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Your Financial Plan and Rising Interest Rates

The Federal Reserve once again seems committed to raising interest rates in 2017. Although there are estimates and targets published, we cannot predict the timing nor the Federal Reserve’s actual interest rates. All of that is out of our control. What can be controlled is our behavior and financial planning. What a perfect time to evaluate your financial plan and get a second opinion.

Here are a few financial items to evaluate when interest rate hikes are anticipated:

Bond Portfolios –

There is an inverse relationship between interest rates and bond values. When interest rates rise the value of a bond usually depreciates. Utilizing asset allocation models (Modern Portfolio Theory), a mixture of asset classes helps to create an investment diversification strategy. Bonds are often utilized in these asset allocation models as they are considered safe. But the fundamental correlation of interest rates and bond prices might cause you to reconsider your bond positions moving forward. In my opinion, bonds should be evaluated with great care as many of you will find the bonds in your portfolios are most likely a losing proposition. By the way, if you own mortgage backed securities you should take the same care evaluating them as they can be equally dangerous with rising interest rates.

Bank Accounts –

On a positive note, there is a direct relationship between rising interest rates and bank depository assets (Checking, Money Market Accounts and Certificates of Deposit). Banks are forced to pay higher interest rates to the lender – which is you because they use your deposits to fund loans.

Bank accounts may be considered a safe investment alternative to bonds. It is quite evident many have found this to be true, as there are trillions of dollars currently sitting in cash. However, cash and bank deposits also have risk. I am referring to purchasing power – the amount of interest paid versus inflation costs. As an example, if a Money Market Savings account is paying 1% interest and inflation is 2% the account is losing 1% safely.

Mortgages –

Mortgages typically are our largest expense and therefore should be analyzed for ways to save money over time. The time to do this is before the interest rates increase. You may be able to take advantage of the still low rates and prevent loss due to rates rising.

As an example, if you have a low balance on your primary mortgage and a high balance on your secondary loan it would make sense for you to contact a mortgage consultant and learn your options.

As interest rates rise minimum HELOC (known as a Home Equity Line of Credit ) payments rise. It may benefit you to consolidate this debt into your primary mortgage. There are many variables, cash flow being one of the largest, to consider before making this type of decision.

Many homeowners have an Adjustable Rate Mortgage (ARM). These are mortgages that guarantee a fixed interest rate for a period of years – usually 5 – and then may adjust to an alternate interest rate. A rising interest rate environment could create a large interest rate hike after the fixed rate term expires.

Many are feeling a push to purchase a home while interest rates remain low. This can make great sense to reduce the lifetime cost of the loan.

Contacting a vetted mortgage consultant may provide you needed clarity no matter what the circumstance.

Credit Cards –

As interest rates rise credit card interest rates typically rise with them. Unpaid balances will almost guarantee increasingly higher payments and eventually credit problems. Many times those who hold credit card balances have budgetary problems that may be easily fixed by controlling or eliminating unnecessary spending. This budget tightening creates additional cash which should be used to pay off credit card balances before any other expenditure.

Budgets –

Isn’t it interesting that budgets are so often feared? A budget is meant to be a tool for clearly showing all income and expenses. This is the best source for the answer on how to improve your financial picture immediately.

As interest rates rise you may want to review that budget, make a few cut backs (bagged lunch over going out) and pay off some of those accounts that charge high interest. Even if you have no debt you may want to invest extra cash in interest earning activities. Finding and eliminating unnecessary expenses can start you on the road to paying off your debts and building up your savings.

These are just a few simple strategies to prepare your personal finances for an imminent interest rate increase. As always know I welcome your questions and am available to visit with you via phone or in person.

This is not intended to give specific legal, tax or investment advice.Advisory Services offered through Nepsis Advisor Services, Inc.; An SEC Registered Investment Advisor.

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Rick Torrington

Rick Torrington, CFP® has been offering sound comprehensive financial, retirement, asset protection and wealth management advice to his clients in Sarasota and most of Florida for close to 20 years. He is diligent in his efforts to provide clarity and financial knowledge to the public through his articles and ebooks.