What a rising interest rate means for you | CNN Business


Editor’s Note: This is an updated version of a story that originally ran on September 22, 2022.

The Federal Reserve has raised its benchmark interest rate for the sixth time in a row on Wednesday, to a range of 3.75% to 4%.

Although there can be many drawbacks In the form of higher borrowing costs for consumers, a positive outcome is that your savings may start earning something after years of hardly any interest deduction.

“Interest rates have risen at the fastest rate in 40 years,” said Greg McBride, chief financial analyst at Bankrate.com. Mortgage rates are up to their 20-year high, equity lines of credit are the highest in 14 years, and auto loan rates are at their 11-year high. Savers will see their best returns since 2008 — if they’re willing to shopping around.”

Here are a few ways to position your money so that you can take advantage of rising rates and protect yourself from their charges.

If you’ve stashed cash with big banks that have paid next to nothing in interest on savings accounts and certificates of deposit, don’t expect that to change much, McBride said.

Thanks to the meager interest rates of the major players, the national average savings rate is still just 0.16%, up from 0.06% in January, according to Bankrate.com’s Oct. 26 weekly survey of major institutions.

But all those interest rate hikes by the Fed to be is beginning to have a greater impact with online banks and credit unions, McBride said. They offer much higher rates – at around 3% currently – and have increased it as the benchmark rates get higher.

As far as certificates of deposit are concerned, there is a noticeable increase in yield. The average rate on a one-year credit union CD is 1.05% as of October 27, up 0.14% at the start of the year. But high-yield one-year CDs now offer as much as 4%.

So shop around. However, if you’re switching to an online bank or credit union, make sure you choose only those that are federally insured.

Given today’s high inflation rates, Series I savings bonds can be attractive because they are designed to preserve the purchasing power of your money. They currently pay 6.89%.

But that rate only applies for six months and only if you buy an I Bond at the end of April 2023, after which the rate will be adjusted. If inflation falls, the interest rate on the I Bond will also fall.

There are some limitations. You can invest as little as $10,000 a year. You cannot redeem it the first year. And if you cash out between years two and five, you’ll lose interest for the previous three months.

“In other words, I Bonds are not a replacement for your savings account,” McBride said.

Nevertheless, they will keep the purchasing power of your $10,000 if you don’t have to touch it for at least five years, and that’s not nothing. They can also be of particular benefit to people who plan to retire in the next 5 to 10 years as they will serve as a safe annual investment that they can tap into in their early years of retirement if needed.

If inflation proves sticky despite higher interest rates, you may also want to 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 tradable government bonds, meaning they can be sold before maturity. They pay a fixed amount of interest every six months based on your adjusted principal. And that rate is set at an auction, but never falls below 0.125%. For example, at the most recent auction in October, the 5-year TIPS had a yield of 1.625%.

When the overnight interest rate — also known as the fed funds rate — rises, various lending rates banks offer their customers tend to follow.

So you can expect an increase in your credit card rates within a few statements.

The average credit card rate is 18.77% on Nov. 2, up from 16.3% at the start of the year, according to Bankrate.com.

“This latest rate hike will have the most impact on those consumers who fail to pay off their credit card balance in full through higher minimum monthly payments,” said Michele Raneri, vice president of US research and consulting at TransUnion.

Best Advice: If you have any balances on your credit cards — which typically have high variable interest rates — consider transferring them to a zero-rate balance transfer card that holds a zero-rate for between 12 and 21 months.

“That isolates you from [future] interest rate hikes, and it gives you a clear runway to pay off your debt once and for all,” McBride said. is deteriorating.”

Make sure you know what costs you will have to pay (for example, a balance transfer fee or an annual fee) and what the penalties are if you pay late or miss a payment during the zero-rate period. The best strategy is always to pay off as much of your existing balance as possible – on time each month – before the zero-rate period expires. Otherwise, the remaining balance will be subject to a new interest rate that may be higher than before if rates continue to rise.

