Saving and Investing for the Future: How Banks, Mortgage Rates, and Lines of Credit Have Improved in the Last 40 Years
“That insulates you from [future] rate hikes, and it gives you a clear runway to pay off your debt once and for all,” McBride said. “Less debt and more savings will enable you to better weather rising interest rates, and is especially valuable if the economy sours.”
“Interest rates have increased at the fastest pace in 40 years,” said Greg McBride, chief financial analyst at Bankrate.com. “Mortgage rates have rocketed to 20-year highs, home equity lines of credit are the highest in 14 years, and car loan rates are at 11-year highs. The best yields since 2008 are being seen by the Savers.
If you’ve been stashing cash at big banks that have been paying next to nothing in interest for savings accounts and certificates of deposit, don’t expect that to change much, McBride said.
The national average savings rate was 0.16% in October, unchanged from January, despite the big players keeping their rates low.
When the overnight bank lending rate — also known as the fed funds rate — goes up, various lending rates that banks offer their customers tend to follow.
As for certificates of deposit, there’s been a noticeable increase in return. The average rate on the one-year CD has gone up from the beginning of the year. But top-yielding one-year CDs now offer as much as 4.5%.
Given today’s high rates of inflation, Series I savings bonds may be attractive because they’re designed to preserve the buying power of your money. They’re currently paying 6.89%.
But that rate will only be in effect for six months and only if you buy an I Bond by the end of April 2023, after which the rate is scheduled to adjust. If inflation falls, the rate on the I Bond will fall, too.
There are some limitations. You only have to put in 10,000 a year. It cannot be redeemed in the first year. You will have to give back three months of interest if you cash out between years two and five.
They preserve the buying power of your $10,000 if you won’t touch it for at least five years. They may be of particular benefit to people planning to retire in the next 5 to 10 years because they will serve as a safe annual investment they can use if need be in their first few years of retirement.
If inflation proves sticky despite higher interest rates, you might also consider putting some money into Treasury Inflation-Protected Securities (TIPS), said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. Unlike Series I Bonds, TIPS are marketable Treasurys – meaning they can be sold before term. They pay a fixed amount of interest every six months based on your adjusted principal. And that rate is fixed at auction but never falls below 0.125%. At the most recent auction in October, for instance, the 5-year TIPS had an interest rate of 1.625%.
Can a Zero-Rate Balance Transfer Card Prevent a High Interest Rate Rate from Happening to Be Paid Off Your Credit Card Balances?
“This latest interest rate hike will most acutely impact those 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.
Best advice: If you’re carrying 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 between 12 and 21 months.
Just be sure to find out what, if any, fees you will have to pay (e.g., a balance transfer fee or annual fee), and what the penalties will be if you make a late payment or miss a payment during the zero-rate period. When paying off your balance, be sure to pay it off on time each month, as the zero-rate period is set to end. If rates rise, any remaining balance will be subject to a higher interest rate than before.
If you don’t transfer to a zero-rate balance card, another option might be to get a relatively low fixed-rate personal loan. The average rate on such loans is approximately 12%, according to Bankrate.com. The best rate you can get depends on a number of variables, like your income, credit score and debt to income ratio. Before applying for a loan, it is important to ask the lender for quotes to get the best deal.
Buying a home or a car: With interest rates rising, why should you wait until the very end of the mortgage cycle? A Certified Financial Planner’s Perspective
The 30-year fixed-rate mortgage averaged 7.08% in the week ending October 27. That is more than double where it stood a year ago.
Don’t jump into a large purchase that is not right for you because interest rates might go up. Rushing into the purchase of a big-ticket item like a house or car that doesn’t fit in your budget is a recipe for trouble, regardless of what interest rates do in the future,” said Texas-based certified financial planner Lacy Rogers.
If you have a variable-rate home equity line of credit that you used to do a home improvement project, and you want a fixed rate loan, ask your lender if it’s possible to fix the rate on your outstanding balance.
In terms of inflation, Ma noted, the costs of services – which make up a big part of the Consumer Price Index – is the thing to watch. The services side of inflation has a big question to answer. While wage pressure has likely peaked, the job market still looks quite strong and that could keep wage growth elevated and filter through to service inflation for some time to come,” Ma said.
There is a risk that the energy warfare could escalate as winter looms, as the market seems to have put geopolitics in Europe on the back burner.
Financial service companies can do well in a rising rate environment because they can make more money on loans. If the economy slows, a bank may have a decline in overall loan volume.
Regarding real estate, Ma noted, “the sharply higher interest and mortgage rates are challenging…and that headwind could persist for a few more quarters or even longer.”
Ma remains bullish on value stocks, especially small cap ones, which have outperformed this year. “We expect that outperformance to persist going forward on a multi-year basis,” he said.
Ma suggests that you make sure your overall portfolio is diversified. Some of those areas will come out ahead, but not all of them.
If you are going to invest in a stock, think about the company’s pricing power and how often you’ll buy it. Technology companies do not benefit from rising rates. Flynn said cloud and software service providers may issue subscription pricing to clients, which may increase with inflation.
Floating Bonds, Fixed Income, and Interest Rates: Why the Fed is Upping Its Benchmark and Where to Look Next
Flynn said that there is a good opportunity in short-term bonds. “For those in higher income tax brackets a similar opportunity exists in tax-free municipal bonds.”
Flynn said that floating rate instruments from companies that need to raise cash may do well. The floating rate is linked to a short-term benchmark rate and will go up whenever the Fed hikes rates.
If you are not a bond expert, you should invest in a fund that invests in floating rate instruments and other bond income strategies that can take advantage of rising rates. Flynn recommends looking for a flexible or strategic income mutual fund that will hold different types of bonds.
The Federal Reserve raised its benchmark interest rate on Wednesday to a range of 4% to 4.5% for the seventh time in a row.
The average credit card rate increased from 16.3% to 19.40% as of December 7, according to Bankrate. Some retail store credit cards are now carrying whopping rates of more than 30%.
Given that inflation may have peaked, market returns may be better next year, said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “The outlook for equity and fixed income returns has improved, and a balanced approach [in your portfolio] makes sense.”
Any cash you have sitting on the sidelines might be put into the equity and fixed income markets in regular intervals over the next six to 12 months, he suggested.
Towards a Better Future for the Continuum and Heavy Implications of the Wall Street Collapse and the S&P Bubble
Some states are in a better financial shape than they were before the crisis and the prices of magi have dropped, but they haven’t started to improve.