Things are far from perfect in the U.S. economy, but economy growth is steady enough that things almost feel back to normal. As this “new normal” sets in, it is expected that banks will charge a higher rate when lending to one another. This, in addition to a rise in the federal funds target rate, will make borrowing money more costly for businesses and consumers. So with that said, here are a few money moves to consider making before lending rates rise:
- Pay down variable rate debts
No one likes carrying around debt in the first place, but as federal funds rates rise, it will likely create a domino effect that results in higher interest rates paid by you if you have variable rates. Pay down your principal or you can expect your payments to rise!
If paying down your debt isn’t an option at this time, consult with a financial representative about your options to refinance to a fixed-rate loan. Today’s fixed rates are some of the best that we have seen in decades, making refinancing a smart move.
Consider buying real estate
There is no better expense in life than buying your own home. Most Americans can’t pay for their home in all cash, so loans are taken out. With mortgage rates near historic lows, now is a smart time to consider locking in a low fixed-rate with your preferred mortgage lender and buying that home you’ve been thinking about! Interest rates won’t be getting any lower, so act now!
- Hold off on long-term fixed-income investments
Investors need to understand the difference between nominal money gains and real money gains. Nominal gains are what you receive when your investment increases in value. Real money gains factor in the rate of inflation and subtract that inflation rate from your nominal gains. In other words, if your rate of return doesn’t outpace the rate of inflation, then you’re actually losing money. Since CD’s and other fixed-income securities have upward adjusting rates of return when lending rates rise, it could be a costing investment if in fact your rate of return fails to outpace inflation.
However, there may be something to say about creating a CD step ladder by splitting your investment up among a variety of maturity dates. This will ensure that you will always have short and long-term flexibility.
ONE MOVE TO AVOID:
Although dividend yields may not seem like a favorable option when lending rates are rising, it’s highly recommended to not abandon your dividend stocks in favor of fixed-income investments in a rising rate environment. Dividend stocks have historically crushed non-dividend-paying stocks over the long-term. Dividend stocks act as a beacon for investors that signal the stability of a business, while regular dividend payments can help buoy investors during inevitable stock market downturns.
Questions? Contact us today! Our loan officers are ready to walk you through your options to make the most of your financial wellness. Email info@traditionllc.com or call (952) 920-5100.
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DISCLAIMER: Content for informational purposes only. We are not a licensed investment advisor. This material/content should NOT be considered investment advice or relied upon.