Rising Interest Rates: Good News and Bad

By Cindy Sumner

News Flash: During the past eight meetings, the Federal Reserve Board raised its interest rate one-quarter of a percent for a total increase of two percent.

What does all the hoopla about rising rates mean to the average mother of preschoolers? Like many economic changes, increases in interest rates mean good and bad news. While long-term rates on loans for mortgages and automobiles have changed little, short-term rates are on the increase. This means the money you borrow for just a year or two, including credit card balances, will cost you more. On the positive side, money in savings will earn additional interest, so it’s more important than ever to pay attention to where your money is and what it’s doing.

The Good

During the past several years when interest rates hovered around one percent, it hardly seemed worth the effort to put money you didn’t need into a savings account. With today’s higher rates, you can maximize your earnings by transferring excess funds in non-interest bearing accounts (like a regular checking account) into savings where they can earn more. Those with larger amounts of cash on hand may not want to invest longer-term just yet. Since interest rates are expected to continue rising, consider putting that money into certificates of deposit (CDs) with a three- or six-month maturity. Once rates have stabilized, you can reinvest at a higher rate in longer-term instruments.

The Bad

This is the time to avoid taking on any variable rate debt (borrowed funds with an interest rate that can continue to climb). In fact, if you have cash available above and beyond the amount needed for everyday expenses and minor emergencies, you might consider using it to pay down debt (starting with the highest interest rate) and reduce your expenses. For those who haven’t taken advantage of low interest rates on long-term debt like mortgages, it’s not too late. Locking in with a 30-year fixed mortgage will keep your interest rate, and your monthly payment, from increasing. Another possibility would be a five- or seven-year adjustable rate mortgage where your rate remains the same until the adjustment date. This option works particularly well for those who anticipate a move before the five or seven years is up.

It’s time to take money out of the can buried in the backyard or hidden under the mattress. Higher interest rates can bring good and bad news, but one thing is certain–this is the time to make your money work for you.