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12 tips to financially prepare for the Fed rate hike

What does the fed rate hike mean, and how are you preparing for it? Learn how to protect the health of your finances as federal interest rates rise.

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After months of anticipation and following a press release this past Wednesday, the Federal Reserve has announced a 0.25% increase to the Federal funds rate, effective immediately. This benchmark interest rate increase marks the first of six intended for the rest of the year to combat rising inflation rates across the nation. As the first of its kind since 2018, American households are expected to feel the costs of the increase. So, what does the fed rate hike mean for you and your family, and how can you prepare for what lies ahead?

What are the Federal Funds, and What Does the Fed Rate Hike Mean?

The federal funds rate is an interest rate determined by the Central Banking System in the United States or the Federal Reserve. This interest rate determines how much it costs banks to borrow and lend funds to one another. Yet, while this rate isn't the same as consumers, this increase will affect how you borrow and save money. 

Further, the effects of the fed fund increase can be both negative and positive, depending on your financial standing. Yet, the timed hike is influenced by some favorable aspects, including:

  • A steady national labor market characterized by record low layoff rates and high job openings rates.
  • Decrease in the percent of Americans claiming unemployed insurance –the lowest it has been since 1970.
  • The economy is healing, following the unprecedented events of the global COVID-19 pandemic.

With that said, the quarter-percent rate increase isn't enough for average Americans to notice the effects immediately. Instead, the cumulative impact of this hike should have consumers on guard for what's to come.

Here are two effects you can expect to notice in the next coming month and over the next year:

1. Borrowing money will become more expensive: This means increases in the interest rates you pay on lines of credit, mortgages, student loans, car loans, and credit card bills.

2. Greater Returns: But, while there is no direct impact on bank deposit rates, those with money in savings accounts will experience higher return rates.

12 Tips to Prepare for the Fed Rate Hike

Acting sooner can help maintain your financial wellbeing. So, now that you understand the crucial elements of answering the question “what does the fed rate hike mean?” you can begin managing and preparing your finances. 

Have a look through the 12 tips below to learn more.

1. Update Your Financial Action Plan

The first step to updating your action plan requires you to assess your current personal finances. This should include:

  • The money you have in your savings account
  • Any debt owed, including whether the interest on that debt is a fixed or variable rate
  • The money you have invested, if applicable to your finances
  • Your monthly salary
  • A list of monthly bills
  • Your current monthly budget
  • Any cryptocurrencies you may have invested in

By obtaining a complete view of your financial situation, you can begin reconsidering your monthly expenses and budget. The goal is to ensure you're putting enough away each month into a savings account while paying off any debt and living inside your means. Americans should also keep weekly and monthly tabs on all expenses to ensure they remain stable as the fed rate continues to rise moving forward. 

2. Start Paying off Your Debt

Further, the current fed rate hike directly affects credit card interest rates. Thus, as the fed fund increases, the interest on your cards will increase. This means Americans will begin noticing increases in their minimum monthly payment requirements. So, you will want to pay off your balances during each billing cycle if possible. As a result, you can avoid paying more over time. 

Thus, to protect yourself from financial deterioration over the next year, aggressively paying off credit card debt. We also recommend concentrating on paying off variable rate loans such as lines of credit and mortgages by reconsidering your monthly budget and expenses. On the other hand, homeowners who have fixed variable mortgages won't have to worry as the hike won't affect you.

3. Evaluate Whether Buying a Home is a Right Move for You 

Buying a home is often a milestone accomplishment for many Americans. Yet, right now may not be the best time to consider investing in real estate. As the fed fund hike makes borrowing money more expensive, it may be worth waiting, even if a fixed-term mortgage is available to you.

This is because the value of homes across the nation continues to rise due to inflation. Therefore, you will be paying more money to purchase a home that you would be waiting for until there is a drop in the real estate market. However, this investment will depend on the needs of each family and whether or not you plan on remaining in your new home for more than five years.

4. Don’t Be Afraid to Invest in the Stock Market

Moreover, while rising interest rates usually cause the stock market to go down in the short term, investing in the stock market can aid you in combating inflation in the long term. As a result, you should not be afraid to invest in the stock market as a long term investor.

For example, investing in high dividend stocks in companies that provide consumers with reliable goods and services, have the opportunity to rise in price due to inflation. This will ensure you receive regular payouts as a shareholder without taking too many risks with your money and your investment portfolio.

5. Move Your Savings to an Account that Has a Higher Yield

The next approach Americans can take to ensure they remain financially stable as the fed fund continues to rise is looking into transferring their money into a high-yield savings account. Consider shopping around consistently for saving accounts at your bank or others, including ones online for high yield accounts. Different banks will likely begin offering new rates and incentives tailored to your financial means every month.

