You may have heard the last few years that interest rates are low or that it’s a great time to buy a home or a car. In fact, interest rates have been low ever since the financial crisis in 2008. It also means that the interest you were getting on your savings was somewhere around .01% or in other words, you haven’t been making any money in interest on your savings. You may have also heard that interest rates are beginning to rise. What does that mean for you?
The Federal Reserve controls the national interest rate which is referred to as the Federal Funds rate. Now that the economy is doing well, we are seeing the Federal Funds rate beginning to rise. You may have noticed a bump in December and the Fed raised interest rates again in March. That is good news for your savings accounts but bad news if you have credit card debt that you do not pay off in full each month or if you are barely managing to make the minimum payments on your debt. If you have federal student loans or a fixed home loan, you won’t see an increase in those rates on existing debt. Adjustable rate mortgages or lines of credit could be in trouble.
What should you do to protect yourself as interest rates rise?
The first thing you should do is pay off any high-interest debt or adjustable rate debt. Most credit cards range from 12%-26% but they can be even higher. If you have credit card debt, you may already be paying a lot of money in interest each month and this means you will be paying even more. Come talk to us at the Personal Money Management Center about your credit card debt and let us help you make a debt repayment plan or go to www.powerpay.org to create a debt snowball plan yourself. Look at all of the interest rates across all of your loans. This is important to know. Write them down. Is the interest adjustable or fixed? Create a plan to pay off that debt quickly.
The next thing you can do is to create an emergency fund of 3 to 6 months of expenses and to find a bank or credit union that can give you a competitive interest rate for those savings. Some savings accounts pay close to 1% now and some certificate of deposit accounts pay 1.5%-2% for a 2-5 year term. This will help stave off inflation with money that you may need in the next five years.
The final thing you may want to consider is purchasing a home in the next couple years. If this is a viable option for you, start saving for a down payment and start thinking about your credit so you can qualify for the best interest rate. We can help with those goals, or check out websites like www.creditsesame.com or www.creditkarma.com that can give you free advice on how to improve your credit (for example, lowering your debt or diversifying your accounts). Remember that the free scores provided by these companies are not your FICO and aren’t the same numbers your lenders will see but they can be valuable educational resources in identifying how you can improve your credit behaviors. If buying a home isn’t in the near future for you, that’s okay too! Homes are expensive investments and it is important that you are in a position where you can afford everything a home entails like maintenance, taxes, insurance. And with such a big decision, especially with your first home, there are a lot of things to consider and it’s important you are ready for home ownership. Don’t worry, keep working on your credit and in a few years you will be in a better situation to buy that first home and in the meantime, you can save for that down payment.