Earlier this month the Federal Reserve announced new benchmark interest rate target of 1.75 percent. The quarter point increase was the first major Fed announcement under new chair Jerome Powell, who has signaled additional increases. These moves are being made to temper the inflationary impact of a low unemployment rate, additional federal government spending, and increased private spending as a result of the recent tax cut.
By increasing interest rates to a level not seen since the Great Recession ten years ago, the Fed is changing the financial game for most of us. The higher rates mean you may need to pursue new financial strategies to maximize your financial health.
Don´t Be a Lazy Saver. It´s possible that lazy savers have not been punished this much since the last recession. Ask yourself how much you´re earning in interest in checking and savings. We are all conditioned to expect microscopic levels of interest on our cash.
If you´re a big bank customer, your suspicion of paltry interest would be confirmed by the 0.01 percent interest that many offer including industry titans Wells Fargo and Chase. That´s one hundredth of one percent, which would mean $2 in annual interest on $20,000 savings account.
What about local credit unions? They fare significantly better with one offering 0.5 percent annual interest, or $100 on that $20,000 deposit, and another with a high teaser rate on low balances that pencils out to about 1 percent on a $20,000 deposit with $193 annual interest.
By far the best rates can be found with online banks, which are FDIC guaranteed just like the brick and mortar ones. Rates can be found at bankrate.com that exceed 1.75 percent. This would mean $350 interest on the $20,000 deposit. Even better these rates tend to increase soon after the Fed announces a new target, which means by the end of the year you could be earning over 2 percent.
Online bank accounts work best in conjunction with a local bank or credit union account. Once your balance gets above a certain level in the low interest account, move your excess funds to the online bank that rewards your thrift.
Watch Your Variable Rate Borrowing. While big banks may be slow keeping savings rates in tune with Fed rate hikes, they are more much quicker to raise the rate on your debt. Review your next credit card statement and look at the interest rate. It most likely has gone up.
Even if you don’t have a credit card balance, you may have a home equity line of credit (HELOC) with a variable rate. Your HELOC interest may have jumped considerably. Plus now HELOC interest will only be deductible if you used the proceeds to purchase or improve your property. Took out a HELOC to pay for college tuition bills? That interest is no longer deductible with the new law, which could increase your effective interest rate by 50 percent or more. Make paying down these balances a priority.
Adjust New Home Expectations. Home mortgage rates are more affected by 10 year Treasury rates than Fed short term targets. That being said, home mortgage rates have been creeping up in 2018 and are now close to 4.5 percent for a 30 year loan. True these rates are still low by historical standards. But when you consider that two years ago a 30 year mortgage could be found for 3.5 percent, it’s possible you may now be able to comfortably afford less house than you were previously considering.
How much a difference does it make? You can afford a house about 8 percent less expensive with today’s higher interest rates. This is not welcome news in expensive Boulder County. So if you had in mind a $570K house, now a $526K house would give you the same payment at 4.5 percent interest as the more expensive one with 3.5 percent loan. Also keep in mind that about 90 percent of taxpayers will not be itemizing federal income taxes under the new law, which could mean the interest and property tax on your primary residence will not be deductible.