Therefore, keep an eye out for higher-yield accounts, and don’t be afraid to move your savings to a different bank entirely if it works for you. However, keep in mind that constantly moving around your money isn’t beneficial. So, simply monitor the market for an opportunity that you believe will benefit you in the long run.

6. Carefully Make Adjustments to Your Investment Portfolio

Furthermore, while investing in dividend stocks can aid in providing you with financial security long-term, we also suggest reviewing your investment portfolio altogether. The key here is to make assessments of your current investments and only make minor adjustments that will benefit you.

Therefore, stay away from risky bets that will only provide you with returns in the next six months. Instead, the next couple of months should be dedicated to managing your investments in ways that offer long-term opportunities. This includes money for your retirement. Although your assets are likely to experience both the ups and downs of market changes, your investments will be secured over time.

7. Look Into Refinancing Your Variable Rate Loans

As indicated, the fed rate hike directly impacts homeowners with variable mortgages. Therefore, homeowners should use this as an opportunity to search the market for a rate that is lower than what they are currently paying.

By refinancing your home from a variable to a fixed-rate mortgage, you can potentially save hundreds of dollars a month on your payments, which leaves more money in your wallet in the end. Additionally, the same can be said for any car loans you may have. It's best to consider locking in on lower rates where you can, to save even more money each month.

8. Continue Increasing Your Credit Score

Furthermore, while working to pay off accumulated credit card debt is crucial during this period, Americans need to also work on increasing their credit scores actively. Should there comes a time when you and your family are required to take out a large loan, it would be more favorable for you to have a high credit score than not. This is because credit loaning businesses tend to provide lower interest rates to individuals who have a track record of success when it comes to their credit scores.

Therefore, by consistently working to pay off your credit card debt and keeping your unionization rate as low as possible, you will positively influence your credit rating. Thus, applying for, and taking out a loan if needed is an option you can have, should any unexpected emergencies or investment opportunities arise.

9. Refinance Your Student Loans

Another area of debt Americans should consider refinancing during rising federal interest rates in their student loans. Federal loan borrowers automatically have a fixed interest rate for their student loans. Therefore, the recent hike in the fed fund will not influence the interest rate they are currently paying.

On the other hand, those who have taken out student loans from private borrowers will be paying more as a result of the increase, regardless of whether they have fixed or variable rate loans.

Yet, keep in mind that those with variable loans will most likely experience increases. Therefore, it may be worth searching for other private borrowings with lower rates and refinancing before fixed rates begin to increase as a result of the fed fund hike before it is too late. Additionally, we suggest looking at the length of your loan term, as it may aid you in obtaining a more favorable interest rate when refinancing your loans as well.

10. Revaluate Career and Income Opportunities

Furthermore, with the job market flourishing, the national economy continues to recover following the global COVID-19 pandemic. Therefore, it may be time to consider evaluating potential career and income opportunities. While raising the fed fund will aid in balancing the rising cost of living over time, it will be years until noticeable changes occur.

Therefore, investing time and effort into developing your career may be favorable to you in the long run. This could mean furthering your education, learning new in-demand skills, committing to more training, or investing your time into a second remote job that provides you with more money on the side. Remember, there are endless opportunities for school and employment available online at your disposal.

11. Always Plan for the Worst-Case Scenario and Continue Saving Monthly

Although the economy remains stable for the time being, and while a recession is relatively unlikely in the upcoming years, it is still possible. Thus, American households must begin preparing for the worst-case scenario to further protect them from any financial hardships that may be on the horizon. 

As such, we recommend you continue saving extra income as much as possible as it will allow you to replenish your assets while protecting you against any unexpected, large payments. Thus, if you don't already have an emergency fund or a new line of credit, you may wish to consider opening up a specialized account and making monthly contributions.

12. Talk to a Financial Advisor About Your Options

Lastly, to ensure financial health and stability, you always need to speak to your financial advisor if you have one. On the other hand, it is never too late if you aren't already partnered with an advisor at your banking institution. They will help you create a strategic plan to achieve your financial goals. Additionally, they will help keep you informed on any market changes that may have an effect on your investment portfolio. 

Additionally, keeping your best interests in mind, your financial advisor will also aid you in paying off your debt quickly. This way, you can experience financial security and put more in your savings. So, rather than waiting to see and experience the changes that lay ahead, book a meeting sooner rather than later. Remember, it's more favorable to stay ahead of economic volatility that may occur. 

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