Are You Going to Win or Lose From Rising Interest Rates?

I want you to understand there is a big shift going on in our economy. I know you are well aware that interest rates have been very low ever since the financial crisis. But that’s changing. The Federal Reserve, which has control of a key interest rate-called the Federal Funds rate-has recently decided that it no longer needs to keep that rate so low because the economy is showing signs of solid strength.

After raising that rate in December, the Fed raised it again in March, and told us that if the economy continues on its current path, it expects two more rate hikes in 2017. As that plays out, you need to understand how higher short-term interest rates will impact your personal finances:

Make More on Your Emergency Fund. I always want you to keep your emergency money safe in a federally insured bank or credit union. For a long time it didn’t really matter much what bank or credit union you chose, as they all basically paid no interest. But some savings accounts now pay 1% or more, and I expect they will continue to rise over time. You should consider moving your emergency fund to an online bank, or credit union that actually pays you some interest. You can research savings deals at depositaccounts.com.

Earn More on Your Cash. Fed policy is also beginning to send the interest rate on certificates of deposit higher. If you have a cash account that isn’t for emergencies, you might want to research CDs offered by online banks. Right now you can earn more than 1.5% for a CD that matures in two years. If you’re worried about your bond funds losing some value as rates rise, locking in a fixed rate on a CD can make sense.

Get Rid of Your Credit Card Debt. Okay, now the bad news of rising rates. The interest rate on unpaid credit card balances is variable. When rates rise, so too does the rate on your credit card. That means the already insanely expensive rates on credit card debt-15% is the norm-are only going to get worse. The best investment you will make in 2017 is to pay down high-rate credit card debt. You can’t tell me you know of another investment that has a guaranteed 15% payoff!

Don’t Panic About Rising Mortgage Rates. Yes, along with short-term rates, we are beginning to see mortgage rates climb as well. But mortgage rates are still pretty great; it’s just that we’ve climbed from a terrific 3.5% rate on a 30-year fixed rate to a still wonderful, but more expansive 4.2% rate. My concern is that you don’t feel pressured to buy right now, because you keep hearing mortgage rates are going to continue to rise. Making the decision to buy a home, especially if it is your first requires careful thought about your overall finances, whether you can afford the additional costs of ownership-property tax, insurance and maintenance-and if you are really ready to own. Don’t let rising mortgage rates rush that decision.