Those of us with savings accounts know where interest rates have been in recent years: Nowhere. But the historically low rates used by the Fed to help stimulate lending and borrowing (and by extension, the entire economy) are very likely to rise soon. In some sectors, such as housing, mortgage rates have already doubled in recent months. Here’s what you need to do now to position yourself for rising rates:
Check Your Current Interest Rates
Find out what you’re paying on private student loans, car notes, mortgages, and so forth, because if any of these are variable, that rate will almost certainly rise in the coming months. Now’s the time to switch to a fixed loan if you can, or re-allocate additional funds in your budget toward debt servicing if you can’t. Rising interest rates make loans more expensive to re-pay, so act now to re-finance, if possible. In the case of variable rate mortgages (whose rates are already increasing rapidly), you should have acted yesterday, so get moving!
Re-Think Savings & Money Market Accounts
My “high yield” savings account has been paying me less than 0.8% interest – and I’ve gladly taken it, because safe sources of yield have been hard to come by in recent years. But many investors have shunned savings and money market accounts and CDs in search of better returns elsewhere. If you’ve been reluctant to hold cash because of low yields, it may be time to re-consider. (Who remembers the pre-recession days when such accounts yielded four or five percent?) Rising interest rates will provide you with better returns and a safer environment for your funds. That’s of real benefit if you’re expecting to make higher payments on variable-rate loans — or if you just plain want more money in the bank.
Bond Market Malaise
Rising interest rates mean a decline in the value of bonds (these move inversely), so the recent suggestion that the Fed might ease back on its bond purchases some time later this year has caused a mass sell-off in the asset class. Depending upon your investing style, this may be the time to re-consider your bond holdings. Some experts believe the worst is yet to come and are encouraging a complete departure, while others think the demand for bonds will re-surface as banks, major companies and government entities seek new purchases to roll-over older debt. They see this dip as a buying opportunity. Either way, one thing’s for sure: Bonds are likely to suffer in the coming weeks and months. Consider positioning yourself accordingly as you see fit.
Potential Five Ten Twenty Club Savings Example:
Let’s say you have a $10,000 savings account that is currently earning 0.5% interest (and that you don’t add a single penny to it). If rates return to their pre-recession levels of about 4%, you’d be earning eight times as much interest! Such a dramatic rise is unlikely in the near-term, however, so let’s focus on a more realistic new rate of about 2%.
Total Savings With 1-Year Interest Gains: $10,200 (vs. $10,050 at current rates)
Total Savings After 10 Years: $12,190 (vs. $10,500 at current rates)
Total Savings After 35 Years: $20,000 (vs. $11,900 at current rates)
..And, if rates do rise to 4% again, you’d have almost $40,000 after 35 years!
What interest rate are you earning on your savings account(s)? Have you started looking at whether your interest rates are variable or fixed? What do you plan to do next? Share your story in the comments below or in our Community Forum!
Disclaimer: This post is for your consideration only and should not be taken as actual financial advice. Please consider consulting a financial management professional before modifying your investments.