“When we talk about rising rates, they’re going back to pre-pandemic levels – the Fed is slowly reversing the cut they made in 2020,” said Greg McBride, chief financial analyst at Bankrate.com.
Here are some ways to position your money so that you can benefit from higher rates and also protect yourself from its negative effects.
Credit Cards: Minimize the bite
When the Fed fund rate – also known as overnight bank lending rate – goes up, it will raise various loan rates that banks offer their customers. So you can expect to see an increase in your credit card rates within a few statements, McBride said.
If you carry balances on your credit cards – which typically have high variable interest rates – consider transferring them to a zero-rate equilibrium transfer card that has a zero interest rate for between 12 and 21 months.
“That isolates you from rate hikes over the next year and a half, and it gives you a clear path to pay off your debt once and for all,” McBride said.
If you are not transferring to a zero-rate balance sheet, another option is to get a relatively low fixed rate personal loan.
In any case, the best advice is to make every effort to pay off your balances quickly.
Home loans: Bargain rates now fixed
That said, “do not jump into a big purchase that does not suit you just because interest rates can go up op. Rushing into the purchase of a great ticket item like a house or car that does not fit into your budget is a recipe for trouble, no matter what the interest rates do in the future, “said Texas-based certified financial planner Lacy Rogers.
If you already have a variable rate home equity line of credit, and you have used part of it to do a home improvement project, McBride recommends asking your lender if they would be willing to fix the rate on your outstanding balance, effectively a fixed-rate home equity loan. . Say you used a $ 50,000 credit line but only $ 20,000 for a renovation, you would ask to have a fixed rate applied to the $ 20,000.
If that is not possible, consider paying off that balance by taking out a HELOC with another lender at a lower promotion rate, McBride suggested.
Bank savings: Shop around
If you stole money from large banks that paid almost nothing in interest on savings accounts, do not expect that to change just because the Fed raises rates, McBride said. This is because the big banks and deposits are floating around and need not worry about attracting new customers.
But online banks looking to keep current accounts and attract more business are likely to offer much better rates. So it’s worth shopping around.
Stocks: Consider price power
Financial services businesses like banks typically do well in rising rate environments because, among other things, they make more money on loans. Insurers can also live, in part because the payouts of the securities they hold in their portfolio increase.
Usually, Real estate can be hurt by rising rates, in part because it can dampen demand. But because the 10-year Treasury Yield, which carries mortgage rates, has already risen sharply in the last year, it can not jump sharply from where it is, Stritch said.
Technology companies also do not usually benefit from higher rates. But when you consider cloud and software service providers, issuing subscription prices to customers can go up with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.
Obligations: Be brief
To the extent that you already own bonds, prices on your bonds will fall in a rising rate environment. But if you are in the market to buy bonds, you are taking advantage of this trend, especially if they are short-term bonds, because prices have fallen more than usual compared to long-term bonds. Usually, they move lower in tandem.
“It’s a pretty good opportunity short-term bonds that are severely dislocated, ”Flynn said.
There are some restrictions. You can only invest $ 10,000 per year. You can not redeem it in the first year. And if you pay out between two years and five years, you leave interest rates for the last three months.
“In other words, I-Bonds are no substitute for your savings account,” McBride said.
Nevertheless, they retain the purchasing power of your $ 10,000 if you do not need to touch it for at least five years, and that is nothing. They can also be of particular benefit to people planning to retire in the next 5 to 10 years, as they serve as a safe annual investment that they can use when needed in their first years of retirement.
Other assets that can do good are so-called floating rate instruments from companies that need cash, Flynn said. The floating rate is often benchmarked against the fed funds rate, so it rises when the Fed raises interest rates.
But if you are not a bond expert, you would be better off investing in a fund that specializes in making the most of a rising rate environment through floating rate instruments and other bond income strategies. Flynn recommends looking for a strategic income or flexible income mutual fund that holds a whole host of different types of bonds.
“I do not see many of these choices in the 401 (k) s,” he said. However, you can always ask your 401 (k) provider to include the option in your employer’s plan.
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