Americans should stay calm, boost their personal savings and sharply monitor their long-term fiscal plan like the Federal Reserve raises interest ratespersonal finance experts told The Post.
The Federal Reserve raised its benchmark interest rate by 0.75% on Wednesday for the third consecutive month. By raising interest rates, the Fed makes it more expensive to borrow money – A Policy action that lowers inflation By cooling the expenditure.
Rising Fed interest rates reverberate across the US economy, affecting interest rates on credit cards, auto loans, and savings accounts, and hampering the purchasing power of ordinary Americans.
It also has an indirect impact on mortgage rates, which have increased by more than 3% since the beginning of the year to more than 6% for a long term contract.
Despite the tough conditions, families can make some logical moves to maintain a strong short-term and long-term budget, personal finance experts said.
“Don’t panic,” said Jacob Channel, chief economist at LendingTree. “What you should never do in a period like this is panic and think the sky is falling. If you do, you are more likely to make risky decisions like selling all your shares out of panic or rushing into a bad real estate deal.”
To start, Americans should focus on “paying off high-cost debt and boosting emergency savings,” according to Greg McBride, Bankrate’s chief financial analyst.
“As many have learned during a pandemic, nothing helps bridge a period of income turmoil like having money hidden on a rainy day,” McBride said. “Now is the time to ramp up emergency savings to put you on a more solid foundation for everything that may lie in wait for the economy going forward.”
Budget-conscious Americans should focus on “protection strategies” for their finances in the current economic environment, according to Kelly Lavigne, vice president of consumer insights at Allianz Life. This includes cutting down on unnecessary purchases, even if items are discounted by retailers desperate to clear inventory.
“If we can avoid that, especially if you’re buying on credit, you’ll be charged more interest than you actually saved on the purchase,” Lavigne said. “You have to be careful not to spend too much on items that you absolutely do not positively need.”
High borrowing costs add to Americans’ suffering during a period of high inflation. Prices were a higher-than-expected 8.3% in August, with food and shelter costs hovering at their highest level in decades even as gas prices fell from record levels.
Federal Reserve Chairman Jerome Powell has personally acknowledged that the central bank will continue to raise interest rates until inflation drops significantly – Even if it means “some pain” for American families.
Aside from enhancing their liquid cash holdings as much as possible, consumers should look for “safe havens” for their money in the form of federally secured savings accounts and government-backed bonds.
Yields on two-year Treasuries rose 4% before the Fed’s announcement.
“Government-backed bonds are always a good option in a period of time when the economy is a bit shaky and there may be a downturn on the horizon, just because they provide a safe return on investment over a certain period of time,” the channel said.
According to Channel, precious metals such as silver and gold, which are traditionally seen as a hedge against economic volatility, are “good long-term investments.”
The housing market is a more disturbing proposition. Potential buyers face a double crunch of rising mortgage rates and still-high listing prices, while potential sellers face dwindling demand and the need to secure a new mortgage when rates are at their highest in 14 years.
The housing market is generally in better shape than it was during the Great Recession – far fewer homeowners than “underwater” mortgages with balances exceeding their home values. However, buying activity is likely to remain muted as the Fed raises interest rates.
“This is not a great time to buy a home due to high home prices, high mortgage rates and a fairly limited inventory to choose from,” McBride said. “I think the environment for homebuyers will improve, but it will probably take a weaker economy to do that.”
While cash savings is an important component of preparations, experts stressed that Americans should not lose sight of long-term savings plans just because the market is struggling.
Consumers should avoid the temptation to indulge in retirement savings and continue to make their regular contributions to 401(k) plans and IRAs.
“Don’t take out Social Security just because it’s there and it may help you get through this short-term hardship,” Lavigne said. “If you need the money quite positively, if you are 62 or older, you will definitely have to claim that benefit, but we have to look long term for things like Social Security. You don’t want to change your plan just for a short term event.”
Investors should also avoid aggressive selling of their shares as the market declines – and even look for buying opportunities with the names of the underlying companies that have gone cheap.
“It is the discipline of continuing to contribute and holding onto hard fortunes that rewards patient and disciplined investors over time,” McBride said.
“Do not save your investment,” he added. “Don’t give in to the sudden reaction of selling in the face of choppy markets thinking you’ll come back later at a better time.”