The Federal Reserve raised interest rates in September for the fifth time this year in an effort to cool rising inflation. These increasing interest rates will affect the way you save, spend and invest.
When interest rates rise, it’s generally good news for savers, as rates on deposit accounts and other savings vehicles tend to rise. But for those paying debts or making large purchases, it might make borrowing more expensive.
No matter your goals, follow these strategies to take advantage of interest rate hikes.
Maximize Your Savings Account Interest Rate
Rising interest rates are a good opportunity to make sure your money is earning as much interest as possible. Money in a savings account, like an emergency fund, can grow faster with a higher interest rate.
“I recommend that clients put their emergency fund savings in a high-interest savings account. That way the cash is being productive without being subject to investment risk,” says Jamie Bosse, a certified financial planner and principal wealth manager at Aspyre Wealth in Kansas.
It might be worth switching banks to get the best possible rate. “Online banks typically provide a higher interest rate,” she says, compared to brick-and-mortar banks.
Moving money to earn the most interest possible can help you take full advantage of rising interest rates and further pad your savings.
Invest with Bonds
Increasing interest rates have big impacts on markets, including the stock market. But even more sensitive to rate hikes is the bond market. Investing in bonds could be a way to add more diversification to your portfolio and help your money make better returns when interest rates rise.
“Bonds are especially sensitive to changes in interest rates. When interest rates increase, (bond) prices tend to decrease while offering higher yields,” says Durriya Pierce, a certified financial planner and investment advisor at banking app Albert in New York.
Right now, that’s especially true. “The 10-year treasury bond is currently yielding almost three times greater than it was just one year ago,” Pierce says. Diversifying your portfolio with bonds could be a smart move when interest rates increase.
Refinance or Pay Off Any Variable Interest Debt Before Rates Go Higher
Private student loans, home equity lines of credit, credit cards and many other common forms of debt can have variable interest rates, meaning rates rise with the federal funds rate.
Experts anticipate that the Fed will continue to raise interest rates at the two upcoming meetings this year. Jason McCoy, certified financial planner and financial advisor at Lodestar Private Asset Management in Alamo, California, suggests refinancing — or paying off — any variable rate loans before they go higher.
Things like home equity lines of credit, for example, became popular while interest rates were low. “Since we had such a long time of really low interest rates, a lot of people took advantage of it,” he says. “Now, interest rates have picked up meaningfully over the last 12 months. And all of a sudden, the 2.5% to 3% interest rate now is more like 6% or 7% in some cases.”
[Read: How to Prepare for a Recession]
Paying off a home equity line of credit, consolidating credit card debt with a balance transfer card or refinancing a private student loan with variable rates to one with fixed rates could be smart moves to make when interest rates are high and rising.
As rates are poised to go higher, it’s worth making sure your debt’s interest rates won’t rise, too. “The things that you thought were very cheap debt, just review those,” McCoy says.
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