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Rising interest rates have most people feeling uncertain, and with good reason. The drastic rate hikes affect many areas of our lives and, if not properly managed, can land you in serious financial trouble. Read more here as we discuss measures you can use to navigate successfully through these uncertain times.

 

The Federal Reserve increased interest rates by three-quarters of a percentage point in July—on the heels of another three-quarters-of-a-point hike in June and a half-point rise in May. This avalanche of historically aggressive hikes puts the benchmark overnight borrowing rate between 2.25% and 2.5%. Rising interest rates haven’t been this drastic since 1994—and many Americans fear how these Fed actions might affect their financial future. This is especially true for Millennials and Generation Z, who may be in the market for their first home or a new car.

With money getting tighter after two years of cheap loans, what financial strategies can you employ to combat rising interest rates?

How Do the Rising Interest Rates Affect You?

Many saw significant increases in consumer prices—the highest increase in 40 years. Inflation continues to grow as wages plateau, suggesting that the best way to combat inflation is to hike interest rates. Still, you must understand how rising interest rates will affect your plans.

Firstly, rising rates will affect mortgages, car loans and outstanding debt (credit cards, student loans, business loans). Home mortgages provide perhaps the most straightforward example.

Let’s say you're approved for $300,000 on a 30-year fixed rate mortgage. At 3.5% interest, you’d pay about $485,000, with $185,000 accounting for interest. Your monthly payments would land at just over $1,300.

But as the Fed takes action and your interest rate jumps—let's say to 4.5%—you’ll pay $547,000 over the 30 years, with $247,000 accounting for interest. Your monthly payments will increase to about $1,500, giving you $200 less to spend elsewhere. Though a simple example, it indicates how the Fed aims to reduce the amount of cash in circulation. The stock and bond markets are also vulnerable to rising interest rates, with the latter being a bit more volatile. Rising rates increase the cost of doing business for public (and private) firms alike. Companies may put off new projects as financing gets too expensive. Ultimately, higher prices reduce revenue, thus impacting growth and stock value.

Market prices for existing bonds decline the moment the Fed raises interest rates. Why? Because new bonds quickly flood the market, offering investors more lucrative interest rate payments. Older bonds will have to lower their prices to compete against new bonds.

On a more positive note, higher interest rates are good news for those with substantial funds in their savings accounts. The Fed’s fund rate is a benchmark for Deposit Account Annual Percentage Yields (APYs). As rates go up, you earn more from interest.

The APYs earned on checking accounts, certificates of deposit (CDs) and money market accounts will also increase. Online savings accounts react quicker as increased competition among online banks spells good news for savers. This strategy encourages people to save their money, thus keeping it out of circulation and (ideally) fighting inflation.

How to Prepare for the Interest Rate Hike

You can't escape rising interest rates—but you can still take steps to mitigate the impact on your finances. The Fed hopes that increasing loan rates will cool current inflation, but it won’t happen overnight. Consumers will experience a rough patch of high interest and  high inflation combined. Maintaining financial control is more important than ever before.

Let’s explore some steps you can take to withstand the effects of rising interest rates during these uncertain times.

Eliminate “Bad Debt”

Credit card debt is the best example of “bad debt,” as it clocks in with the highest interest rates. Make sure you’re paying off as much of your credit card debt as possible each cycle to avoid paying hundreds (if not thousands) in interest.

Refinance

If you’re eligible to refinance your home or auto loan, now is the time. Meet with your bank or loan officer to refinance to lock in the current interest rate before it gets any higher.

Boost Your Credit Score

The better your credit score, the better your rates will be. Do everything you can to increase your credit score before applying for a loan—financial companies love “safe” borrowers. Ensure you’re making all your payments on time and keeping your credit utilization as low as possible.

Financial Strategies You Should Know During the Interest Rate Hike

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Rising interest rates will eat into your finances, but there is room to leverage rising rates in your favor. Consider the following strategies to protect your finances against increasing rates.

Lock In Low Rates

If you’re carrying adjustable-rate mortgages or own a company with adjustable-rate financing, talk to your bank or loan officer about refinancing options into a fixed-rate loan. Don’t wait for rising interest rates to increase. Lock in low-rate loans ASAP.

Leverage HELOCs

A Home Equity Line of Credit (HELOC) is a revolving credit line that uses your home as collateral for the loan. Unlike a Home Equity Loan, HELOCs let you borrow money up to a limit, like a low-interest credit card.

You can use that money on home renovations or even consolidating existing debt, as moving to a new home will likely cost more given increased rates. HELOCs tend to have lower rates than home equity and personal loans, making them more attractive in today’s climate

Guard Against Rising Interest Rates For Now

Millennials and Generation Z must take proactive steps to determine how rising interest rates and looming inflation might affect them financially. By laying down sound financial strategies, they can curb the more severe effects of interest rate hikes—and perhaps even profit from them. This is significantly easier with the help of a trusted financial partner like Bank of Blue Valley.

Get in touch with Bank of Blue Valley for further industry expertise and insight. Together you can navigate through these inflationary times, making proactive money moves in the face of rising rates.