As much as I hate to admit it, I understand why the Fed keeps pushing interest rates up … but that doesn’t mean I like it.
When it comes to “regular” folks – those who earn a living with a paycheck or as a contractor, it might seem like those higher rates don’t affect you, but they truly do – almost instantly.
The Fed’s actions have ripple effects on every aspect of your financial life: it affects the costs associated with borrowing money or how much your savings can earn when in the bank. In short, when the Fed raises interest rates, the prices you pay for your credit cards, home equity lines of credit (HELOCs), auto loans and adjustable-rate mortgages ALL go up.
The good news is that the interest rates you can earn on certificates of deposit (CDs) and savings accounts also begin to rise – usually not quite as fast, though.
So even though the Fed is following a monetary policy to stave off inflation – and that policy has worked for decades – it still hurts a lot of us.
Is there anything you can do to fight this?
Well, for starters, the long answer is no. Higher rates are simply that: higher rates.
Yes, “in the good old days” there were concepts like LIBOR that could be used to finance the purchase of a home, but the meltdown in 2007-2008 pretty well killed the funny-money financing that was based on the London Inter-Bank Offered Rate. For the record? LIBOR-based financing isn’t the great deal is once was – England has it’s own economic struggles right now.
As a tax professional, my advice in these times of high inflation and rising interest rates is deceptively simple, and it all starts with one key action:
Get a grip on your current financial situation.
In short, you need to have a budget, and you need to know two key pieces of data in that budget – where higher interest rates factor in and where the current inflation is hurting you the most.
As I said – higher rates impact the price of borrowed money AND the price you can earn as a saver of money. Here are some examples…
- For those folks looking for a new home, you’re going to pay higher interest rates, but I can virtually guarantee home prices will drop in the coming months.
- People with high credit card balances are going to pay more, so the time to pay off those debts is now.
- Folks with savings are going to get a better return on those savings with higher rates, so think about how you might be able to convert or liquidate certain assets for cash, and then get that cash into an interest-bearing account if the yield is going to be worth it.
- Now is also the time to really dig into your credit score and try to boost it up. The higher the score – in most cases – the lower the interest rate you’ll pay on any debt.
- Think about you, too. You are, quite frankly, an asset to your employer. What things can you do to create a higher value? That might be more training, online courses or certifications, or – let’s be blunt – changing jobs or even careers.
None of these things can ever begin without action on your part, though.
You’ve got to know where you are financially – what your budget is (and could be) and you have to be honest with yourself about your ability to save, or even to generate income. Every one of us is in this financial challenge, and traditionally, the biggest winners in an economic downturn are those who can create (or maximize) their personal value.
Don’t be afraid to reach out if you’re ready to win!