Plan Now for Rising Interest Rates

January 3, 2019

After four interest rate hikes in 2018 and two more projected for this year, there is ample reason for investors to do some serious planning now in order to:

  • Reduce the impact of higher interest rates on outstanding debt
  • Maximize earnings on your cash and investments

This is one of those times when it’s appropriate to call on your advisor for help. Here are some of the areas you can discuss to help accomplish these goals.

 

Credit cards and other variable interest rate loans

Credit card interest rates are among the first to respond when interest rates go up.1 Go over all your loans and credit cards; make a list of those with variable rates and the outstanding balance on each account. You may want to consider paying off as much of this debt as possible now.

Some people use a fixed-rate loan to consolidate their debt at today’s lower interest rate. This may be another strategy to consider. The danger, however, is building up more debt. This works only for those who can remain committed to paying off their debt.

Talk to your financial advisor about creating a debt repayment plan – you may not need a new loan after all.

 

Mortgages

Years of low interest rates fueled consumer interest in adjustable-rate mortgages. If you hold a variable mortgage, now is the time to evaluate whether you should consider other types of financing options.

Do you want to lock in what is still considered a low interest rate by converting to a fixed-rate loan? While fixed rates have been rising in tandem with last year’s rate hikes, there are still fixed-rate mortgages below 5% as of December 27, 2018.2 This is a decision that will impact your total investment picture. Tap your advisor for help.

 

Cash savings

Rising interest rates aren’t all bad! Savers will start earning more interest on the cash in their bank savings accounts, CDs and money market funds. Consult with your financial advisor about the cash portion of your investments.

Cash is an important slice of the investment pie for its liquidity and the safety.
While yields on savings at many financial institutions have stayed below 0.5% APY, the list of online savings accounts that offer 2% APY or more is growing rapidly.3

 

Investment portfolio

An informative conversation for you to have with your advisor could start with this question: “How will rising interest rates impact the various asset classes, funds and other holdings in my portfolio?” While your advisor is continuously monitoring your portfolio and making changes as needed, nearly ten years of historically low interest rates is coming to a close. Does this event, which will be gradual, merit fine-tuning your strategy and/or holdings?

 

 

 

Sources:

 

1. “When the Fed Raises Rates, Credit Card Holders Feel It First,” The New York Times

2. Current Mortgage and Refinance Rates, Wells-Fargo

3. Best High-Yield Online Savings Accounts of 2019

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