Adjusting to Rising Interest Rates
By: Source: AARP Bulletin Today Date Posted: 2004-09-16 13:14:00-04:00
With interest rates on the rise, many Americans are wondering what their next step should be.
The first thing to do, say experts, is relax. There’s no need to panic but every reason to proceed carefully.
Over the next year, most analysts believe, the Federal Reserve will ratchet up interest rates carefully. That means you have ample time to make adjustments in how you save and spend.
Here are some highlights of what to expect:
Credit Cards
Brace yourself: Rates are on a one-way track upward. If you have a variable-rate credit card, you’re probably paying more already. Rates for these cards can go up at any time. With other cards, 15 days’ notice is required.
If the Fed’s rates keep rising, your credit card costs will, too. Now’s an excellent time, say financial planners, to reduce your card debt.
Cash Investments
Interest rates on CDs and savings and money market accounts are going up, much to the relief of millions of people who, hurt by the stock market downturn, fled to the safety of these investments but have had to put up with paltry returns.
Still, don’t expect dramatic change. Bankrate.com reports, for example, that while the average rate on a one-year CD has jumped in recent months, it’s still hovering around a modest 2.14 percent.
To take advantage of the current situation, planners say, it’s unwise to purchase a CD with a term longer than one year. Further, many advise clients to "ladder" their CDs. For example, this might involve buying CDs of equal value with terms of three, six and 12 months. Then as each matures, convert it to a 12-month CD. That way you’d be positioned to get the best rates over time.
Bonds
As with CDs, experts strongly advise against committing for long periods. If you buy a long-term bond now, you may miss out on higher yields and also lose money if you have to sell the bond. That’s because "old" bonds lose resale value when newer bonds offering higher yields hit the market.
A safe and increasingly popular way to keep pace with the cost of living is through inflation-indexed government investments. There are two types, and both pay competitive rates and increase in value automatically when the Consumer Price Index rises.
So-called "I bonds" can be held for up to 30 years, and accrued interest is paid when they’re cashed in. "TIPS," for Treasury inflation-protected securities, pay interest to holders twice a year.
Stocks
Don’t abandon them. Many studies have shown that they outperform bonds over the long run. If inflation should really take off, stocks may provide your best hedge against its ravages.
FOR FURTHER INFORMATION: The U.S. Treasury Department www.publicdebt.treas.gov provides details about I bonds and TIPS online. For daily updates on rates of various kinds, visit Bankrate.com.
preview