Our debt is costing us more, but our savings aren’t keeping pace. That’s the issue with the Federal Reserve’s recent interest rate hikes. Financial advisor Brad Allen talked with Milwaukee’s WTMJ-4 about the tough spot rate hikes are putting consumers in and how we can make the most of our money.
The Federal Reserve is widely expected to raise the federal funds rate at its next meeting June 12th and 13th. The federal funds rate is the interest rate that banks lend money to other banks so they can meet their reserve requirements. It has an indirect relationship with short-term interest rates we pay as consumers. The Fed has already raised the rate six times since 2015. The benchmark rate is now at a range of 1.5% – 1.75% after spending nearly a decade at the near-zero mark as part of an effort to boost economic growth during and after the Great Recession.
There is no direct link between the Federal Reserve and the interest rates we pay, but the two often go hand in hand. The average household has a total of $8,683 in credit card debt. That’s up 8.6% over 2017. And it’s not necessarily because we’re spending more! Credit card holders are paying more in interest, a trickle down effect of the Federal Reserve’s interest rate hikes. If you’re getting offers for 0% balance transfers – you may want to take advantage of them because they could be going away.
Savings Not Keeping Pace
Since we’re paying more in interest, you would expect we are also earning more in interest, but that’s not necessarily the case. As we mentioned, the Fed has raised its key interest rate by 1.5% since 2015. Meanwhile, the average interest rate for a savings account has risen just 0.01% (from 0.06% to 0.07%). CD yields have increased a little more, but still are not keeping pace. This is particularly rough on many who are approaching retirement and want to utilize lower-risk investments like savings accounts and CDs. You may have to shop around to find a higher interest rate. Investigate smaller players, including online banks, credit unions and community banks.
Rising Mortgage Rates
The average rate for a 30-year mortgage has been trending upward. Rates are hovering around 4.5%, which is an increase from last year, but still at historically low levels. Over the past 30 years, the average rate on a 30-year fixed mortgage is 6.56%. If you are considering buying a home or refinancing, don’t wait too long or you might miss out on a low rate. Click here for a calculator to help decide if you should refinance.
Stock Market Volatility
Rising interest rates have contributed to the recent volatility on Wall Street. The Fed has previously said it would raise the interest rate three times in 2018, but investors are concerned they may raise it four times. Investments should be diversified and have appropriate risk for your age and how close you are to retirement. A good financial plan does not let short-term volatility impact a long-term approach.