How to take advantage of rising interest rates
While the US economy is still operating in a fairly low rate environment, this won’t last long. The central bank is expected to hike rates multiple times in the coming months, but by how much is unclear.
“Inflation is the pivot of the wheel and will dictate how much and how often the Fed will have to raise interest rates,” said Greg McBride, chief financial analyst at Bankrate.com.
Credit cards: minimize the bite
When the federal funds rate, also known as the overnight bank lending rate, rises, this will drive up various loan rates that banks offer their customers. So you can expect to see a hike in your credit card rates in a few returns, McBride said.
If you have balances on your credit cards — which typically have high variable interest rates — consider transferring them to a zero-rate balance transfer card that locks in a zero rate for 12 to 21 months.
“It protects you from rate hikes over the next year and a half, and it gives you a clear track to pay off your debt once and for all,” McBride said. “Less debt and more savings will make you more resilient to rising interest rates, which is especially helpful if the economy is deteriorating.”
If you’re not transferring to a zero-rate balance card, another option might be to get a relatively low fixed-rate personal loan.
In any case, the best advice is to do everything possible to pay off your balances quickly.
Home loans: Lock in fixed rates now
“Mortgage rates have jumped two percentage points since the start of the year, from 3.27% to 5.28%,” McBride noted.
That said, “don’t go into a big purchase that isn’t right for you just because interest rates might at the top. Rushing into buying a big-ticket item like a house or a car that doesn’t fit in your budget is a headache, regardless of what interest rates will do in the future,” Lacy said. Rogers, a certified financial planner based in Texas.
If you already have an adjustable rate home equity line of credit and used part of it to complete a home improvement project, McBride recommends asking your lender if they would be willing to fix the rate on your outstanding balance. , creating a fixed line of credit. home equity loan rates. Say you have a $50,000 line of credit but only use $20,000 for a renovation, you would ask for a flat rate to be applied on the $20,000.
If that’s not possible, consider paying off that balance by taking out a HELOC from another lender at a lower promotional rate, McBride suggested.
Bank savings: shop around
If you’ve been hiding money in big banks that have paid next to nothing in interest for savings accounts, don’t expect that to change just because the Fed raises rates, McBride said. This is because the big banks are swimming in deposits and don’t have to worry about attracting new customers.
But online banks, looking to keep current accounts and attract more business, offer far better rates and actively raise them as benchmark rates rise. So it’s worth shopping around.
Equities: Consider pricing power
Financial services firms, such as banks, generally do well in rising rate environments because, among other things, they make more money on loans. Insurers can also thrive, in part because the returns on the securities they hold in their portfolio are increasing.
Normally, real estate may suffer from rising interest rates. But since the 10-year Treasury yield, which determines mortgage rates, has already risen sharply over the past year, it may not jump sharply from where it is, Stritch said.
Tech companies don’t typically enjoy higher rates either. But since cloud service and software providers issue subscription fees to customers, those can rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.
Bonds: go short
To the extent that you already own bonds, your bond prices will fall in a rising rate environment. But if you are in the market to buy bonds, you will benefit from this trend, especially if they are short-term bonds, since prices have fallen more than usual compared to long-term bonds. Normally, they move lower in tandem.
“There is a pretty good opportunity in short-term bonds, which are badly dislocated,” Flynn said.
There are certain limitations. You can only invest $10,000 per year. You cannot redeem it in the first year. And if you cash out between the second and fifth year, you’ll lose the previous three months of interest.
“In other words, I-Bonds don’t replace your savings account,” McBride said.
Still, they preserve the purchasing power of your $10,000 if you don’t need to touch it for at least five years, and that’s a big deal. They can also be particularly beneficial for people planning to retire in the next 5-10 years, as they will serve as a safe annual investment that they can tap into as needed during their early retirement years.
Other assets that are likely to do well are so-called floating rate instruments from companies that need to raise cash, Flynn said. The floating rate is tied to a short-term benchmark rate, such as the federal funds rate, so it will rise each time the Fed raises rates.
But if you’re not a bond expert, you’re better off investing in a fund that specializes in exploiting a rising rate environment through floating rate instruments and other strategies. bond income. Flynn recommends looking for a strategic income or flexible income mutual fund or ETF, which will hold an array of different types of bonds.
“I don’t see a lot of those choices in 401(k)s,” he said. But you can always ask your 401(k) provider to include the option in your employer’s plan.