by Phil Lebkuecher | May 26, 2023 | Behavioral Finance | 0 comments
I’ve been told that I have an amazing ability to state the obvious, but obviously some things need to be stated over and over again. I’m also excellent at redundancy if you didn’t notice. What I’m really trying to say is that rising interest rates are a significant threat to our financial well-being. Here are a few thoughts to consider as our country confronts rising interest rates for the first time in the last 30 years.
Higher interest rates typically mean that assets like single family homes, rental properties, apartments, businesses and real property such as cars or RVs decrease in price. The basic reason is that as interest rates rise, it costs more to borrow the funds needed to buy things. If a farmer needs to buy a combine to harvest crops, or a trucking company needs to replace a tractor trailer to haul those crops to market, it’s going to cost them a lot more to buy the new equipment. And they are going to pass that cost along in form of higher prices to the consumer.
Businesses are facing very difficult times because many depend on lines of credit, fixed loans or both to continue their operations. As rates rise and costs go up, typically these types of loans to businesses become much harder to obtain. That’s what’s happening today.
And like businesses, many Americans often refinance their homes, cars or other debt to lower their monthly payments. Rising rates often make refinancing less beneficial or even impossible. And as the cost of food, utilities and transportation rises, it often puts a burden on families who live paycheck to paycheck.
So by now I hope I have convinced you there is a problem, and what the problem is. Here are some action items that you can do that may help.
First, have an emergency fund so you can pay cash for immediate needs or emergencies. This helps you to avoid accumulating credit card debt.
Second, if you already have credit card debt, it’s now critical to pay off those cards as quickly as you can. The rates on credit cards were already high and it’s simply getting worse, so you are going to end up owing even more.
Lastly, whatever debt you do have, make sure it’s set at a fixed rate and not a variable interest rate. The risk if you have an adjustable-rate loan is that, as interest rates rise, your monthly payment rises also, making your cash flow even tighter.
These are a few ideas of how to adjust and adapt to rising rates. If you have questions or would like to discuss your financial situation in greater detail, please contact us. We help our clients to navigate the changes that come in financial markets – including interest rates!