3 Ways to Stay Financially Healthy As Interest Rates Rise
After reaching an all-time low, interest rates are once again marching upwards. Raising the federal funds rate is the Federal Reserve's way of keeping inflation in check and preventing the economy from overheating. This rate is the interest rate at which banks lend money to each other.
With the federal funds rate projected to increase to 3.4 percent by 2021 (from 2.25%), you might be wondering what it all means for your finances in the short- and long-term. Here are three ways to keep your financial health firmly in sight when rates rise.
- Grow your emergency fund (and take advantage of higher rates)
Having a cash cushion in savings can come in handy if you have an unexpected vet bill to pay or your roof needs a repair that your insurance won't cover. Yet, 23 percent of Americans say they have nothing in emergency reserves, according to a June 2018 Bankrate survey.
If your own emergency savings account is on the skimpy side, a rising rate environment is ideal for giving it a boost. When the federal funds rate rise, banks can raise the annual percentage yields on deposit accounts accordingly. That means the money you sock away in savings can grow faster.
Consider opening a high-yield savings account with Barclays if you don't have one already. These accounts currently offer an APY that's currently 22 times the national average, with no monthly maintenance fee. Best of all, there's no minimum amount required to open your account and start cashing in on higher rates.
- Consider adding CDs to the mix
Certificates of deposit or CDs are another way to save but they're different from savings accounts in one key way. Unlike a savings account, which allows you to make up to six withdrawals each month, CDs are time deposits. You commit to keeping your money in the CD for a set period of time; in exchange, the bank offers you a guaranteed rate of return. Once the CD matures, you can withdraw your initial deposit, along with the interest earned.
While a savings account usually works best for an emergency fund, CDs are better suited for setting aside money that you don't need right away. For example, you might open a CD to save money for a dream vacation you plan to take or to buy a new-to-you car. Some CDs can even be used to save for retirement. Because your money isn't invested in the market, CDs are a safer option than stocks or mutual funds.
Like savings accounts, CDs also benefit from rising rates. Barclays 60-month CD, for instance, has one of the most competitive rates around for savers who don't think they'll need to tap their money for at least five years. Barclays also offers other CDs with terms ranging from three to 48 months, all with no minimum balance required to open an account.
If you're considering a CD, pay attention to the terms and pick one that meets your needs. The longer the CD term you choose, generally the better the rate. Remember also to read the fine print on fees and withdrawing from a CD early. Many banks charge an early withdrawal penalty, which can be a flat fee or a percentage of the interest earned, if you take money out before the CD fully matures.
- Keep your credit in good shape
A good credit score can be critical for unlocking the best rates on loans, credit cards or lines of credit. If you're planning to refinance your mortgage or take out a home loan to buy an investment property while mortgage rates are relatively low, it pays to make sure your credit score is up to snuff. The best ways to maintain good credit health include:
- Paying all of your bills on time each month
- Maintaining low balances on your credit cards
- Being selective about how often you apply for new credit
- Keeping older credit accounts open
- Using different types of credit (i.e. credit cards and loans)
If you're thinking of refinancing or buying an investment property while rates are rising, take time to comparison shop with different lenders. And aside from your credit score, consider how much of a down payment you'd like to offer. The more you put down on a home, the less you'll have to finance. That could mean a lower monthly payment and reduce the amount you'll pay in interest over the life of the loan. If you haven't started your down payment fund yet, that's a great reason to open a savings or CD account to lock in a higher APY.
All content and photo provided in this blog is supplied by Rebecca Lake and is for informational purposes only. Barclays makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.