Carmen Reinicke -
CNBC + Acorns
For the first time in years, Americans are in a period where interest rates are rising.
The Federal Reserve raised its benchmark rate by half a point on Wednesday to try to rein in inflation, which is the highest consumers have seen in 40 years.
Additionally, Fed Chairman Jerome Powell noted that more half-point hikes are on the table for all remaining meetings this year.
As rates rise, there are a few key moves financial experts recommend consumers make to put themselves in a better financial position.
Broadly speaking, these include paying off or lowering debt and bolstering personal budgets to be able to withstand any sudden shocks to the economy.
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“If your New Year's resolution was to create a family budget, you may need an update and a review,” said Cathy Schaeffer, certified financial planner, vice president and manager of Family Advisors at Baker Boyer in Walla Walla, Washington.
Now is “an opportunity to really look at your personal budget and identify some ways to pay down your debt more aggressively as these rate increases are expected to continue,” he added.
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Attention to variable rate debt
Certain borrowers need to be especially careful at this time.
That includes anyone looking to buy a home, buying a car or in credit card debt, according to CFP Lauren Anastasio, director of financial advice at Stash.
“If you're looking for a home, you might want to ask your lender if they can lock in your rate now,” he said.
"Sometimes the lender, for a flat fee, will let you lock in today's rate, even if it's not going to close for a few months."
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Some borrowers are considering adjustable-rate mortgages, which offer lower initial rates but eventually return to market conditions.
People who had ARMs and are nearing the end of that period may want to consider refinancing to a fixed rate.
Car buyers will be able to stick with the newer models and avoid the used car market, where prices have risen the most.
Taking the time to shop around for the best deal you can find is also in your best interest.
Experts recommend that if you're planning to buy a home, try to lock in your loan interest rate now, even if you close in a few months. Gene J. Puskar / AP
“There's still a lot of value out there,” said Jacqui Kearns, director of brand and strategy for Affinity Federal Credit Union in New Jersey, adding that while rates are rising, they're still historically low.
People with credit card debt are encouraged to contact their lenders to see if they can work out a deal.
“I always recommend that people call their lender and see if they can lower their interest rate,” Anastasio said.
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It may also make sense to consolidate credit card debt into fixed-rate debt, since this type of debt is the most sensitive to rate increases and often carries the highest interest;
right now, the average interest rate on a new credit card is nearly 20%, according to LendingTree.
Paying off the debt in full is also a good idea, if possible.
Kearns recommends addressing those cards that have relatively low balances.
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“If you have that lingering $200 or $300 [debt], just pay it off,” he said.
Prepare for the future
Paying off debt is just one way to set yourself up for future financial success, something that's especially important as people weigh the risk of a recession.
“This is a very delicate dance that the Fed is performing,” Anastasio said, adding that while the central bank will do its best to control inflation without holding the economy back too much, there are many factors that are out of its control.
such as the uncertainty stemming from the war in Ukraine.
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Financial experts recommend taking the time to review your spending and savings to strike a solid balance.
“Be smart about spending the money you have,” Kearns said.
This may mean cutting back on discretionary purchases or budgeting more for items that have gone up in price.
Americans should also make sure they have solid emergency savings to offset rising prices.
As people plan for future expenses, like an upcoming vacation, they may also want to budget more than they normally would, Anastasio said.
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"The reality is that we may see a slowdown in rapidly rising costs, but that doesn't necessarily mean that when you go to the supermarket to buy baby formula, suddenly the manufacturer will go back to charging the same as two years ago," he said.
ask for help
To be sure, there are some benefits to raising interest rates.
Over time, savers may start to see better rates on savings accounts, Schaeffer said.
Investors also have opportunities to benefit from market volatility, Kearns said.
"It's a good time to invest if you have an appetite," Kearns said.
"Literally just a few dollars a day in the volatility we're seeing can create a lot of value if it sticks around for the long term."
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Those who are struggling to manage their money or feel stressed by the current environment can seek professional help for better budgeting or future planning.
“This is the right time to take a hard look at your goals, your risk tolerance and your financial plan,” Schaeffer said, adding that this is especially important for those in transition periods, such as when approaching retirement or preparing for retirement. to send a child to college.
“Have a plan and work with someone to set up that plan,” Kearns said, adding that there are many resources at different prices ranging from digital tools to in-person counselors.
This article is part of the
Invest in You: Ready series.
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(Invest in you: Ready. Ready. Grow), an initiative of CNBC and Acorns, the micro-investing app.
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