Federal Reserve Chairman Jerome Powell.
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Americans face a period of rapidly rising interest rates for the first time in years.
The Federal Reserve released the minutes of its last meeting on Wednesday, showing that the central bank plans to make further 50 basis point rate hikes this year, likely at every remaining meeting on the calendar. In an effort to curb inflation, the Fed could also raise interest rates more than the market currently anticipates.
The minutes are from the central bank’s meeting in early May, where it raised its key rate by half a point.
As rates rise, financial experts recommend consumers make key money moves to put themselves in a better financial position. These typically include paying off debt and bolstering personal budgets to be able to withstand any sudden shocks to the economy.
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“If your New Year’s resolution was to build a family budget, it may need a refresh and a review,” said Cathy Schaeffer, Certified Financial Planner, Vice President and Director of Family Counselors at Baker Boyer in Walla Walla, Washington. Now is “an opportunity to really look at your personal budget and identify ways to pay down your debt more aggressively because these rate hikes are likely to continue.”
Pay off the debt
Some borrowers need to be especially careful at this time.
That includes anyone looking to buy a home, buy a car or have credit card debt, according to CFP Lauren Anastasio, director of financial advice at Stash.
“If you’re shopping for a home, you might want to ask your lender if you can lock in your rate now,” she said. “Sometimes the lender, for a flat fee, will let you lock in today’s rate even if you don’t close for a few months.”
Some borrowers consider adjustable rate mortgages, which offer lower initial rates but eventually revert to market terms. People who had ARMs and are nearing the end of that period may want to consider refinancing at a fixed rate.
Car buyers may want to stick to newer models and avoid the used-car market, where prices have jumped the most. Taking the time to shop around for the best possible deal is also in your best interest.
“There’s still a lot of value there,” said Jacqui Kearns, chief brand and strategy officer at Affinity Federal Credit Union in New Jersey, adding that while rates are rising, they’re still historically low.
People with credit card debt may also want to contact their lenders to see if they can work out a deal.
“I always recommend people call their lender and see if they can lower their interest rate,” Anastasio said.
It may also be a good idea to consolidate credit card debt into something fixed rate, as this type of debt is the most sensitive to rate hikes and often has the highest interest rate. Right now, the average interest rate on a new credit card is nearly 20%, according to LendingTree.
Paying off debt in full is also a good idea, if possible. Kearns recommends going after cards that have relatively low balances.
“If you have that $200 or $300 [debt] there, just pay it,” she said.
Prepare for the future
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Paying down debt is just one way to prepare for future financial success, which is especially important when people are assessing the risk of a recession.
“It’s a very tricky dance the Fed is doing,” Anastasio said, adding that while the central bank will do its best to rein in inflation without shutting down the economy too much, there are many factors beyond its control, like the uncertainty linked to the war in Ukraine.
Financial experts recommend taking the time now to review your spending and saving to find a solid balance.
“Be smart about spending the money you have,” Kearns said. This may mean reducing discretionary purchases or budgeting more for items that have increased in price. Americans should also make sure they have strong emergency savings to counter rising prices.
As people plan for future expenses, like an upcoming vacation, they may also want to budget more than they usually would, Anastasio said.
“The reality is that we may see a decrease in rapidly rising costs, but that doesn’t necessarily mean that when I go to the grocery store to buy formula, the manufacturer is suddenly going to go back to what they were charging. two years ago,” she said.
Ask for help
Of course, rising interest rates have some advantages. Over time, savers might start seeing better rates on savings accounts, Schaeffer said. Investors also have opportunities to take advantage of market volatility, Kearns said.
“Now is a great time to invest if you feel like it,” Kearns said. “Literally a few dollars a day on the volatility we’re seeing can add a lot of value if you stay long term.”
Those who are struggling to manage their money or feeling stressed by the current environment may want to seek professional help for better budgeting or future planning.
“Now is a good time to really take a hard look at your goals, your risk tolerance and your financial plan,” Schaeffer said, adding that this is especially important for those going through transitional times such as approaching retirement. or preparing to send a child to college. .
“Have a plan and work with someone to put that plan in place,” Kearns said, adding that there are plenty of resources out there that cover prices for digital tools, from platforms to in-person advisors.
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