Make these 3 personal financial moves when interest rates rise

The Federal Reserve made its biggest interest rate hike in 22 years, and more are on the horizon. In an environment like this, where inflation is outpacing personal income and the investment outlook is murky, it can be easy to get lost in confusion. International strains like the war in Ukraine and ongoing pandemic restrictions in China have only made the situation more difficult to manage. But there’s still plenty within your control, so read on to learn more about what to do when interest rates rise.

Keep perspective

These aren’t the easiest of economic times, but they pale in comparison to the 80s when interest rates soared over 19 percent and never dipped lower than 5.6 percent. This month’s rate hike only raised the key interest rate to .9 percent. The point is that high interest rates may not be fun, but they are manageable. You can even profit from them by looking at how they affect cash going out of your budget and money going into it.

Look at Loans

Let’s analyze how to keep interest rate hikes from eating into your personal income. If you are completely debt-free, the following few lines will be a waste of time. But if you are one of the 77% of American households with some level of consumer debt, this will be helpful. The first area to get control of is credit cards. Unsecured liabilities like these are very vulnerable to interest rate hikes. The revolving debt rate average is 16.44 percent, so now is the time to pay off credit card debts and use them very sparingly while rates continue to rise. Student loans are the next area to watch. Federal fixed-rate loans won’t be affected much, but private lenders can (and usually will) raise rates. If you have a variable rate on a private student loan, these should be addressed first as they are most susceptible to rate hikes.

Mortgages are next. If you have a fixed-rate mortgage, you are protected from interest rate hikes, but not if you have an adjustable rate mortgage (ARM). If so, you can find a lender who will switch you to a fixed-rate loan. Finally, avoid any home equity lines of credit or loans until interest rates settle down. Like ARMs, they will go up as the Fed raises interest rates. Now that you have an overview of protecting your outflow, let’s look at investing in a rising interest climate.

Review investments

Interest rates are usually hiked in response to inflation. The key is to position your investments so they outpace inflation. Most people’s exposure to securities like stocks and bonds comes in the form of a retirement account like a 401K or 403(b). Many of these invest in broad securities like mutual funds and exchange traded funds. That means less flexibility than individual investors who can cherry-pick individual stocks. But you can still sit with your financial advisor and adjust exposure to funds loaded with volatile stocks.

Also, keep an eye on bonds. As interest rates rise, so do bond rates, often providing a haven for your hard-earned cash. Most importantly, seek advice from a qualified financial advisor who can help you navigate the changing investment landscape. Finally, remember the U.S. economy moves in waves. These times might seem troubled, but follow these three tips, and you’ll be in good shape when brighter days return.