By now you have probably heard about the Federal Reserve rate hike that took place last Wednesday. For many, it’s likely a passing news story. But for those of us who have credit cards, want to get a mortgage, or even buy a car, that quarter-percentage rate increase actually means a lot. It means a hit to our bottom line if you are getting a new mortgage, buying a new car, or your credit card rate increases. If you are a cash saver though, it’s likely a good thing!
Let’s take the biggest of the aforementioned in our list of items – mortgages. How does the rate hike affect mortgages? Well, right off the bat you likely know that it means the money you borrow will cost more. What that translates to is that you are not only paying more for the money borrowed, but you are likely not able to buy as much home. That is, if the money costs more, it reduces your buying power. That tine quarter point hike could push you down a notch in the home market.
If you are already a mortgage holder and think the rate hike does not affect you, it could. If you are looking to sell your home, you may have fewer qualified buyers. If you have a home equity line of credit (a HELOC), your rate on that HELOC is going to adjust upward. Most HELOCs adjust immediately. This could mean if you have an outstanding balance, your monthly payment just increased!
How about cars? Well, similar to mortgages, the cost to buy that car just increased on a monthly basis. Car prices are generally set, and the terms are generally set (12-months, 24-months, etc.) for the length of the loan. Your monthly payment on that car purchase will be higher.
Credit card holders usually don’t notice the rate hike at first. For those who only make minimum payments, they will start to notice that they are making the payment but their balance isn’t decreasing.
For mortgage products, car loans, and credit cards, this rate hike is a negative aspect. It raises the cost of the money borrowed, hits your monthly budget, and reduces the amount of what you can buy (a cheaper home, or car). But what about savers? Well, for savers this rate hike is actually a good thing; eventually. The Federal Reserve has no direct influence on savings rates, but there tends to be a correlation, although a savings rate increase tends to lag the immediate increase in lending.
For those of us with a cash emergency fund in a high-yield savings account or certificates of deposit, we should start to see higher payouts in the form of an increased savings rate. Better yet, savers should see increasing yields in bonds and various bond funds.
So, what’s a person to do? Well, for starters, you can’t control the rate hikes. You can be proactive. Here are few tips to survive a raising rate environment.
Maintain your emergency fund, but be sure it’s in a high-yield savings account or possibly a money market account that pays a competitive savings rate. Generally, our retail checking and savings accounts do not pay very well. Look online for better rates.
Consider buying now if you need to finance. The Federal Reserve has several more rate hikes scheduled. That means, the cost of borrowing money will continue to increase. So now be the “best” rate available for the foreseeable future if you are considering a new home, mortgage refinance, or car.
If you can, retire that HELOC so you are not paying more each month at the new, higher rate. Yes, paying off or paying down debt can be an inflation fighting technique. For more tips on surviving inflation, see my 10 Inflation Survival Tips from earlier this month.
As an independent CERTIFIED FINANCIAL PLANNER™, I can help you plan for periods like this, refine your goals, or plan for retirement. Contact me and let’s get started on a savings, investing, debt reduction, or retirement plan. #talktometuesday #education #Hireaplanner #stressfree #inflation #FederalReserve #savings #retirement #CFPPro