Putting Your Money in Focus as the Fed Gets Ready to Raise Interest Rates
Inflation is up at levels not seen since 1982, with prices having increased by 7.9% on average over the past 12 months. In response, the Federal Reserve has indicated it plans to raise its target rate, which is how institutions determine what to charge each other when lending money.
The central bank is expected to enact a 25-basis-point hike in an attempt to slow inflation, which would be the first such increase in three years, with more hikes expected before the end of 2022. Economists point out that spending traditionally decreases when interest rates rise, due to the increased cost of borrowing associated with things like credit cards. This theoretically helps push down prices.
Reconsider Your Bills and Deposits
Financial advisors note credit cards are important to focus on, especially if you carry what’s known as revolving debt from month to month. Your annual percentage rate may change once the Fed makes a move. There are a few ways to ease revolving debt, however. The simplest, though in some ways the hardest, is to make a payoff plan. That requires you to plot out how much you can afford to pay each month and calculate how long it’ll take to pay off what you owe.
In the long term, debt consolidation could potentially help people spend less money over the life of the loan, if they are able to secure a lower interest rate on the consolidation loan.
Student loans are something to look at depending on their structure. Federal student loans have fixed rates that won’t change as a result of any hikes, but private loans can have variable rates.
What to Expect For Cars and Homes
Rising rates will push up the cost of an auto loan, but this may be easier for some consumers to ignore. For example, a typical auto loan payment for a $25,000 car will only increase by a few bucks a month based on a quarter-percentage-point hike.
Monthly mortgage payments are also set to increase in a rising-rate environment. If you have a home equity line of credit your payment may go up immediately, as they adjust in real time rather than annually. The central bank seems convinced hikes are what’s needed to slow down inflation, and it’s always best to consider where your finances need to be adjusted in response.
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