Editor’s Note: This is an updated version of the story that originally ran on September 22nd, 2022.
federal reserve system Raised 6th benchmark interest rate From 3.75% to 4% on consecutive Wednesdays.
Although there may be many disadvantages One good result, in the form of higher borrowing costs for consumers, is that after years of barely lower interest rates, your savings may actually start making a little money. .
“Interest rates are rising at their fastest pace in 40 years,” said Greg McBride, chief financial analyst at Bankrate.com. With quotas at a 14-year high and auto loan rates at an 11-year high, savers are seeing their highest yields since 2008 — if they’re willing to shop. ”
Here are some ways to place your money so that you can benefit from rising interest rates and protect yourself from its costs.
Don’t expect it to change much if you were keeping your cash at a big bank that paid you very little interest on savings accounts or certificates of deposit.
Bankrate.com’s weekly survey of large financial institutions on Oct. 26 found that the national average savings rate was still at 0.16, up from 0.06% in January, thanks to modest interest rates at big companies. It stays at %.
But all these Fed rate hikes that is McBride said it’s starting to make a big impact on online banks and credit unions. They offer much higher rates (currently he has over 3% in some) and they are increasing their rates as their benchmark rates get higher.
In terms of certificates of deposit, there has been a significant increase in revenue. The average one-year credit union CD interest rate is 1.05% as of October. That’s up 27% from 0.14% at the beginning of the year. However, the highest yielding 1-year CD now offers as much as 4%.
So shop around. However, if you switch to an online bank or credit union, choose only those that are federally insured.
However, that rate is only valid for 6 months and will only be valid if you purchase an I-Bond by the end of April 2023, after which the rate will be adjusted. As inflation falls, the interest rate on I-Bonds will also fall.
There are some restrictions. You can only invest $10,000 a year. Not available for the first year. Also, if you cash out between Year 2 and his 5th year, you will lose the previous 3 months of interest.
“In other words, I Bonds is not a replacement for a savings account,” says McBride.
Still, if you don’t need to touch it for at least five years, you still have $10,000 of purchasing power. It can also be particularly useful for those planning to retire within the next five to ten years, as it serves as a safe annual investment that can be used as needed during the first few years of retirement.
If you find inflation to be stable even as interest rates rise, you might consider investing. Treasury Inflation Protection Securities (TIPS) said Yung-Yu Ma, Chief Investment Strategist at BMO Wealth Management. Unlike Series I bonds, TIPS are marketable government bonds. This means that you can sell it before the due date. Pays a fixed amount of interest every six months based on the adjusted principal. And that rate is fixed at the auction, but never below 0.125%. For example, at the most recent auction in October, the interest rate for 5-year TIPS was 1.625%.
As the overnight bank lending rate (also known as the federal funds rate) rises, the various lending rates banks offer to their customers tend to follow suit.
So you can expect your credit card rate to go up in just a few statements.
According to Bankrate.com, the average credit card rate was 18.77% as of November 2nd, up from 16.3% at the beginning of the year.
Michele Llanelli, vice president of U.S. research and consulting at TransUnion, said: “This rate hike will have the most severe impact on consumers who haven’t paid off their credit card balances by raising minimum monthly payments. ‘ said.
Best advice: If you have credit card balances (usually with high floating interest rates), consider moving them to a zero rate balance transfer card that is locked at zero rate for 12 to 21 months. Please consider.
“It makes you [future] Interest rates will be raised, giving us a clear runway to fully pay off our debt,” McBride said. “By reducing debt and saving more, you can weather rising interest rates better, and are especially valuable if the economy takes a turn for the worse.”
Find out what fees you have to pay (e.g. bank transfer fees and annual fees) and what the penalties are for late payment or failure to pay during the zero rate period. period. The best strategy is to pay off as much of your existing balance as possible on time each month before the zero rate period ends. Otherwise, if interest rates continue to rise, your remaining balance will be subject to new interest rates that may be higher than before.
