The Federal Reserve is expected to dial down its aggressive campaign to stamp out inflation Wednesday with a more modest interest-rate increase.
An expected 0.25 percentage point increase won’t be as jarring to American wallets as the half or three-quarter point hikes of the past six months, financial advisers said, but even a smaller increase will make it more expensive to buy homes and cars or carry a credit-card balance.
Inflation may be cooling, but since rates and prices remain high, people should adjust their medium- and long-term financial plans to weather this environment, said Nina O’Neal, partner and investment adviser with AIM Advisors.
“The worst is probably over, as far as interest-rate hikes,” she said, adding that people would have to accept that it still may not be the right time to make big purchases such as a house or new car.
Given that many economists and executives say a recession is likely this year, people should also seek ways to boost their savings, advisers said.
Here are three strategies to consider in the coming months.
Rethink your timeline for car loans and mortgages
This expected rate increase means the cost of borrowing money won’t be dropping soon, said Charlotte Geletka, certified financial planner with Silver Penny Financial in Atlanta. Consumers who have been holding out hope for prices to drop and rates to return to 2021 levels need to manage expectations and rethink plans, she said.
“A small rate hike isn’t going to move the needle in a huge way,” she said.
As of the week of Jan. 26, 2023, the average interest rate for a 60-month auto loan on a new car was 6.18%, up from 5.69% in November 2022, according to Bankrate.
The average rate on a 30-year fixed-rate mortgage, meanwhile, has been trending down, driven in part by lower home prices and decreased demand. The average rate on 30-year FRM dropped to 6.13% for the week of Jan. 26. A year ago, it was 3.55%—and consumers shouldn’t expect those low rates to return soon, Ms. Geletka said.
“We’ve definitely had some clients have to pause renovations and home purchases, and I think the overarching theme is, ‘You can do it, but just not right now,’” she said. “We have to have a little patience.”
That may mean adjusting your timeline for big purchases, Ms. Geletka said. If there is flexibility in your projected timeline, then putting a purchase on hold could allow you to save more for a down payment and thus reduce what you owe in monthly payments.
But if you need such a purchase much sooner—say, a home for your family or a new car to replace the broken one—then trying to time rates might not be a smart move, Ms. Geletka said. In those cases, she said, it is wiser to make the purchase within your budget now, rather than sit and wait for interest rates to fall.
Look beyond the monthly payment
With the cost of borrowing money higher, some people may feel pressured to take on a longer-term loan to make monthly payments more manageable, said Ms. Geletka. But doing so also means you will end up paying significantly more in interest, especially in a higher rate environment.
Take the time to do some math on the front end, she said. Spending more on interest means you will have less cash over time to cover other expenses, she said, which can then lead to people putting more money on credit cards to make ends meet.
“You have to really dig: What is the interest over the life of the loan? What is the true cost of borrowing?” she said. “You want to make sure you don’t get yourself on a borrowing hamster wheel.”
Replenish your emergency savings
Consumer spending has fallen in recent months, driven in part by persistent inflation. At the same time, people are saving less. The percentage of monthly income Americans saved dropped to 3.4% in December 2022, down from a pandemic-era high of nearly 34% in April 2020.
Rising rates bring an opportunity to maximize that savings, said Yiming Ma, assistant professor of finance at Columbia University. Typically, an increase in rates means better yield on savings products, but banks don’t always move in lockstep with the Fed rate. Some consumers are looking to other products for better yield, such as money-market accounts, a form of mutual fund that invests in Treasury bills and other short-term debt securities.
There is often a spread between what some banks are offering and what opportunities could be had at other institutions, she said.
“Consumers should be aware of that gap and look for savings opportunities that are closer to the interest-rate environment we’re in,” she said.
Taking advantage of better rates on savings products—such as 3.3% for high-yield savings accounts at both Ally and Goldman Sachs’s Marcus—can maximize that savings while still keeping it accessible in case of emergency. Meanwhile, some money-market accounts can pay as much as 3.8% annualized interest.
“Something people have learned over the past 12 months: Save for the sake of saving,” Ms. Geletka said. “Saving to have more cash on hand is going to help you in almost every scenario.”
By Julia Carpenter
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Dow Jones & Company, Inc.
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