Life and Religion
|Rising interest rates and the future of financial portfolio|
|Weigh risks vs. reward to personal debt|
|Published Thursday, July 19, 2018 10:25 am|
The reality is that rising interest rates will likely continue through 2018.
This has been choreographed by the Federal Reserve for some time now, and even most of the talking heads on television agree that this is more likely to continue than not. This begs the question of whether rising interest rates will harm your finances or benefit them.
The answer is that they can affect your finances in both ways. A closer look at how interest rates affect you will help you to position your finances for optimal benefits.
Impact on your debts
Interest rates directly impact the cost of your debts. If you have a fixed rate debt, such as is common with a home or a car loan, rising interest rates will not affect these debts until you refinance your home or buy a new car.
You also may have adjustable rate debt, such as is common with credit cards and some loans. The rates on these debts will rise as the market rates rise, and this means that your monthly debt payments will increase. If you carry substantial debt with an adjustable rate, you can generally expect your budget to feel burdened.
Furthermore, high interest rates can be costlier when you apply for new financing in the future.
Impact on assets
On the other hand, rising interest rates can be beneficial for you if you have specific types of assets.
For example, savings accounts and money market accounts are directly tied to interest rates, and you will benefit from a higher yield on these accounts. CD rates and bond rates generally will improve substantially as well, and this means that you can enjoy a higher yield on relatively safe investments. Stocks and mutual funds may be hit for a short period of time until corporations adjust their finances.
Understanding how your assets are tied to interest rates is important if you want to take full advantage of rising rates while minimizing your financial risk.
Position to benefit from rising rates
As you can see, in the most basic sense, rising interest rates benefit your assets and are detrimental to your debts. Make an effort to pay down debt balances.
Take out new debt strategically. For example, now may be the time to purchase a home so that you can lock in a low interest rate with a 30-year fixed term. Eliminate adjustable rate debt, if possible. In addition, prepare to take advantage of rising interest rates with strategic CD and bond purchases.
You may even invest in rental real estate now. You can lock in a low fixed rate mortgage on your rental property, and you can enjoy the income stream with affordable financing for decades.
Interest rates are a critical component to personal finances. By understanding how interest rates impact your financial well-being and by paying attention to expert insight regarding changes to interest rates, you can better position yourself to improve your financial situation in the years to come.
Play it safe
As you near retirement your planning should zero in on safer investments in general. The shorter your time horizon until retirement, the less you may want to have riding on things like stocks.
Stocks can be great for building long-term wealth, but they are also risky by nature. They are higher risk and higher reward.
It is when you near the time that you are ready to leave work that you will want to shift into investments that have less risk to them but can still afford you some return on your money. Moving into more guaranteed income vehicles, cash and interest baring accounts could be a better strategy. You may want to avoid risky investments that could leave your nest egg with a lot less money than you had expected to retire with.
Speak with adviser
Understand that a professional financial adviser can help you create a plan that will last through your retirement and achieve your retirement planning goals. He or she has the ability to really make an impact on your golden years. We are here to help answer your questions as the market and our nations economy changes.
Joyce Palmer is CEO of JP Financial LLC in Charlotte. Telephone: (704) 543-6269.
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