While the timing remains uncertain, many financial experts speculate that the Federal Reserve could raise its key interest rate before the end of 2015. According to Wayne Titus, CPA, PFS, AIFA®, founding member of AMDG Financial, consumers should take steps now to prepare for the first Fed rate hike in nearly ten years, by considering three tips.
Americans who follow the news may have heard that the Fed is considering an interest rate hike, but they may not fully understand how a potential rate hike could affect them. Wayne Titus of AMDG Financial, a fee-only fiduciary financial advisory firm, says anyone with a car or home loan, an investment portfolio, credit card debt or savings could feel the impact of the Fed’s decision. “When interest rates go up – and it will be ‘when’ as opposed to ‘if’ – consumers should make sure they have a plan to cope with the change,” says Titus.
Titus offers three tips to help consumers prepare for an interest-rate hike by the Fed:
- Consumers should review their investment portfolio with their adviser. This is a good idea to do periodically regardless of whether the Fed plans to take action, but Titus says it would be wise to review in the context of an interest rate hike to determine whether the portfolio is adequately balanced and could withstand the impact of such a change. Some advisers may also recommend “laddering” or implementing a variable maturity strategy – in which an investor creates a portfolio with varying maturity dates, providing the opportunity to take advantage of market changes on a periodic basis.
- Lock in a fixed mortgage interest rate before rates begin to creep upward. While mortgage rates aren’t likely to climb immediately after a Fed ruling, over time, they will increase. So now may be the best time to purchase or refinance a home. Titus acknowledges that many other people will have the same idea, which could drive up competition and drive down inventory.
- Purchase big-ticket items, for which credit is necessary, now. Those who anticipate using credit to make a purchase should consider doing it now, while interest rates are still low, says Titus. Titus expects that auto loan interest rates could climb, especially as banks see their own rates for borrowing increase. “Lease contracts could also be affected,” Titus says, “so people with leases that end soon may want to consider trading their cars in early to be able to lock in a lower fixed rate for the life of the lease.”
While this may be a time in which consumers spend money now to ensure paying less over the long term, Titus reminds consumers to continue to save. “Once interest rates begin to climb, certificates of deposit and money market funds will become more attractive, but that doesn’t mean people shouldn’t be saving now,” he says. “The most important thing to remember is to have a plan and stick to it, because a variety of market factors will always affect interest rates over the long term.”