Another option, if you don’t want to move to a zero-interest balance card, is to take out a relatively low-interest, fixed-rate personal loan. Currently, interest rates on such loans range from 3% to 36%, with an average of 11.27%, according to Bankrate.com. However, the best rate you can get depends on your income, credit score, debt-to-income ratio, etc. bank advice: To get the best deal, ask several lenders for quotes before filling out your loan application.
Mortgage interest rates are rising It has increased by more than 3 percentage points over the past year.
30-year fixed-rate mortgages averaged 7.08% in the week ending Oct. 27, according to Freddie Mac. That’s more than double what he was a year ago.
In addition, mortgage interest rates are likely to rise further.
so if you’re near Buy a house Or if you are refinancing, lock in the lowest fixed interest rate available as soon as possible.
However, “Don’t jump into a big purchase that isn’t right for you just because interest rates might go down. Up. Rushing to buy big-ticket items like a house or a car is going to get you in trouble regardless of future interest rates,” says Lacey Rogers, a Texas-based certified financial planner.
If you’re already a homeowner and have a variable-rate home equity line of credit that you’ve used part of on a home renovation project, McBride asks the lender to fix the interest rate on the outstanding balance. I recommend asking if you can effectively create one. Fixed rate home equity loan.
If that’s not possible, consider borrowing the HELOC from another lender at a lower promotional rate to pay off the balance, McBride suggested.
When it comes to investing, two big factors to consider are the impact of inflation on businesses and consumers, and the geopolitical outlook.
As for inflation, Ma noted that the cost of services plays a big part. Of the consumer price index – something to watch. “The big question right now is how sticky the service side of inflation is. Wage pressures have likely peaked, but the job market is still very strong, and that’s what drives wage growth. , and could affect service inflation for some time.”
On geopolitics, he added: “Markets appear to be putting Europe’s geopolitical concerns on the back burner, but as winter approaches, there is a risk that the energy war will escalate again.”
Financial services companies can thrive in an environment of rising interest rates. Because you can make more profit on the loan. But an economic slowdown could reduce overall bank lending.
On real estate, Ma said, “The steep rise in interest rates and mortgage rates is a challenge, and that headwind could continue for another few quarters or more.”
On the other hand, he added, “Although commodity prices have fallen, they are still a good hedge given the uncertainty in energy markets.”
He remains bullish on value stocks. Small caps in particular have outperformed this year. “We expect the outperformance to continue for years to come.” He said.
Roughly speaking, however, Ma Entire portfolio Diversified in stocks. Some of these areas will be favorable, but not all, so the goal is to hedge your bets.
With that said, if you are planning to invest For a particular stock, consider the firm’s pricing power and how stable the demand for its product is. For example, tech companies typically don’t benefit from rising interest rates. But cloud and software service providers issue subscription prices to their clients, which could go up with inflation, said Doug Flynn, his planner and co-founder of Flynn Zito Capital Management. said Mr.
As long as you already own bonds, bond prices will fall in a rising interest rate environment. But if you’re in the market to buy bonds, Especially if you buy short-term bonds, meaning 1 to 3 years, you can benefit from this trend.The reason is Their prices have fallen more and yields have risen more than long-term bonds. Short-term government bonds and long-term government bonds usually move in tandem.
“There are considerable opportunities Mr Flynn said: “Similar opportunities exist in tax-exempt municipal bonds for people in higher income tax brackets.”
Municipal prices have fallen significantly, yields have risen, and many states are in better financial shape than they were before the pandemic, Flynn said.
Flynn said other assets that could do well are so-called floating-rate instruments from companies that need to raise cash. Floating rates are tied to short-term benchmark rates, such as the Federal Funds rate, so they go up whenever the Fed raises rates.
However, if you are not a fixed income expert, we recommend investing in funds that specialize in making the most of the rising interest rate environment through floating rate products and other fixed income earning strategies. Mr. Flynn recommends looking for strategic income or flexible income holding different types of bonds He Mutual his funds or his ETFs.
“With 401(k)s, you don’t see many options like this,” he said. However, he can always ask his 401(k) provider to include the option in his employer’s plan.