Has your budget tightened over the year? If so, you are not alone.
After raising interest rates 10 times in the 14 months, the Federal Reserve hit the pause button on increasing rates in June 2023.
But interest rates were raised again in July by 0.25%, increasing the fed funds rate to a target range of 5.25-5.5%, the highest level in 22 years.
When interest rates are high, the cost of borrowing on mortgages, auto loans and other debts increases. It can also take longer to pay off these debts over time.
As Branch Manager at OnPoint Community Credit Union’s Tualatin Branch inside Fred Meyer, many community members ask me how higher interest rates may affect their monthly budgets, debt repayment and savings goals.
Here are the most critical steps I share with members so they can address the effects of rising rates.
What can I do to manage debt?
• Refinance or consolidate. Take advantage of today’s interest rates by refinancing your loans. Make a list of your debts, starting with the highest interest rate. Then, contact each creditor to explore options for refinancing to a lower fixed rate.
When refinancing is not an option, consider consolidating – in other words, combining all debts into a single loan to simplify repayment. This approach may also provide a lower monthly payment and lower interest rate.
• Secure your fixed home equity line of credit (HELOC). If you are a homeowner, your home value has likely increased in the last few years. I recommend looking into a HELOC because it is a flexible line of credit that can help you consolidate debt and improve cash flow.
HELOCs also often have rates much lower than other types of credit. Funds can be used for almost any purpose, such as paying off high-interest debt.
How can I build my savings?
• Consider high-yield savings accounts and Certificates of Deposit (CDs). For borrowers, high-interest rates result in higher borrowing costs for loans. But savers will build their money faster when interest rates go up.
When you deposit funds into a savings account, the bank pays you interest on that balance at a specified rate. Today’s high-interest rates may increase your savings account balance, so your money grows over time. Check in with your financial institution to discuss if these strategies will meet your needs.
What action can I take to help manage my expenses?
• Build an emergency fund. An emergency fund helps you avoid tapping investment accounts or using credit cards with high-interest rates. I always recommend having at least three to six months of living expenses for unforeseen emergencies.
Give every dollar a job to better track how your money is being spent, saved or invested. Reassess your spending habits to uncover areas where you can save and put those dollars into your emergency fund.
• Consider a personal loan. Personal loans can be a smart solution for an unexpected purchase or to get control of your debt. These loans can be used for a variety of reasons, such as medical expenses, moving costs, funerals, weddings – and so on.
However, they are not always the right solution. Talk with your financial institution to see if you qualify and can afford the payment.
No one can predict future interest rate increases, but you can start reviewing and updating your financial plan today to prepare for what may come tomorrow. If you need help getting started, stop by our branch in Fred Meyer to talk with our dedicated team.
