Jan 8, 2019

What You Should Know About the Recent Fed Rate Increase

fed rate increase

The continuous stream of morning news feeds that lead with the next fed rate hike may create worry for some savvy investors and even everyday consumers. So, what do rising interest rates mean for the average American? A federal interest rate hike results in an increase in the cost of borrowing money

Here’s how.

  • The annual interest rate charged on most credit cards, adjustable rate mortgages and other loans are based on the Prime Rate.
  • The Federal Interest Rate, aka Fed Funds Rate, is the basis for the Prime Rate. When it costs more to borrow money due to the uptick in interest rate charges, consumers may be less likely to incur new debt or spend money in general.

Fortunately, with a relatively healthy real estate market and the movement of millennials towards starting families, continued economic growth is still expected but at a slower pace.

While we never know when an economic slowdown is coming, it’s always a good idea to plan. Here’s how to prepare.

Save More Money

Create a budget and build an emergency fund. Aim to save at least six months of living expenses in a savings account in case your household experiences an unexpected dip in income or job loss. Emergency funds can also pay for medical care or other necessary, but unexpected, expenses without having to charge them to a high-interest rate credit card. Establish your emergency fund quickly by:

  • Taking a second job or performing a weekend side hustle
  • Depositing your tax refund into your emergency fund account
  • Selling unwanted items around your home using mobile reselling apps, e.g., LetGo, Facebook Marketplace, eBay, etc.
  • Cutting unnecessary expenses, e.g., premium cable packages, unlimited cell phone data plans, monthly car wash services, etc.

Reduce Debt

Pay off as much debt as possible. High-interest rate credit cards should garner most of your attention right now since many come with a variable annual percentage rate (APR) which will likely increase along with each fed rate hike. Other debts should be paid off, but the focus should be on the ones that cost the most to keep.

Refinance and Enjoy Lower Rates

Now is the time to refinance. When you refinance, you obtain a new loan with better interest rates and terms to pay off your current loan. This has the potential to not only reduce overall debt repayment obligations by saving money with lower interest rates, but can also be a way to reduce minimum monthly payments. Once a refinance is complete, borrowers can elect to make extra payments to get out of debt quicker, apply the saved money to their emergency funds, or both.

Consumers who refinance can likely avoid a financial squeeze due to the expected increase in credit card APRs and private student loan interest rates. A low-interest rate personal or debt consolidation loan can be used to combine several debt obligations and make payments more manageable. If you have an Adjustable Rate Mortgage (ARM), then you might want to consider replacing it with a fixed rate mortgage to avoid a steady increase in monthly mortgage payments.

There’s no reason to fear when you regularly review your finances and take steps to ensure you and your financial house are in order. In fact, many of the same financial principals apply regardless of the state of the economy: stick to a realistic budget, eliminate high-interest rate debt as quickly as possible, and save for the future.