4 ways to protect your finances from a Fed rate hike right now: “When uncertainty starts to happen, people tend to freeze”

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Sharpen your talons, because it’s time to channel your inner hawk.

As Federal Reserve Chairman Jerome Powell signals a willingness to rush inflation with interest rate hikes bigger than March’s first hike, financial experts say those able to respond with success in a rising rate environment can more easily navigate the uncertainty ahead.

Take a moment to recalibrate investment portfolios, moving very quickly to extinguish pending credit card debt and lock in rates as soon as possible for any major upcoming purchases like cars and homes, a financial adviser said. .

Powell and the rest of the central bank’s Federal Open Market Committee are meeting Tuesday and Wednesday as the fight against inflation continues. Many observers expect one outcome to be a half-percentage-point hike in the all-important federal funds rate telegraphed by Powell’s tough talk lately.

According to experts, a person’s real struggle is understanding their emotions and financial capabilities right now.

In March, the Fed rose a quarter of a percentage point, from near zero. Powell told the International Monetary Fund forum last month: “It is appropriate, in my view, to move a little faster. I also think there’s something to the idea of ​​up-loading whatever housing one feels is appropriate. Some saw the comment as a signal of a “spike in warmongering” to come.

Don’t fight the Fed, as the saying goes. A person’s real struggle, experts say, is understanding their emotions and financial capabilities right now — and making the most of them during a volatile stock market unaided by the drumbeat of a another possible recession.

“When uncertainty starts to happen, people tend to freeze. They don’t know what to do, so they end up doing nothing,” said Brian Stivers, of Stivers Financial Services in Knoxville, Tennessee. “We almost make the changes when it’s too late.

Here are ways to avoid being too late, according to financial planning experts.

1. Step up the fight against debt

Less than a month after the Fed’s first rate hike, three-quarters of the roughly 200 new credit card offerings raised their annual percentage rate (APR) by a quarter of a percentage point, according to Matt Schulz, Chief Credit Analyst at LendingTree.

For all forms of credit cards, including balance transfers and rewards cards, the average APR fell from 19.62% in March to 19.68% in April, according to data from LendingTree.

If you haven’t seen the higher APR on the credit card than you already have, wait. High APRs arrive on existing accounts within one or two billing cycles, Schulz said. And that’s just the impact of the March 25 basis point hike on the federal funds rate, not even the aftermath.

“There’s a lot of advice about getting a balance transfer card before rates go up, but that doesn’t reduce debt, it just mixes it up.”


— Matt Schulz, Chief Credit Analyst, LendingTree

“Your credit card debt is going to get more expensive in a hurry, and it’s not going to stop anytime soon,” Schulz said. The incremental borrowing costs might be small for one or two APR increases, but think of the cumulative costs of multiple increases and it looks different.

That’s why it’s so important to pay off as much credit card debt as soon as possible, say Schulz, Stivers and others.

“We want people to keep debt reduction in mind. There’s a lot of advice on getting a balance transfer card before rates go up, but that doesn’t reduce debt, it just mixes it up. Having a plan to pay down debt aggressively is the best course of action,” said Melinda Opperman, president of Credit.org, a nonprofit focused on debt relief and financial education.

It seems hard to get more money to pay off debt when inflation is stretching so many households, said Ana Gonzalez Ribeiro, a certified financial adviser. But it can be done by going back to basics, said Gonzalez Ribeiro, of Rise Up Financial Coaching, serving clients in the Bronx and Westchester, NY.

That means revisiting your budget with a new mindset as the cost of debt rises, or asking a professional or even trusted friend or relative to give it a fresh look, she said. What are the real needs and desires? Which services are used and which are not? “Every little bit counts, and it really adds up,” she said.

2. Find a chance to save more

When the Fed’s short-term interest rate rises, credit card rates also rise. Annual percentage rates of return (APY) are also increasing on savings accounts and other conservative money vehicles.

Average April APYs for online high-yield savings accounts rose to 0.54% in May from 0.50% in April, according to Ken Tumin, founder and editor of DepositAccounts.com. A one-year certificate of deposit (CD) online now averages 1.01%, down from 0.74% in April, and a five-year CD online averages 1.70%, down from 1.23% a month ago.

For anyone who doesn’t have revolving credit card debt to manage, this could be a time to try and save more to capitalize on the moment, Stivers said.

“Saving is more about setting specific goals — like the legendary six-to-nine month income — and hitting them.”


— Melinda Opperman, President of Credit.org

For example, this is a decision for people who may be paying more on top of their mortgage payments – for a low rate mortgage of up to 4% – and can afford to redirect that money somewhere else. “You might as well get rid of that interest now, while you can,” he said.

Others say the move shouldn’t be about getting more out of an APY.

Savings accounts may generate higher returns in this environment, but they are not likely to beat inflation rates – so it is important to remember that the purpose of these accounts is to fill a safety net for the household budget, Opperman noted. “Saving is more about setting specific goals—like the legendary six-to-nine month income—and hitting them. The interest earned is a nice bonus, but the point is to have funds on hand to deal with a crisis,” she said.

3. Investment changes

So far, 2022 has been a lousy one for the stock market. Don’t forget scary. Friday ended with a bad end to April. Then came Monday’s late-day rally, pushing the Dow Jones Industrial Average DJIA higher,
+0.03%,
S&P 500 SPX,
-0.36%
and Nasdaq Composite COMP,
-1.03%.
And that’s just with a Fed meeting under the belt.

How can investors move forward if it’s hard enough to keep their portfolio above water right now? Avoid sudden, drastic decisions, advisers say, but don’t hesitate to make a few moves.

“If you have obligations, keep the duration short.”


— Tom Balcom, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Florida.

“I love index investing,” said Stivers (who’s in good company there). But with its broad diversification, many stocks are “suffering”, he said. That’s why Stivers suggests reducing the allocation to global indices and pouring money into sector investing via ETFs and mutual funds.

According to Stivers, sectors ripe for upside potential include consumer staples, energy and banking. Investing in gold- and commodity-linked ETFs is one way to play defense, he said.

Speaking of defense, when interest rates rise, bond prices fall. They can still be a useful part of a portfolio’s safety net, said Tom Balcom, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Florida. mentioned. A warning though in a rising rate environment, Balcom added: “If you have bonds, keep the duration short.”

4. Fancy a major purchase? Do this.

Firm the rate on a mortgage or auto loan as soon as possible, Gonzalez Ribeiro and Stivers said. “The sooner you lock in, the better,” Stivers noted. Along the same lines, in any choice between variable rate and fixed rate loans, go for the fixed rate, Balcom said. “Rates only go one way,” he said.

To be clear, Stivers isn’t saying anyone should rush into these deals right now — not when the housing market is so expensive now and supply chains for autos are still shaky.

But for anyone already shopping around, it’s a good tactic to cut costs in times of rising interest rates and prices. Several Stivers clients have asked him if he should commit to rates for future home purchases, and he’s said yes every time.

If you are choosing between variable rate and fixed rate loans, go for the fixed rate.

The 30-year fixed-rate mortgage stood at 5.1% for the last full week of April, Freddie Mac FMCC,
-1.87%
mentioned. Although only slightly lower than the previous week – down one basis point – forecasters at Freddie Mac note that the trend should continue to rise.

The central bank’s Federal Open Market Committee announced the 25 basis point hike on March 16. On the same day, the average five-year loan rate for a new car was 4%, according to Bankrate.com. As of April 27, the rate for the same loan was 4.47%, the site said.

“If you don’t desperately need a car, don’t go buy one right now,” he said, later adding, “If you know you’re going to have to, you might as well go for it.” before and block the rate now.”

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