Economics is complicated. But, you don't have to be an economist or professor to realize an important fact: interest rates are on the rise.
That's due in large part to the Federal Reserve's ("the Fed's") decision to raise the fed funds rate this past March, interrupting a two-year run at 0%. While that benchmark rate represents the interest banks charge each other for borrowing, it can have a profound impact on you – and your budget. What's more, with the Fed indicating future hikes will soon follow, the impact is likely to get greater over time.
Fortunately, there are some things you can do to prepare:
- Make room in your budget. You can't control rising rates, but you can control your spending. Take some time to review your expenses and cut out some of the extras. For example, instead of three streaming services, cut it down to one.
- Shop for savings rates. The rising-rate environment is not all bad news – at least not for savers. Fed rate increases often prompt financial institutions to raise the interest rates they pay on savings, money markets, and CDs. So, now's a great time to shop around for the best savings rates.
- Up your savings game. Speaking of saving, keep doing it. To make it even easier, set up automatic transfers from your checking account each month. Or, have a portion of your pay direct deposited to your savings account. Your savings is a safety net that can help you manage unexpected expenses.
- Consolidate credit card debt. Having credit card debt is never optimal since the rates are often variable rates and higher than those of other types of credit. In a rising rate environment, it can be devastating to your budget. If you can, consolidate your credit card debt to a lower interest loan or take advantage of a balance transfer offer. If you do consolidate debt, be sure to put your credit cards on ice. The last thing you need is more debt.
- Refinance other high-interest debt. Do you have a student loan or mortgage with a variable rate? Now's a great time to take a look at your options for refinancing to a fixed rate. In some instances, refinancing could really help lower the amount of interest you have to pay each month and over the life of your loan.
- Lock in a fixed-rate mortgage. If you're planning on buying a home, be sure to choose a fixed-rate mortgage and lock in your rate as soon as you can. A lower interest rate will allow you to keep your payments lower, reduce the interest you have to pay over the life of the loan, and afford more house.
- Work on your credit score. A strong credit score will help you earn better rates, which could save you significantly on mortgages and auto loans. Check out these credit-score boosting tips from Experian.
In summary, there's not a lot you can do about economics and rising interest rates. You do, though, have the power to prepare for them.