The Federal Reserve is among the Western central banks that are stubbornly fighting high inflation.
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For the first time in years, Americans are in a period of rising interest rates.
The Federal Reserve on Wednesday raised its benchmark rate by half a point to calm inflation, which is the highest consumers have seen in 40 years. Additionally, Fed Chairman Jerome Powell signaled that more half-point increases were on the table for all remaining meetings this year.
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.
“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.”
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Repay variable rate 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 almost 20%, according to LendingTree.
Paying off debt in full is also a good idea, if possible. Kearns recommends going after those cards that have relatively low balances.
“If you have that $200 or $300 [debt] there, just pay it,” she said.
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Prepare for the future
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 a lot of factors that are off the table. of their control, such as 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 spending, 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.