What to do with the highest interest rate in 15 years

Editor’s note: This is an updated version of a story published on November 2, 2022.

At the last policy-making meeting of the year, The Federal Reserve raised interest rates for the seventh time on Wednesday from 4.25% to 4.5% sequentially. This is the highest indicator in the last 15 years.

In an ongoing bid to tame decades of high inflation, the central bank may continue to hold rates higher next year, albeit at a more modest pace.

This, of course, means higher borrowing costs for consumers. But it also means that your savings can actually start earning some money after years of interest.

“Credit card interest rates are at record highs and still rising. Car loan interest rates are at an 11-year high. Home equity lines of credit are at a 15-year high. And online savings account and CD yields haven’t been this high since 2008,” said Greg McBride, chief financial analyst at Bankrate.

The good news: There are ways to invest your money so you can take advantage of rising interest rates and protect yourself from their costs.

If you’ve been stashing cash in big banks that pay no interest on savings accounts and certificates of deposit, don’t expect that to change much, McBride said.

Thanks to modest interest rates from the big players, the national average savings rate is still fair It rose to 0.19% from 0.06% in January, according to Bankrate’s December 7 weekly survey of major institutions.

But all these Fed hiked rates there is Online banks and credit unions are beginning to have a more significant impact, McBride said. They offer higher rates — some are currently above 3.75% — and increase them as benchmark rates rise.

As for certificates of deposit, there is a noticeable increase in income. As of Nov. 22, the average rate on one-year CDs is 1.20%, up from 0.14% at the start of the year. But the highest-yielding one-year CDs now offer 4.5%.

So, shop around. If you switch to an online bank or credit union, be sure to choose only federally insured ones.

Given today’s high inflation rates, Series I savings bonds can be attractive because they are designed to preserve the purchasing power of your money. They currently pay 6.89%.

But this rate will only be in effect for six months and only if you buy Bond I by the end of April 2023, after which the rate is scheduled to adjust. If inflation falls, the rate on Bond I will also fall.

There are some restrictions: You can only invest $10,000 per year. You cannot redeem it in the first year. And if you cash out between years two and five, you’ll lose the previous three months’ interest.

“In other words, I Bonds don’t replace your savings account,” McBride said.

However, if you don’t need to touch it for at least five years, they protect the purchasing power of your $10,000, which is nothing. They can also be of particular benefit to people who plan to retire within the next 5 to 10 years, as they will serve as a safe annuity investment that they can draw on when needed during the first few years of retirement.

When the overnight bank lending rate, known as the fed funds rate, rises, it tends to follow the various lending rates that banks offer to their customers.

So you can expect to see an increase in your credit card rates on multiple statements.

The average credit card rate hit a record high of 19.40% on Dec. 7, up from 16.3% at the start of the year, according to Bankrate. Some retail store credit cards now have rates as high as 30%.

“[Interest rate hikes] This will have the greatest impact on consumers who do not pay off their credit card balances in full through higher minimum monthly payments,” said Michele Raneri, vice president of US research and consulting at TransUnion.

Top tip: 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, which locks in a zero rate for 12 to 21 months.

“It isolates you [future] interest rate hikes and gives you a clear runway to pay off your debt in one go,” McBride said. “Less debt and more savings will allow you to better withstand rising interest rates, and is especially valuable if the economy turns sour.”

Just find out what fees you have to pay (such as a balance transfer fee or annual fee), if any, and what the penalties are if you pay late or miss a payment during zero rate. period. The best strategy is always to pay off as much of your existing balance as possible – on time each month – before the zero rate period expires. Otherwise, any remaining balance will be subject to the new interest rate, which may be higher than before if rates continue to rise.

If you can’t transfer to a zero-interest balance card, another option might be to get a relatively low fixed-rate personal loan. According to Bankrate, average personal loan rates for those with excellent credit scores are 10.3% to 12.5%. The best rate you can get will depend on your income, credit score, and debt-to-income ratio. Bankrate’s tip: Ask several lenders for quotes before you apply for a loan to get the best deal.

Mortgage rates have been rising by more than three percentage points in the past year.

The 30-year fixed-rate mortgage averaged 6.33% in the week ending Dec. 9, according to Freddie Mac. This is twice as much as a year ago.

“Mortgage rates have pulled back slightly since rising above 7%, but not enough to affect buyer affordability. Year-on-year increases in mortgage rates have deprived homebuyers of one-third of their purchasing power,” said McBride.

Moreover, mortgage rates may rise further.

So if you’re close to buying a home or refinancing, lock in the lowest fixed rate available to you as soon as possible.

However, “don’t jump into a big purchase that isn’t right for you because interest rates may drop up. Rushing into a big-ticket item like a house or car that doesn’t fit your budget is a recipe for trouble, no matter what interest rates do in the future,” said Texas-based certified financial planner Lacy Rogers.

If you’re a homeowner who already has a variable-rate home equity line of credit and you’ve used some of it for a home improvement project, McBride recommends asking your lender if it’s possible to set the interest rate on your outstanding balance. fixed rate home equity loan.

If that’s not possible, consider paying off that balance by taking out a HELOC with another lender with a lower promotional rate, McBride suggested.

Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said market returns could be better next year given that inflation may have peaked. “The outlook for equity and fixed income returns has improved and the approach is balanced [in your portfolio] meaningful.”

That doesn’t mean markets won’t remain volatile in the near term. But Ma noted that “a soft landing for the economy is not only possible, but seems likely.”

He suggested that any cash you have sitting on the sidelines can be invested regularly in the equity and fixed income markets over the next 6 to 12 months.

Ma continues to be bullish on value stocks, especially small-cap stocks that have outperformed this year. “We expect this strong performance to continue on a multi-year basis,” he said.

As for real estate, Ma noted that “sharply high interest and mortgage rates are challenging … and this headwind may continue for several more quarters or longer.”

Meanwhile, commodity prices have fallen. “But given the uncertainty in energy markets, they are still a good hedge,” he said.

Broadly speaking, however, Ma suggests making sure your overall portfolio is diversified across stocks. The idea is to hedge your bets because some of these areas will pan out, but not all.

That is, if you plan to invest Consider a company’s pricing power in a given stock and how consistent demand for their products will be, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.

To the extent that you already own bonds, the prices on your bonds will fall in a rising interest rate environment. But if you’re in the market to buy bonds you can benefit from this trend, especially if you buy short-term bonds, i.e. one to three years. That is why their prices have fallen more and their yields have risen more than long-term bonds. Usually, short and long bonds move in tandem.

“There is a very good opportunity short-term bonds are severely dislocated,” Flynn said.

“For those in higher income tax brackets, a similar opportunity exists in tax-exempt municipal bonds.”

While Muni rates have fallen significantly and are beginning to improve, yields have generally increased and many states are in better financial shape than before the pandemic, Flynn noted.

Ma also recommends short-dated corporate bonds or short-dated Agency or Treasury securities.

Other assets that might work well are so-called floating rate instruments of companies that need to raise cash, Flynn said. A floating rate is tied to a short-term benchmark rate, such as the Fed funds rate, so it will rise when the Fed raises rates.

But if you’re not a bond specialist, you’d be better off investing in a fund that specializes in making the most of a rising interest rate environment through floating rate instruments and other bond yield strategies. Flynn recommends looking for a strategic income or flexible-income mutual fund or an ETF that will hold different types of bonds.

“I don’t see many of these options in 401(k)s,” he said. But you can always ask your 401(k) provider to include the option in your employer’s plan.

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