Federal Reserve Chairman Jerome Powell (left) meets with President Joe Biden in the Oval Office on May 31, 2022.
Saul Loeb | AFP | Getty Images
The Federal Reserve is poised again to hike interest rates in a bid to curb the highest inflation in four decades without plunging the US economy into recession.
The central bank was expected to raise interest rates by likely half a point at each meeting this year. But after May’s worse-than-expected CPI report, some analysts are now expecting the Fed to hike 75 basis points on Wednesday.
When interest rates rise, there are some key money moves that financial experts are recommending for consumers to put themselves in a better financial position and prepare for an upcoming downturn.
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Broadly speaking, this involves paying off debt and increasing personal budgets to withstand sudden economic shocks.
“If your New Year’s resolution was to build a household budget, it may need a refresher and review,” said Cathy Schaeffer, board-certified financial planner, vice president and family counselor at Baker Boyer in Walla Walla, Washington. Now is the time to “really look at your personal budget and find ways to pay down your debt more aggressively as these rate hikes are expected to continue.”
pay off debts
Certain borrowers should be extra cautious right now.
That includes anyone looking to buy a home, buying a car, or with credit card debt, according to CFP Lauren Anastasio, head of financial advisory at Stash.
“If you’re buying a home, you should ask your lender if you can set your interest rate now,” she said. “Sometimes, for a flat fee, the lender will allow you to lock in today’s rate even if you don’t close for a few months.”
Some borrowers are considering adjustable rate mortgages, which offer lower initial interest rates but eventually return to market conditions. Individuals who have had ARMs and are nearing the end of this period may wish to consider refinancing at a fixed rate.
Car buyers may want to stick with newer models and avoid the used car market, where prices have risen the most. It’s also in your best interest to take your time to research the best deal you can find.
“There’s still a lot of value out there,” said Jacqui Kearns, chief brand and strategy officer at Affinity Federal Credit Union in New Jersey, adding that while interest rates are rising, they’re still historically low.
This is a very tricky dance that the Fed is doing.
Director of Financial Advisory at Stash
Those with credit card debt may also want to contact their lenders to see if they can close a deal.
“I always recommend people to call their lender and see if they can lower their interest rate,” Anastasio said.
It may also make sense to consolidate credit card debt into something with a fixed rate, since this type of debt is most sensitive to interest rate increases and often carries the highest interest rates. Currently, the average interest rate on a new credit card is nearly 20%, according to LendingTree.
If possible, it’s also a good idea to pay off debt in full. Kearns recommends tackling the relatively low-balance cards.
“If you have that nagging $200 or $300 [debt] out there, just pay it off,” she said.
Prepare for the future
Dmytro Varavin | Istock | Getty Images
Paying off debt is just one way to set yourself up for future financial success, which is especially important as people weigh the risk of a recession.
“This is a very tricky dance that the Fed is doing,” Anastasio said, adding that while the central bank will do its best to contain inflation without slowing down the economy too much, there are many factors at play out of their control. such as uncertainties due to the war in Ukraine.
Financial experts recommend taking the time now to review your spending and savings to find a solid balance.
“Be smart about spending the money you have,” Kearns said. This may mean saving on discretionary purchases or budgeting more for items that have increased in price. It also means reviewing your emergency savings to make sure you’ve saved enough to cover the increased prices.
When people are planning for future expenses, such as an upcoming vacation, they may also want to budget more than they normally would, Anastasio said.
“The reality is that we may see a slowdown in the rapid increase in costs, but that doesn’t necessarily mean that if I go to the grocery store to buy baby formula, the manufacturer will suddenly go back to what they did two years ago.” charged for years,” she said.
to accept help
Of course, rising interest rates have some advantages. Over time, savers could see better rates on savings accounts, Schaeffer said. Investors also have opportunities to take advantage of market volatility, Kearns said.
“It’s a great time to invest if you have an appetite,” Kearns said. “Literally just a few dollars a day at the volatility we’re seeing can add a lot of value if you stick with it over the long term.”
Those who are struggling to manage their money or who are feeling stressed about the current environment may want to seek professional help for better budgeting or future planning.
“Now is the right time to take a close look at your goals, risk appetite and financial plan,” says Schaeffer, adding that this is especially important during transitions like retirement or preparing for college with a child.
“Have a plan and work with someone to put that plan in place,” Kearns said, adding that there are many resources spanning price points from digital tools, platforms to personal consultants.
Join us for that CNBC Financial Advisor Summit on Wednesday 15th June to hear forward-thinking advisors and financial experts discuss the state of the markets, inflation and their best investment practices. Register here.
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