Amid rising interest rate, here’s how to handle savings, investments and debt.
For the first time in 22 years, the Federal Reserve raised interest rates by more than one-quarter percentage point. Indeed, on Wednesday the Fed announced that, thanks to inflation sitting at a 40-year high, it would raise interest rates by a half-percentage point. “Inflation is much too high and we understand the hardship it is causing,” Federal Reserve Chairman Jerome Powell said Wednesday. “And we’re moving expeditiously to bring it back down.” We asked financial advisers and experts to weigh in on what consumers should do with their money as a result.
Look for a savings account with better rates
Consumers can benefit from expected rising yields on savings accounts, especially from high-yield online savings accounts, which tend to react more quickly to rate hikes, pros say. “Usually, the silver lining with rate increases is that you can also earn more on your savings,” says says Snigdha Kumar of Digit. Adds Kimberly Palmer, personal finance expert at Nerdwallet: “If you have savings, it’s a good time to shop around to make sure your money is earning as much as possible. You can find a number of high-yield savings accounts paying 0.6% or more right now; aim to have at least 3-6 months of essential expenses in your emergency fund.
Pay down debt, stat
All the pros we spoke to agree that paying down debt is of utmost importance. “Rising interest rates means that your debt is going to cost you more. For example, if you have $10,000 in debt, a 50 basis points increase will mean that you will be paying an additional $50 per year in interest cost. It’s expected that these interest rates will increase even more in the next few months so now is the time to pay down your debt, especially costly credit card and other variable rate debt,” says Kumar.
If you have any credit card debt, you can try calling your card issuer to ask for a lower rate. You can also consider consolidating and paying off high interest credit cards with a lower interest personal loan or home equity loan (see the lowest home equity rates you might qualify for here). Switching to a 0% interest free balance transfer credit card can also lower borrowing costs. “That debt is poised to become more expensive with each rate hike, so if you can’t pay it off, it’s worth considering refinancing with a balance transfer credit card or debt consolidation loan with a lower interest rate,” says Palmer. (See the lowest rates you can get on a personal loan here.)
Maintain your long-term perspective
Though things like massive Fed rate hikes can create panic, investors should have a long-term plan in place and not make rash moves. “This has been, and will continue to be, a volatile year for financial markets. It’s important for investors to maintain their long-term perspective, their regular investing cadence and resist the urge to make wholesale changes to their portfolios in the face of volatility. The increased volatility is short-term, but your investment horizon is much longer term,” says Greg McBride, chief financial analyst at Bankrate.
That said, it’s OK to look into your portfolio and make tweaks, as long as it doesn’t upend your strategy: “Checking your investment and retirement portfolios to make sure your asset allocation between stocks and bonds matches your tolerance for risk can give you the peace of mind needed to stay the course during periods of market volatility,” says James S. Gladney, chairman and CEO of Liberty Wealth Advisors.
Think outside the box
In a rising rate environment, consumers may want to consider alternative asset classes to dampen the impact of market volatility and generate income as they still need to make money in tough times, some pros say. For Lorenzo Esparza, CEO of Manhattan West, an LA-based investment firm, that means private debt, which he calls “an intriguing asset class in this case” adding that: “The spread between the 10-year treasury and private debt instruments typically expands rather than compresses. Investors can get a better yield, well above treasuries and inflation even while inflation is running high, while maintaining principal protection.
Others have different opinions on what to invest in now. You can see what other pros recommend investing in during times of high inflation here.