Combat the Fed

1. Evaluate your three top vendors – especially the company that processes your credit cards. Simply establish performance indicators and devise an evaluation method. Maintain good great relationships and decide when to issue a red flag and when to cut weak links. Hint – start here for the low hanging fruit.

2. Get a snapshot of your finances
Before you form a financial action plan, you should get an idea of where they’re at with you finances, including how much you have in both savings and debt. Plan down to the decimal point how this will impact your budget. We don’t know exactly how many rate hikes there are going to be, but the most important thing is going into this with a clear picture of where you stand financially.

Print out statements from any account that’s housing liquid cash — or money that you could withdraw without penalty. Those are most likely savings accounts, but they could also be funds in a money market account or no-penalty CD. Even better, make a note of each account’s annual percentage yield (APY).

Next, make a list of your current debts, including your outstanding balance and the annual percentage rate (APR) you’re charged. Keep tabs on whether that debt has a fixed or variable rate and calculate how much you spend in interest each month.

The goal of taking a hard look at your finances is to hopefully inform you of how fragile you might be in a rising-rate environment. You might also be able to find the debt that’s low-hanging fruit to eliminate, as well as identify budget cuts that you can make. Folks who live outside of their means and borrow to fund their expenses will feel squeezed in a rising-rate environment.

3. Know what’s good debt and bad debt — and eliminate the latter
If you have a fixed-rate mortgage, you’ll be safe when the Fed raises rates. But those with variable-rate and high-interest debt will want to act fast as rates climb. They’ll be the borrowers who are hit the hardest.

Anything you can do to pay off your balances faster and make adjustments in your budget, so you don’t have to rely on your lines of credit and carry debt from month to month, that’s the best strategy when rates are on the rise.

High-interest debt commonly comes from a credit card. Even when the Fed’s rate held near zero, the average credit card rate hovered slightly higher than 16 percent. If you don’t pay off your balance in full each billing cycle, that’s likely costing you hundreds, if not thousands, of extra dollars a month.

You would also be wise to eliminate any variable-rate debts by refinancing into a fixed rate.

You don’t want to be a sitting duck for higher interest rates on your credit card or line of credit. Fixed-rate debts like mortgages and equipment/capex loans that are low and mid-to-single-digit rates — there’s not a whole lot of incentive to pay ahead when inflation is higher.

That’s because the relatively low-cost debt can be a strong hedge against inflation. Simply put, you might be better off putting that money toward other avenues that meet your financial goals — such as saving or investing — than paying it off.

The real value of that debt will decline in an inflationary environment. Since debt is a liability, when the value of your debt declines, you’re making money.

4. Shop around for the most competitive borrowing rates
Shopping around will be one of the most important steps you can take in a rising-rate environment. Mortgage rates now above 7 percent signal an end to record-low refinance rates of the coronavirus pandemic-era — and even the low rates you were accustomed to before then. Yet, some lenders might be more inclined to offer better deals than others to separate themselves from the competition.

The Fed doesn’t directly impact mortgage rates, which are instead pegged to the 10-year Treasury rate. Yet, the same market forces influencing the Fed often steer that benchmark yield.

If the Fed overcorrects and the economy starts to slow, then mortgage rates will come back down. Be careful what you wish for because an economic slowdown — or worse, a recession — isn’t fun for anybody.

5. Work on boosting your credit score
If there’s any factor that inhibits your ability to borrow cheaply more than the Fed, it’s your personal credit scores. Most of the time, financial companies save the best rate for the so-called “safest” borrowers: those with good-to-excellent credit scores and a reliable credit profile.

Improving your credit score means more than just reducing the interest you pay on credit card debt. It could also help you save throughout all aspects of your borrowing life, including on auto loans and mortgages.

To have the best credit score possible, concentrate on making all of your debt payments on time and keeping your credit utilization ratio as low as possible — the two factors with the biggest influence on how your rating is calculated.

6. Keep up frequent communication with your credit card issuers
If your credit card rate hasn’t changed after a significant improvement to your credit score, a crucial step in your financial plan should be opening up the channels of communication with your credit card issuer. Issuers might give you a new APR. If they don’t, you’ll at least know it’s time to shop around or take advantage of a balance-transfer card.

It’s sad how few people talk to their creditors when times are good because it’s when you have those conversations, you realize a lot of really great things you could be doing to save even more money.

Typically, rates on variable loans change within one to two billing cycles after a Fed rate hike. Credit card companies, by law, have to give cardholders a 45-day notice if they’re going to increase their cardholder’s interest rate. Yet, any rate increase is up to the creditor, meaning it’s not outside of your issuer’s purview to hike rates faster or sooner than the Fed.

7. Don’t let low yields and high inflation keep you from saving
Soaring inflation might make you hesitant to sit on large piles of cash, but experts say it’s more important now than ever. A crucial part of any part of any financial plan is having cash for emergencies. Experts typically recommend storing six months’ worth of expenses in a liquid and accessible account. That balance was never meant to bring you a hefty return.

Better yet, think about your emergency fund as the difference between having to pay for unplanned expenses with a high-interest credit card.

8. Look around for the best savings yields
Be prepared to shop around regularly for the best savings yields on the market, even if it means moving your funds to a different bank to capitalize on a better return. Typically, online banks are able to reward their depositors with higher yields because they don’t have to pay the overhead associated with operating a brick-and-mortar financial institution.

As of Nov 1, the 12 banks ranked for Bankrate’s best high-yield savings accounts for November 2022 are offering an average yield of 2.48 percent, nearly 16 times the national average of 0.16 percent. Those banks offer yields as high as 3 percent and as low as 2.2 percent.

9. Start recession-proofing your finances
Saving is crucial right now because the U.S. central bank could get rates wrong: It could ultimately end up slowing down economic growth, or worse — causing a recession. Raising interest rates is putting the brakes on the economy. The harder they press the brakes, the sharper it’s going to slow down. The cumulative impact of ongoing rate hikes is where you’re likely to see a slowdown in economic activity and the labor market.

Recessions aren’t always as severe as the coronavirus pandemic, the Great Recession or even the Great Depression almost a century ago. They do, however, mean increased joblessness, reduced hiring job security, as well as market volatility.

10. Tune out market volatility if you’re investing for the long term
Higher rates typically cause market dysfunction. That’s partially by design: When the Fed raises rates, it wants to tighten financial conditions, soaking up extra liquidity in the marketplace. Case in point: The S&P 500 is down nearly 20 percent since the beginning of 2022.

Still, that shouldn’t mean anything for long-term investors, especially those that put money into the markets by way of a retirement account. If you’re investing over a time horizon that spans decades, you’ll no doubt have to endure both booms and busts.

Remember: Downdrafts in the market are a powerful buying opportunity. Investing can also help you beat inflation, though it’s something you should think about mostly after you start saving.

Bottom line
The ultimate goal with rate hikes is to give the economy a soft landing — slowing inflation, but not too much that it tips the economy into a recession. But for U.S. central bankers, that might be one of the most difficult jobs yet. Federal Reserve Chair Jerome Powell is also starting to admit he’d be willing to sacrifice the expansion to get inflation down.

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