If you do not switch to a zero-rate balance card, a personal loan with a relatively low fixed-rate period may be another option. Currently, rates for such loans range from 3% to 36%, with an average of 11.27%, according to Bankrate.com. But the best rate you can get will depend on things like your income, credit score, and debt-to-income ratio. Bankrate Advice: Ask a few lenders for quotes before filling out a loan application to get the best deal.

Mortgage rates have risen by more than three percentage points in the past year.

According to Freddie Mac, the 30-year fixed-rate mortgage averaged 7.08% in the week ending October 27. That’s more than double what it was a year ago.

In addition, the mortgage interest can rise further.

So if you are about to buy or refinance a home, secure the lowest fixed rate available to you as soon as possible.

That said, “don’t get into a big purchase that isn’t right for you just because interest rates may fall” upwards. Rushing to buy a large item like a house or car that doesn’t fit your budget is a recipe for trouble no matter what interest rates do in the future,” Texas-based certified financial planner Lacy Rogers said.

If you’re already a homeowner with a variable-rate line of credit, and you’ve used some of it to complete a home improvement project, McBride recommends asking your lender if it’s possible to fix the interest on your outstanding balance. effectively giving you a fixed rate loan.

If that’s not possible, consider paying off that balance by taking out a HELOC with another lender at a lower promotional rate, McBride suggested.

When it comes to investing, two important factors to consider are the effects of inflation on businesses and consumers, and the geopolitical outlook.

In terms of inflation, Ma noted, the cost of services — which is 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 is proving to be. While wage pressures have probably peaked, the labor market still looks quite strong and that could keep wage growth high and seep into service inflation for a while,” Ma said.

As for geopolitics, he added: “The market seems to have put geopolitical concerns in Europe on the back burner, but as winter approaches there is a risk that the energy war could escalate again.”

Financial service providers can thrive in a rising interest rate environment, as they can earn more money from loans, among other things. But if there is an economic slowdown, a bank’s overall credit volume may fall.

On the real estate front, Ma said, “the sharply higher interest and mortgage rates are challenging … and those headwinds could last for a few more quarters or even longer.”

Meanwhile, he added, “commodities have fallen in price, but are still a good hedge given the uncertainty in energy markets.”

He remains optimistic about value stocks, especially small caps, which have outperformed this year. “We expect that outperformance to continue over several years,” he said.

But broadly speaking, Ma suggests making sure your overall portfolio is spread across stocks. The idea is to hedge your bets as some of those areas will advance, but not all of them.

That said, if you intend to invest in a specific stock, consider the company’s pricing power and how consistent demand for their product is likely to be. For example, technology companies generally do not benefit from rising rates. But as cloud and software service providers provide subscription prices to customers, they could rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.

To the extent that you already own bonds, the prices of your bonds will fall in an environment of rising interest rates. But if you are in the market to buy bonds, you should can take advantage of that trend, especially if you buy short-term bonds, i.e. one to three years. That is because their prices have fallen more compared to long-term bonds, and their yields have risen more. Usually short and long-term bonds move simultaneously.

“There’s a pretty good chance in short-term bonds, which are severely disrupted,” Flynn said. “For those in higher tax brackets, a similar opportunity exists in tax-exempt municipal bonds.”

Muni’s prices have fallen significantly, yields have increased, and many states are financially better off for it than they were before the pandemic, Flynn noted.

Other assets that could do well are so-called floating-rate instruments of companies that need to raise money, Flynn said. The floating rate is linked to a short-term benchmark rate, such as the Fed Funds rate, and so will rise when the Fed raises rates.

But if you’re not a bond expert, invest in a fund that specializes in making the most of a rising interest rate environment through floating rate instruments and other bond income strategies. Flynn recommends looking for a strategic-income or flexible-income mutual fund or ETF, which will include a range of different types of bonds.

“I don’t see many 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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