The Federal Reserve’s decision to hike short-term interest rates is big news for investors.
The Fed raised the federal funds rate a quarter percentage point — to 2 percent, from 1.75 percent — last week and signaled that it plans another two hikes this year.
The change brings the rate — which sets the terms for how much you pay on the money you borrow and the money you can earn on savings — “closer to normal historical levels,” said Rob Williams, director of income planning at Charles Schwab.
But what you should do with that change depends a lot on the stage of life you are in.
Many investors who are just starting out grapple with a four-letter word: debt.
If that’s you, you want to watch the interest that you are paying on your credit cards and student loans.
If the money you are charged for using your credit card gets too expensive, shop around for a better deal.
Also take a look at your debts from college or graduate school. If you have a federal loan, those rates will be fixed and will not change.
But if you have a variable-rate loan, you will see the interest rates on that debt increase. Now could be the time to lock in a lower rate.
You should also look to start an emergency fund of three to six months’ living expenses. The good news is that the short-term rate increases will push up the yields on savings and interest-bearing checking accounts, Williams said.
“You’re going to earn a little bit of a return on that now, 1 [percent] to 2 percent potentially, because the Fed is increasing rates,” Williams said.
Keep in mind that you will want to shop around for the best deal when it comes to those accounts, said Scott Hanson, co-founder and senior partner at Hanson McClain Advisors.
“The banks have been very slow to increase rates on their savings accounts” because of the money they are earning on cash deposits, Hanson said.
Online, community or regional banks offer the most competitive deals, while large national banks’ rates have yet to catch up, Hanson said.
If you have already put in some years in the workforce, chances are you own a home or are planning to own a home.
Those who have a variable-rate or adjustable-rate mortgage may want to change those terms.
“[That way], if mortgage rates do rise or the Fed continues to raise rates, you’re not surprised by a much higher mortgage payment,” said Williams at Charles Schwab.
If you’re looking to buy a home in the next couple of years, watch how those funds are invested.
The same goes for other near-term goals, such as 529 college savings plans for children who are set to go to school in the next couple of years.
If you’re going to need the money soon, avoid investing heavily in riskier investments, such as stocks, Williams said.
Investors may want to consider putting that money in bonds instead. But be sure to match the maturities of the bonds to your investment time horizon, Williams said.
You generally want to avoid taking chances in the bond market, such as with junk bonds and long-term bonds, and reserve those risks for the stock side of your portfolio, said Hanson at Hanson McClain Advisors.
“For people who haven’t done any in-depth analysis on their portfolio, now would be a good time to do so,” Hanson said.
For retirees, rising rates are good news for one reason: income.
“On the investing side, rising interest rates has most impact for those who are nearing or in retirement, because a lot of them look to interest payment or are looking for income to support their spending,” Charles Schwab’s Williams said.
Those investors will benefit as rising rates increase the money they make on certificates of deposit or savings accounts.
“It’s not going to outpace inflation, but it provides some stability,” Williams said.
At the same time, they should also aim to strike a balance between investing conservatively in bonds and taking some risk in stocks, Williams said. Consulting a financial advisor can help you identify exactly the right balance for you.
Rising rates will also make it more expensive to borrow a home equity line of credit in retirement. “Downsizing a home might be a better course for many people,” Williams said.
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Source: Investment Cnbc
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