The Good, the Bad and the Ugly of Interest Rates HikesThe primary tool the Federal Reserve (the Fed) uses to conduct monetary policy is the federal funds rate. Changes in this rate influence other interest rates as well as broader financial and economic conditions.1 When inflation is too high, the Fed typically raises rates to slow the economy and help push inflation down. We saw that in March when the Fed approved a 0.25% rate hike— the first increase since December 2018—and again in May with a 0.50% increase. As inflation surges at the highest levels seen in more than 40 years,2 many economists expect rate increase to total 3%-3.25% by year end.3 That makes it likely that rising interest rates will impact your wallet in the coming months. Whether that’s good, bad or ugly depends on a number of factors. - The good. You may begin to see higher returns on short-term savings, such as bank savings accounts, certificates of deposit or certain fixed income investments. That reduces the need to take on added risk by investing money earmarked for short-term expenses in assets that fluctuate in value over time.
- The bad. As interest rates rise, the cost of borrowing becomes more expensive as we saw earlier this year when 30-year mortgage rates soared past 5% for the first time in more than a decade.4 Homeowners who took the opportunity to lock in lower fixed rates on home loans in recent years will see no impact from rising mortgage rates. However, those with variable rate mortgages or home equity loans should expect an increase in their interest payments going forward. As financing costs increase, homeownership becomes less affordable for buyers. While housing prices typically decline to attract more buyers when mortgage rates rise, it’s unclear if that trend will hold in today’s hot housing market where demand exceeds supply.
- The ugly. When borrowing money, you want the lowest rate possible, especially when financing assets that will depreciate over time, such as a car, boat, furniture or appliances. Even a slight increase could translate to hundreds of dollars more in interest over the life of the loan. Revolving credit card debt is another area where rising rates can get ugly. The higher the annual percentage rate (APR), the longer it can take to pay off credit card debt. While you can’t directly control the rates that lenders charge, you can take steps to ensure you get the best rate available, based on your credit history. Lenders consider your credit score when evaluating borrower risk. Ideally, you want yours to remain in the “very good” to “excellent” range. To learn more about managing credit, visit myfico.com.
If you have concerns about the impact of rising interest rates and inflation on your income in retirement, let’s schedule time to talk. 1 https://www.frbsf.org/education/teacher-resources/what-is-the-fed/monetary-policy/
2 https://tradingeconomics.com/united-states/inflation-cpi
3 https://www.reuters.com/business/big-fed-rate-hikes-ahead-amid-early-signs-hot-inflation-is-peaking-2022-04-29/
4 https://www.freddiemac.com/pmms Weighing the Pros and Cons of the RV LifestyleSummer is just around the corner and millions of Americans are hitting the road—many for the first time in more than two years. According to AAA, travel to certain destinations this spring is up a whopping 211% over last year and 10% over 2019.1 Due to the increased demand for flights, lodging and rental cars, many people are finding it difficult to book travel for their preferred dates and destinations. That has led to a growing interest in recreational motor vehicles and campers with self-contained lodging, commonly called RVs. Is the RV lifestyle right for you?
Whether you’re considering a weekend expedition, cross-country road trip or “full-timing,” as it’s referred to in the RV community, it pays to weigh the pros and cons first. - Pros – RVs come in all shapes, sizes and price ranges, from affordable “pop-up” campers to million-dollar luxury motorhomes. They offer the freedom to travel where and when you want without having to repack or haul luggage when making multiple stops. In many cases, you can bring all the comforts of home with you from groceries, kitchenware, and linens, to lawn chairs, outdoor grills and more. Many also provide the option to tow a car, boat or trailer. RVs can provide a cost-effective way to visit one or many destinations in a single trip. On average, it costs $20 to $40 to park overnight at an RV park, which is significantly less than most hotel rooms.2 RVs allow you to swap airport hassles, delays and crowded flights for a slower but more scenic approach to travel. Another bonus—generally, you can alter your plans on a whim without expensive cancellation or change fees.
- Cons – The initial and ongoing maintenance costs associated with owning an RV can be high, depending on the size, model and year of the vehicle purchased. Many dealers offer refurbished RVs, which can be more cost effective, especially for first time buyers who may not be ready to fully commit to the lifestyle. While it’s true that rising fuel prices have made RV travel more expensive but as airfare and hotel rates also climb, RV travel remains a comparatively cost-effective option. However, due to high demand, some popular destinations, including certain U.S. national parks, require advanced reservations and overnight rates can be high. For example, Zion and Grand Teton national parks charge over $100 a night during peak season.3 Don‘t forget, if you have to pay to park or garage your RV when you’re not traveling, you’ll need to factor that expense into your budget. Finally, if you haven‘t owned, operated or traveled in an RV before, consider renting one first to see if it’s right for you.
1 https://www.cruiseamerica.com/rv-adventures/rv-lifestyle/average-rv-park-cost
2 Ibid.
3 Ibid. This information was written by KRW Creative Concepts, a non-affiliate of the broker-dealer. |
