5 Financial Moves to Make While Interest Rates Are High

The Federal Reserve recently increased the federal funds rate, bringing it to a range of 5.25-5.50. This means the interest rates are now the highest they’ve been in more than 20 years. This change is affecting how people in the United States save and spend their money.

With these shifts in the market, it’s a good time to take another look at your finances. Higher interest rates can make it tougher for people who borrow money, but they also open up new chances to save and explore different ways to invest your money. So, let’s take a closer look at how these changes might impact your financial decisions.

Important Financial Moves to Make While Rates Are Still High

Navigating your finances during times of rising interest rates involves making strategic decisions. While it’s true that higher interest rates may lead to increased costs for borrowing, it’s essential to recognize the potential benefits of your investments.

In this dynamic financial landscape, consider the following five strategies to make the most out of elevated interest rates:

Pay Off Variable Interest Rate Debt

Certain types of debt, such as student loans, credit cards, and HELOCs (Home Equity Lines of Credit), have variable interest rates. This means that the interest rates on these loans can fluctuate based on changes in the federal funds rate.

When interest rates are high, it’s crucial to address debt promptly with variable interest rates. As interest rates increase, the cost of servicing this debt also rises. For instance, the average credit card interest rate has reached a record high of 20.69%, indicating that consumers may face substantial increases in interest payments.

• Prioritize Variable-Rate Debt: Identify all your variable-rate debts, such as credit cards or variable-rate student loans. These are the ones that will be directly affected by changes in interest rates.
• Accelerate Payments: Consider allocating extra funds toward paying down these variable-rate debts faster. This proactive approach can save you money in the long run by reducing the total interest paid over the life of the loan.
• Review Budget and Expenses: Assess your budget to identify areas where you can cut unnecessary expenses. Redirecting these savings towards debt repayment can expedite the process of paying off variable-interest debt.
• Consider Refinancing: Explore options for refinancing high-interest debt into fixed-rate loans if possible. This can provide stability in your interest payments, protecting you from future rate hikes.

Suppose you have a credit card with a $5,000 balance and a variable interest rate of 18%. If the interest rate increases by 2%, your annual interest payment will rise from $900 to $1,000. By paying off the debt sooner, you could avoid these additional costs.

Real Estate Investment

Contrary to common perception, high-interest rate environments can present unique opportunities for real estate investment. While many individuals shy away from investing in real estate during such periods, experienced investors recognize the potential profitability of this strategy.

High-interest rates can create a buyer’s market in real estate. Sellers may be more motivated to negotiate favorable terms due to the reduced pool of potential buyers. Additionally, they might be concerned that delaying the sale could lead to further interest rate hikes, making it challenging to sell the property.

• Negotiation Advantage: Leverage the current market conditions created by high interest rates as a negotiation tool. Sellers may be more open to flexible terms, lower prices, or additional concessions to close the deal, recognizing the challenges posed by the interest rate environment.
• Long-Term Investment Perspective:
  Consider real estate as a long-term investment. While short-term market fluctuations may occur, the potential for property appreciation over time can offset the impact of temporary interest rate increases.
• Diversification: If you already have a diversified investment portfolio, adding real estate can provide an additional layer of diversification. Real estate often behaves differently than traditional financial assets, potentially serving as a hedge against certain economic conditions.
• Evaluate Financing Options: Explore financing options carefully. While interest rates may be high, it’s essential to compare and secure the most favorable loan terms. Work with lenders who understand the nuances of the current market and can offer competitive rates.

Imagine a scenario where you’re interested in purchasing an investment property during a period of high interest rates. The seller, aware of the challenges in the market, may be willing to reduce the asking price or provide more flexible financing terms to secure a sale.

This presents an opportunity for you to acquire the property at a favorable price, potentially realizing significant returns over the long term.

Bonds

Diversifying your investment portfolio is a fundamental strategy to mitigate risks associated with inflation and increasing interest rates. Bonds, as financial instruments, play a crucial role in this diversification strategy because they often exhibit an inverse relationship with interest rates.

As interest rates rise, bond prices tend to decrease. However, bonds still provide a source of income through their yields. By including bonds in your portfolio, especially those with short-term maturity dates, you can manage volatility and protect your investments during periods of rising interest rates.

• Inverse Correlation: Understand the typical inverse correlation between bond prices and interest rates. When interest rates go up, bond prices tend to go down, and vice versa. This knowledge can guide your investment decisions during periods of changing interest rate environments.
• Yield Consideration: While bond prices may experience temporary declines when interest rates rise, the interest payments, or yields, from bonds can still contribute positively to your overall returns. Focus on the yield aspect of bonds as they remain relatively stable despite market fluctuations.
• Short-Term Maturities: Consider investing in bonds with short-term maturity dates, especially when there’s concern about rising interest rates. Short-term bonds are less sensitive to interest rate changes, providing a level of stability in your portfolio.
• Risk Management: Evaluate your risk tolerance and investment goals. Bonds, even with the potential for price fluctuations, are generally considered lower risk compared to some other investment classes. Assess how bonds align with your overall risk management strategy.

