The moves you make now won’t just impact your wallet this year, but
for decades to come — so move carefully.
Recently, the Federal Reserve announced that the federal funds rate — its benchmark short-term interest rate — would remain unchanged for the remainder of 2019. Forgoing previous plans to deliver two additional rate hikes this year, instead rates will stay in the 2.25% to 2.5% range.
While that’s low, it’s still a far cry from 0.25% — the low and lasting interest rates that were the norm from 2008 until 2015, as the Fed sought to do damage control following the housing market crash and Great Recession. The interest rates of today require a slightly different playbook. Depending on where you are in your financial life, here’s what you need to do.
If you’re a saver…
Interest rates aren’t moving, and neither is the annual percentage yield (APY) on your savings account. In other words, you don’t stand to earn any additional money via a traditional savings account, so you may want to look into the higher interest savings accounts you can often find at credit unions and online banks, as well as into money market accounts suggests Steve Parrish, Director of the Retirement Income Center at The American College of Financial Services. In addition, if you’ve considered getting a Certificate of Deposit (CD), now may be a good time, Parrish says. Pay careful attention to the cost-benefit equation of locking your money up for longer. Right now, one-year CDs are paying an average .88% while two year CDs are paying an average .94%? The difference isn’t worth an additional year of illiquidity. (On March 22, the yield curve actually inverted, an indicator that has been the predictor of past recessions. Although it has since turned around, it’s something to keep an eye on.) With CDs as other savings products, shopping around can also make a significant difference in your return.
If you’re a borrower…
The Fed’s announcement represents good news. Mortgage rates are at or near their lows for the last fourteen months, with 30-year fixed rate loans averaging just over 4% and 15-year fixed rate loans about a half a point lower. That may mean an opportunity to refinance particularly if your credit has improved in the last year or so. If you’re buying rather than looking at a refi, don’t let low rates convince you to buy more home than you can afford to live comfortably in and maintain. And, if you’re carrying a balance on your credit card? Even though rates aren’t going higher, the debt is already likely to be costing you plenty with average credit card interest rates sitting at 16% a year. According to a study by MagnifyMoney, Americans will spend about $122 billion on credit card interest in 2019 — double what we spent five years ago. It’s time to make a plan to pay your part of that liability down.
If you’re an investor…
Diversifying your investments is the key this year, Parrish says. If your investments consist of mostly bonds or mostly stocks, you may want to mix it up a little. Why? Recession worries. A Wall Street Journal poll of economists gives a 25% chance of recession this year but over 50% in 2020. A recession generally devalues stocks, while climbing rates do the same to bonds, so you don’t want to have your money tied up in just one type of investment. Because it’s impossible to predict which way the market will go, it’s best to play it safe and make sure you’re investing in both. For example, if the economy were to slow down following this rate stagnation, stocks could decrease in value while bonds would continue to produce fixed income for you. Meanwhile, if the economy grows and rates continue to climb post 2019, it’ll be your stocks that bring in that extra profit.
With Megi Meskhi