UBS advisor on what rising interest rates mean for consumers

Borrowing costs have risen rapidly so far in 2022, with the Federal Reserve raising interest rates in a bid to cool an economy facing inflation rates at 40-year highs.

High interest rates have significant financial implications for consumers, especially with respect to household spending, investments and retirement planning.

Household spending has likely increased so far this year, not only due to inflation, which plagues our entire economy, but also due to rising interest rates and borrowing costs.

If you have credit card debt, chances are the interest rate you paid has gone up because credit card interest rates tend to rise during times when the Federal Reserve increases interest rates. Rising credit card interest rates result in higher monthly payments for any unpaid credit card debt. The best rule of thumb with credit cards is to pay off the entire balance each month. Many credit cards offer the option of making a “minimum payment”, but this is usually a small fraction of the total balance due. By only making the “minimum payment”, interest charges will begin to accrue.

Prioritize credit card debt reduction. Getting out of credit card debt means allocating as much money as possible to payments until the entire balance is paid off. This may involve cutting spending in other areas of your budget to allocate extra money to paying off your debts. The faster you can pay off your credit card debt balance, the less you will notice the financial impact of rising interest rates.

After all, credit card debt is expensive and interest payments are not tax deductible, like most mortgage interest payments.

Reducing credit card debt will also help boost your credit score, which is a vital measure of your financial health.

Second, it’s important to re-examine your savings efforts in a rising rate environment. Do you have an emergency savings fund that includes enough cash for at least six months of living expenses? An emergency savings fund is intended to help cover expenses in the event of an unexpected job loss. Accumulating an emergency savings fund may be more difficult in a rising interest rate environment, but as recession fears grow, it’s essential that you start taking steps to put some cash in aside in an emergency.

In addition to an emergency savings fund, it’s important to make sure you’re also saving for retirement. Many use their employer’s 401(k) plan. With a 401(k), many employers will match your contributions up to a certain threshold. It is optimal for you to contribute up to the amount contributed by your employer, as this is a 100% return on investment.

The money in a 401(k) is usually invested in mutual funds. Even if you don’t see market returns immediately, your assets are growing through employer matching. You may also be able to contribute additional money to your 401(k) — beyond the employer match — a maximum of $20,500 for those under 50.

Finally, rising interest rates can affect the structure of your investments. Certain sectors of the stock market may perform better than others in times of high interest rates, such as commodities and value stocks, especially those that pay high dividends.

Your financial advisor can help you structure your investment portfolio to withstand higher interest rates.

It’s not just the stock portion of your investment portfolio that may need adjustment. The bond portion of your portfolio may also need some tweaking, as rising interest rates can lower the value of bonds.

As difficult as rising borrowing costs and rising interest rates can be, a few financial adjustments along the way can help you get through these uncertain times.

Teresa Jacobsen is a Private Wealth Advisor at UBS Private Wealth Management, based in Stamford.

Comments are closed.