Although it has recently paused its rate increases , the Federal Reserve still remains “hawkish”. That means it is willing to resume raising rates if conditions warrant — namely, if inflation remains stubbornly high.
High rates — with the possibility that they could go even higher — is not a pleasant place to be for anyone who needs to borrow money. Still, you can’t control what the Federal Reserve does, but here are three things you can do about it. When all is said and done, recognizing and acting on the parts you can could be the difference maker that helps you better navigate tough times.
The most efficient way to get your debt under control is to follow an approach known as the debt avalanche method. The key steps are as follows:
Line up all your debts in order from highest interest rate to lowest interest rate.
Pay the minimums on all your debts except the one with the highest interest rate.
On the highest interest rate debt, pay as much as you can, above and beyond the minimum.
Once that debt is paid off, plow everything you can into your new highest interest rate debt.
Continue that process until you are either out of debt or your remaining debts are in control.
As long as your debts are at a low interest rate (low single digits or below) and have payments you can afford without cramping a basic lifestyle, you can potentially think of them as being in control. If those remaining debts are also for key life priorities (like a place to live or a way to earn a living) that’s all the more reason they may be worth keeping around.
While higher interest rates make debts more expensive, they also make saving money more worthwhile. Of course, not every bank has moved their savings rates up at the same pace as what they charge customers to borrow. As a result, you may need to look for a new home for your savings.
In these days of online banking and fast electronic transfers, any FDIC-insured bank should be fine, as long as your savings are within the $250,000 insured limit. It may take a little longer to access your money vs. simply heading to your local bank branch or ATM, but the higher rates will very likely be worth those few extra clicks.
Many companies that owe debt owe it in the form of bonds. Bonds have a published payment schedule that includes interest payments and a final return of the bond’s face value at maturity. When a bond matures, the company needs to have access to enough cash to pay off that face value in order to avoid a default.
To come up with that cash, a company can either save up enough from its operations to pay off the debt or it can refinance that debt by placing another bond offering to pay off the previous bonds. If interest rates are higher when a company needs to refinance its debt, it will result in higher interest payments on the new bond for the issuing company.
Debt payments have to be made before any cash can be handed to shareholders as dividends. The higher the interest rates and the bigger the total debt, the tougher it is for any company to cover its debts, its other costs, and have sufficient more money to reward its shareholders.
By understanding when your investments’ debts will come due and how much they’ll need to come up with, you can get a better picture of the risks that they face from today’s higher interest rates. That can help you make better investing choices.
The Federal Reserve will do what it needs to in order to get inflation back under control. You can’t really change their path, but you can take care of your own debts and your own savings, and you can keep an eye on the effect the Fed’s actions will have on your investments.
By taking charge of what’s in your control, you can set yourself up to be in a better spot, even if the Fed’s current “hawkish pause” turns into a need to resume raising rates. The sooner you begin taking care of your own finances, the better your chances are of making it through financially intact. So make today the day you get started.
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