Interest rates are up.
Inflation is high post COVID so the Fed has dramatically increased interest rates in order to dampen inflation. These moves are BIG and they impact your financial situation. One-month interest rates are now above 5% up from near zero in January 2022. The Fed’s increase of interest rates had the intended effect, as inflation is now running at about 5%, which is almost half of the 9.1% peak in inflation in the middle of 2022. Inflation of 5% is still high in comparison with the Fed’s target inflation rate of about 2%, but the Fed does not want to overcorrect for inflation and cause a recession, so they are taking a break in raising rates for a month and will be watching the economy over the coming weeks to determine whether to continue rate increases. We fully anticipate that rates will continue to increase in the second half of the year but believe much of the increase is already behind us.
How does this impact you?
Borrowing is more expensive than it was a year ago.
Challenge yourself to be consumer debt free in ’23. We have never been fans of personal debt, especially not when it supports daily spending. This is even more true today than it was a year ago. At over 20%, credit card interest rates are at the highest level since tracking started in 1994. Yet credit card borrowing has increased to nearly $1 trillion recently. If you have credit card debt that you don’t always pay off at the end of the month, everything you buy costs significantly more than the price you think you are paying. If possible, consolidate your borrowing, set a budget (check out the budget information on our website), and pay off your most expensive debt first. We know it is hard to pay off debt, but it is liberating and rewarding. If it is too daunting to pay off all your credit card debt, take small steps first. For example, just start by paying 10% more than the minimum payment on your next credit card due date. Look at our website for some savings ideas. It is not all drudgery. Having a homemade picnic instead of going out to a restaurant can be lots of fun.
Investing cash can generate income.
If you have paid off your debt and have cash that you don’t yet want to invest in long-term investments, consider investing it in short-term investments. Relatively safe, short-term investments such as money market funds and bank savings accounts now pay 4-5% interest, so it is important to make sure your money is working for you. How much should you have in short-term investments? Most advisors suggest that in addition to having $500 cash for emergencies, it is wise to have a few months’ worth of expenses put aside, in case you lose your job and need time to look for another one.
Tax advantaged investing for the long-term is a good tool.
If you are one of the hard-working people who have paid off debt, and invested the cash you need for short term expenditures into short term investments, what now? Next, make sure that you optimize tax advantaged savings accounts such as 401K plans, Roth IRAs or traditional IRAs. For most people, it makes sense to maximize your tax advantaged investing before moving to the next step.
Other long-term investing is the next step.
If you have taken all of the above steps, it is time to consider long-term savings and investments outside the above-mentioned tax advantaged investments. We don’t give investment advice. However, we would point out that stocks, which may be much more volatile in the short term than other investments, have historically generated 8-10% as opposed to money market funds which currently offer yields that are about ½ that rate. When investing, always be guided by the principle of diversifying your investments and making sure that you understand what you are investing in before you make the investment.
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