The Federal Reserve recently raised interest rates one-quarter of a percentage point (0.25%). That may not seem like much, but even a slight rate increase can impact how consumers spend, borrow save or invests. (Sample impact on mortgage or credit card repayment)
Here are a few pros and cons how how an interest rate hikes can impact you:
Savings accounts become a bit more profitable. You earn more interest on savings when interest rates rise.
Certificates of Deposit (CDs) and Money Market Accounts (MMAs) also become more attractive as higher interest rates means profits to short-term investors in this investment vehicles.
Bond yields increase making these low risk, long-term securities a touch more appealing to investors looking to shift some of their investment dollars away from the volatility of the stock market.
It costs more to borrow money when interest rates rise which means loans will become more expensive.
Credit becomes tighter making it harder for consumers to get approved for credit cards, credit limit increases or home equity lines of credit.
Mortgage rates will increase. So, if you considered refinancing now is the time to do it before prime lending rates nudge into the 5-6% range. Homes sales decrease as well.
The cost of consumer goods will slowly get more expensive. (Translation: Inflation will slowly eat away at your disposable income. Time to adjust your household spending plan.)
A slight interest rate increase may not seem like much, but even a small increase can have a big impact on your wallet, credit line or investment portfolio. Now is a good time to re-evaluate your spending or borrowing needs.
A simple truth: There’s no magic bullet to getting rid of debt. You can pay hundreds of dollars to consolidate your debts into “manageable” monthly payments or at the very worst have your debts liquidated through bankruptcy, but in the end managing your debt comes down to three simple practices that make up the pillars of debt management:
Have a Budget Plan. It’s often said, “Those who fail to plan most certainly plan to fail.” Poor planning and financial mismanagement can only lead to debt. Therefore, if you’re not operating from a long-term budget plan to manage your money and monitor your spending habits, you can expect to play hide-N-seek with your creditors on a regular basis. If you think about it, having a budget makes perfect “cents”. (Pun intended). Every successful business operates from a monthly or quarterly budget. Granted, a budget for a business will be far more detailed than your household budget, but the point here is that no business can operate effectively without knowing exactly how much money is coming in and how much money is going out. And so should you! Creating your budget does take a little work, but if the choice is between spending 20 to 30 minutes to write down your bills and other expenses each month versus continuing to live paycheck-to-paycheck struggling to make ends meet, the choice is simple: Take the time to draft a monthly budget. In drafting your budget, you should plan your expenditures on a quarterly basis (every 3-4 months) instead of working from payday-to-payday or month-to-month. By taking the long view to your finances, you can better plan for future growth in savings and handle most emergencies that may arise. I’d recommend using a spreadsheets for ease in calculating your expenses or you can use an on-line budget calculator to create your budget plan.
Improve your Creditworthiness. We live in a society where having access to credit not to mention having a great credit rating impacts just about everything we do. Whether it’s to get a car loan, a mortgage, travel, auto repairs, retail shopping or in some cases to even get a job, your creditworthiness plays a significant role in your ability to function effectively within the marketplace and sometimes in the workplace. The better your credit rating, the more credit is likely to be extended to you. So, it’s a good idea to maintain a good credit rating in order to do more of what you want more effectively from a financial standpoint. Start by getting a copy of your credit report from the three leading credit bureaus – Experian, Transunion and Equifax – or you can get your credit reports for free from AnnualCreditReport.com. You’re entitled to a free copy of your credit report each year. So, why not take advantage of it! Check your credit reports for errors, such as misspelled named or wrong SSN and correct any errors you find, then clean up any inaccuracies. You can also add a statement to your credit report(s) to clear up any errors or outdated information to your credit history. A bit of caution: Always use credit wisely! Only make purchases using a credit card you can afford and pay your credit card balance in full and on time each month when the bill is due. You can learn more about credit and how to find the type of credit card that’s right for you at Credit.com.
Start Saving – Pay Yourself First! The best advice I’ve ever heard concerning investing was to pay yourself first. After all, you work hard for your money. Does it make sense to spend all or most of your hard earned dollars each payday on debt alone? Of course not! Contrary to popular belief, you can – and should – use your budget to increase your savings each pay period even while trying to pay down your debt. Granted, it’s better to throw every dollar you can spare towards paying down your debts to eliminate them faster, but I would suggest that you take full advantage of the compounding an interest bearing savings account can bring (that is, the cumulative interest earned each month plus the amount of the original deposit) even if you’re only able to stash away $5 a month to start. Over time as your debts are reduced and become more manageable, you can increase the amount you deposit into savings or better yet, increase the amount you contribute to your 401k or IRA assuming you have either or both. And by the way, by increasing the amount you contributions to your 401k or IRA you’ll be decreasing your pre-tax liability on your income and that’s truly “paying yourself first”. To see bank rates on interest bearing savings or checking accounts or to learn more about the various types of investment vehicles, such as, money market accounts, certificates of deposits, stocks, bonds or IRAs, visit BankRate.com or Investopedia.com, respectively.
And there you have it, the three pillars to successful debt management: budget, improve your creditworthiness and invest in yourself.
That’s my blogpost for this week. Join the discussion by posting your comments below. And don’t forget to tune in next week where I’ll once again share more ways you can break the debt cycle and then go…beyond.