How do you make your financial decisions with the rise in US interest rates?

The US Federal Reserve raised interest rates by 0.75% last Wednesday, as part of measures it is taking to stem high inflation in the United States, calm the economy and slow unbridled growth in prices. The impact of these measures will extend to the countries of the world and the wallets of millions of people, which will change the way a series of financial decisions, large and small, are calculated.

Financial advisers say that with inflation in the US at 8.6% in May, the cost of everything is rising, so it may make sense to speed up some fiscal plans and postpone others. If you notice that credit card debt and other floating rate loans are likely to become more expensive, it needs to be dealt with first, in addition to deferring loans for large purchases such as buying a car or home.

“It’s important to start thinking about the optimal decision right away, with interest rates changing in the future,” Columbia University professor of financial science Yiming Ma was quoted as saying. She pointed out the importance of rearranging the way money is handled in the short and long term, and of focusing on debt relief before it becomes more expensive.

An increase in interest rates usually means a higher annual percentage rate for credit card interest rates. The average annual percentage of people with good credit is about 19%, and this figure may rise, given the expected rate hike.

Peter Gallagher, managing director of the Consolidated Retirement Planning Group in Briarcliff Manor, New York, said higher interest rates mean more expensive loans or perhaps higher credit card debt. He said the fear of inflation and the threat of recession could make people reluctant to use their savings to pay off debt. To point out that paying off debt can save big money now in the future, which are the benefits of that debt. “I met people who had $ 200,000 in the bank account and $ 20,000 in debt,” he said. And he added: “If you’re confused about which card to pay off first, you should start with higher interest debt.”

The return on savings must also be maximized once debt has been paid off. One of the positive aspects of raising interest rates is that many banks and other institutions offer better interest rates on savings accounts as interest rates on many deposit certificates and savings accounts move according to the federal rate.

“If one has excess money that you do not need to buy groceries, then it’s time to really think about where you can put that amount of money,” Yiming Ma said. She pointed out the importance of the person also taking into account the real safe space for inflation and volatile markets, and whether some financial shifts will be postponed, such as prioritizing the repayment of existing debt and the need to think carefully before any new debt incurred, such as a mortgage or car loan.

The average rate for a new car loan in the US for five years was 4.53% in the week of June 14, already up from 4% last March. Mortgage rates are also largely dependent on yields on US 10-year treasuries, and when the Fed raises interest rates, the increase pushes yields on treasuries higher, which in turn raises mortgage rates. According to US mortgage lender Freddie Mac, the average 30-year fixed-rate mortgage rate was 5.78% in the week ending June 16, while the same rate was 2.93% just one year ago.

Requests for variable rate mortgages may increase, but Peter Gallagher warns that these loans are associated with other risks, especially with higher interest rates, as the interest rate on these mortgages is periodically reset and their costs can rise significantly over time. He pointed out that “it is sometimes difficult to know the cash flow of people over two to three years.”

In the same vein, Yiming Ma advises home seekers to take a closer look at their schedules. She said if fears of a future recession materialize, interest rates and house prices are likely to fall. “If you have to buy a house soon, fixing the mortgage rate may save you money, but if you have some flexibility, it may be worthwhile to wait with lower prices in the future,” she added.

Regarding the timing of price stability, Federal Reserve Chairman Jerome Powell told a news conference on Wednesday that the committee had approved a larger increase in interest rates due to concerns about economic data related to the high inflation rate. “The increase of 75 basis points is extremely large,” Powell added. He added, “It appears that an increase of 50 or 75 basis points is likely to be in our next meeting on 26 and 27 July 2022.”

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