For the first time years, the Federal Reserve raised interest rates in December 2015. The interest rate hike wasn’t very big, and rates remain near historic lows. However, this move is considered the first interest rate hike in a series of interest rate hikes. While the Fed will likely take a long-term approach and raise rates somewhat gradually, the reality is that we are looking at a situation where higher interest rates will take effect soon.
Are you ready?
Higher Interest Rates = More Expensive Money
I’ve taken advantage of low interest rates in the last few years. I financed my car at 1.9%, and instead of paying it off, I’ve been investing the money I would have used — and seeing better returns. The loan I got to pay for my move last summer was also low-rate.
As interest rates rise, though, loans will become more expensive. Variable rates on credit cards are likely to go up, so try to pay down debt before the rates rise if you’ve been carrying balances.
Some mortgages rates will be higher as well. Car loans, personal loans, and other debt will become more expensive as rates rise. Start looking to refinance your mortgage if you’re hoping to lock in good rates. As rates rise, you won’t find as many good deals for your money.
Stock Gains Could Slow
We’ve seen the stock market surge higher in the last few years. We could be looking at another crash in the future, but that’s something we can’t really time. As interest rates rise though, and with the Fed’s quantitative easing program over, there is a good chance we will see gains for the stock market move at a slower pace.
Earnings might be affected as well, since higher interest rates can impact margins. Stay on the lookout. While higher rates won’t necessarily mean stock losses, it does mean gains are likely to be more tempered than they have been during the time of low rates and quantitative easing.
Savers Might See Some Benefit
Finally, savers might start seeing some benefit. Low rates are designed to encourage money to move through the system, usually through borrowing. As rates start to increase, deposits such as money in an online savings account will start earning more. Of course, it will be some time before we start seeing the kinds of yields that were common prior to the financial crisis, but savers might start seeing some better offers moving forward, as the Fed raises rates.
Planning Your Finances
The exact timing of future rate hikes isn’t known, and will likely depend on economic factors. However, the trend is likely to be toward higher interest rates over the next couple of years, and you need to plan for that. Whether you hope to buy a home, invest, or pay down debt, you need to take that into account. Think about how higher rates will impact your finances, and adjust your plans accordingly.
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