Suppose you allocate a portion of your portfolio to short-term government bonds during a period of rising interest rates. While the prices of these bonds may experience a temporary decline, the regular interest payments they provide can act as a consistent income stream, helping to stabilize your overall portfolio returns.

Certificate of Deposits (CDs)

Certificates of Deposit (CDs) are fixed-term deposits offered by banks and credit unions. When interest rates are high, CDs become an attractive option as they can provide returns exceeding those of high-yield savings accounts.

High-interest-rate environments often translate into higher CD rates. By locking in a fixed interest rate for a specific term, investors can secure a predictable return on their investment, potentially surpassing what is available with other savings options.

• Interest Rate Comparison: Compare the interest rates offered by various CDs and financial institutions. Take note of special promotions or higher rates for longer-term CDs. This research helps you make informed decisions about where to invest your funds.
• Match Term to Goals: Choose a CD term that aligns with your financial goals and liquidity needs. While longer-term CDs typically offer higher interest rates, they also require a more extended commitment. Shorter-term CDs provide more flexibility but may offer slightly lower rates.
• Early Withdrawal Considerations: Be aware of the terms and conditions, especially early withdrawal penalties. Accessing your funds before the CD matures may result in forfeiting a portion of the interest earned or, in some cases, the principal. Plan your investments with a clear understanding of your financial timeline.
• Laddering Strategy: Consider implementing a CD laddering strategy. This involves dividing your investment across multiple CDs with staggered maturity dates. This approach provides regular access to funds while taking advantage of varying interest rates.

Suppose you invest $10,000 in a 3-year CD with an interest rate of 5%. If interest rates rise during the CD term, you still benefit from the locked-in 5% rate. However, if you need to withdraw the funds early, you might incur a penalty, such as the loss of a few months’ worth of interest.

High-Yield Savings Account

An emergency fund serves as a financial safety net, providing a cushion for unexpected expenses or income disruptions. In a high-interest rate environment, utilizing a high-yield savings account for this purpose can enhance the growth of your emergency fund.

Building or replenishing an emergency fund is a fundamental financial step. In times of high-interest rates, utilizing a high-yield savings account becomes particularly advantageous. These accounts offer a higher interest rate compared to traditional savings accounts, allowing your emergency fund to grow more rapidly.

• Assess Your Emergency Fund Needs:
  Evaluate your current financial situation and determine the appropriate size for your emergency fund. Generally, aim for three to six months’ worth of living expenses to cover unforeseen circumstances.
• Explore High-Yield Options: Research and compare high-yield savings accounts offered by various banks or financial institutions. Look for accounts with competitive interest rates and minimal fees. Online banks often provide higher rates due to lower overhead costs.
• Regular Contributions: Establish a consistent savings routine by making regular contributions to your high-yield savings account. This disciplined approach ensures steady growth and helps you reach your emergency fund goal more efficiently.
• Accessibility: Choose a high-yield savings account that provides easy access to your funds when needed. While these accounts typically offer liquidity, some may have restrictions or delays in withdrawals, so be aware of the terms and conditions.

Suppose you aim to build a $10,000 emergency fund. By depositing this amount into a high-yield savings account with a 5% interest rate, you could potentially earn $500 in interest over a year, as opposed to a traditional savings account with a lower interest rate.

Things To Be Cautious About During Periods of High Interest Rates

Individuals seeking ways to save and invest can find opportunities in rising interest rates. However, it’s essential to be mindful of the potential downsides, particularly the increased cost of borrowing. As an illustration, the current 30-year mortgage rates stand at 7.50%, a notable rise from the 2.84% observed in 2020.

For many borrowers, the prospect of refinancing may not be economically viable until interest rates begin to decline. Financial experts generally advise considering refinancing only if the new rate is at least 1% lower than the current rate.

Crucially, it’s important not to succumb to panic simply because interest rates are on the rise. Having savings and maintaining a diversified portfolio provides a solid foundation, and there’s no immediate need to take drastic actions if markets experience sudden downturns. Emphasize adherence to a long-term strategy, prioritizing stability over short-term fluctuations.

Final Thoughts

In conclusion, navigating through rising interest rates offers a chance to save and expand your financial portfolio. Explore options like high-yield savings accounts, CDs, and bonds, and consider real estate for potential profits. Your specific actions will depend on your unique situation.

When it comes to funding, don’t shy away from opportunities in a high-interest environment. Rather than avoiding loans altogether, carefully weigh the costs against potential returns. Businesses and individuals must seize opportunities, especially if borrowing can lead to achieving important financial goals.

For those considering business loans and real estate financing, GoKapital is a private lender worth exploring. With straightforward terms and a commitment to supporting your financial growth, GoKapital can be a valuable partner on your journey toward success. Make informed decisions about borrowing costs and their impact on your business, ensuring that spending on interest aligns with your overall financial strategy.