4 Moves to Consider Before Interest Rates Rise
July 2, 2013
There are expectations that interest rates could rise soon. With the Federal Reserve announcing earlier this month that it will begin tapering asset purchases, and with Treasury yields starting to creep up, the signs are there for some higher interest rates.
While there is no way to completely predict what will happen next with the markets or with monetary policy, there are some things you can consider now in order to prepare for what might be higher interest rates later:
1. Don’t lock in your CDs for too long.
If rates do rise, that is likely to mean higher yields on your cash products. High-yield savings accounts should see rates creep up (especially online accounts), and CDs should also see some improvement.
As a result, it might not be in your best interest to lock your money up into a long-term CD. If rates are expected to rise in the next two years are so, you’ll want to be free to take advantage of that situation. A CD ladder can help, but think twice before you lock in today’s low rates.
2. Consider refinancing.
Earlier this year, my husband and I refinanced our house. I’m glad we did, since the average 30-year rate is already almost 75 basis points higher now than our current rate. If you’ve been dithering about refinancing, now might be the time to take action. Generally, if you can refinance to a rate that is about 1% lower than your current rate, it is considered worth it.
If you can lock in today’s near-record-low rates now, you’ll be in better shape for the future.
3. Think about moving out of bonds.
If you are considering whether or not it’s time to shift your asset allocation, now may be the time to move out of bonds â€“ at least temporarily. If you can reduce your exposure to long-term bonds, and move into short-term bond funds, you could avoid some of the long-term bond fund losses that might be coming. Then, later, as rates start rising (and prices drop â€“ usually prices and rates have an inverse relationship with bonds), you can shift back into long-term bonds.
4. Pay down high-interest debt.
One of the best investments you can make in your finances is to pay down high-interest debt. This is especially true right now. While rates are comparatively low, make as much progress as you can on your consumer debt. If you can consolidate to a relatively low fixed rate, it might be worth considering.
Once interest rates start rising again, your high-interest debt will become even more expensive and even more difficult to pay off. You’ll make better progress now if you can attack some of your high-rate debt while your payment will have a bigger impact on your principal.
Consider your financial situation, and think about what would happen if rates started rising. We’re probably going to see a little more stock volatility in the near future, so it might be worth it to be ready to buy on dips, or just stay the course with dollar cost averaging. Additionally, rising interest rates will affect borrowers and savers alike, although the results are likely to be different.
Think about the changes that will come to your own situation, and adopt strategies to reduce the impact rising rates are likely to have on your budget and your portfolio.
Are there any additional moves you should consider as interest rates rise? Leave a comment!
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