and schedule
Do the math and decide whether it makes sense to reallocate funds and increase your monthly debt payments. By paying more on your loans you reduce the principal quicker and therefore accrue less interest payments over the life of the loan. Your financial advisor may suggest that your investment gains may still offer the potential to offset any interest rate increase however there are many things to consider before making any adjustments (see our risk tolerance point below).
3. Bank and credit card balance transfers
It is always a good idea to shop around for the most favorable credit card and bank rates, particularly if interest rates are about to rise.
4. Your risk tolerance
It is a great time to sit down with your financial advisor and determine whether the level of risk you are comfortable with has changed in light of an expectation of rising interest rates and determine if it is time to rebalance your portfolio or make any adjustments.
5. Your budget
Rising interest rates and a strengthening economy may lead to an increase in the prices for everyday items including gas, groceries, and entertainment. Take a look at your spending and make any adjustments necessary so that you can stay on track with your savings plan.
What’s the good news?
By raising rates, the Fed is signaling its confidence that the economy is strengthening, which is great news if you have clearly defined goals and a diversified portfolio.
Keep an eye out for these possible benefits:
1. Interest rates on your savings accounts could increase
While banks tend to raise interest rates on deposits more slowly than on loans, you may see the interest rates applied to your savings accounts increase over time.
2. Incentives to buy a home now
The specter of rising rates could be just the incentive you need to switch from renting to owning your own home.
3. Increasing employment rates and salaries
The Fed has communicated that it believes the economy will continue to improve and that “labor market conditions will strengthen somewhat further.” That is good news because continued growth could mean more jobs and rising wages.
4. More business
A more robust economy may also lead to more consumer confidence , driving more customers, clients, or contracts to your business and this additional business could offset the less desirable attributes of rising rates.
Take a look, then take it in stride!
March’s rate hike, while small, was an indication that the Federal Reserve is slowly downshifting the stimulus policies it put in place after the financial crisis of 2008. It also indicates confidence that the economy is growing and will continue to grow, at least in the near future.
Take a look at your savings plan, your investment portfolio, and your risk tolerance with your advisor, and see if you need to make any necessary adjustments.
With proper diversification, goal-setting, and the help of a Fiduciary financial advisor, you can stay on track to achieving you and your family’s financial goals despite a potentially more costly borrowing environment.