Financial Planning
April 25, 2022

Preparing for Interest Rate Hikes

The Federal Reserve is planning to keep increasing interest rates to combat inflation. How can you prepare your finances?
Stewart Willis
Co-Founder & Co-Owner Asset Preservation Tax & Retirement

The Fed has been raising interest rates for months and has signaled plans to continue the increases, possibly into 2023. Rapidly rising inflation is the main culprit, but the economic impacts of COVID-19 also played a hand. The rise in interest rates is meant to slow down economic growth and bring inflation rates back down to around 2%.

These changes can make planning for your future retirement that much more daunting, but there are steps you can take now to help reduce any losses and set yourself up for a fruitful retirement.

Look at Your Investments

One of the biggest concerns we have with interest rates going up is the effect on the bond market. Bonds tend to be less risky than stocks, which is why many people use them to save for retirement or other long-term expenses. The trade-off is lower returns. Interest rate hikes have impacted the classically safe investment adding just as much risk as being invested in the volatile stock market. Bonds react inversely to interest rates. When rates go up, bond prices tend to fall. People really need to ask themselves if it makes sense to take risks on low-yield bonds if there is a high likelihood of losing money. A diversified portfolio with a mix of stocks and bonds can help mitigate risk. If you’re unsure your portfolio can weather these hikes, give our office a call or schedule time to meet with us. We’re happy to answer your questions and alleviate your concerns.

Don’t Get Distracted

It’s easy to feel good about something when we are distracted by what’s going on around us. We see this a lot in professional sports, like boxing. Sugar Ray Leonard is one of the best boxers in history. When he was in the ring, he would distract his opponents before he landed a blow that knocked the wind out of them. We’re seeing this with the market.

In 2022, we’ve seen new coverage on stock market volatility and the war in Ukraine that people aren’t paying as close of attention to the rapid rise in interest rates. Once things start to slowdown, that’s when people are really going to start feeling it.

We can expect the Federal Reserve to continue increasing interest rates in the coming months. You can avoid reacting emotionally to these hikes by assessing your risk often and rebalancing your portfolio if you find you’re taking on too much risk.

Refinance Now

If you have any refinancing or debt you need to deal with, now is the time! Borrowing money as been cheap over the past few years, but rising rates will make it more expensive to take on debt.

Gone are the days of 0% interest rates at car dealerships, and home and rent prices continue to soar. Phoenix is leading the nation in rental increases, with prices going up 30% in 2021. The average rate for a 30-year mortgage has been trending upward. Rates have risen to 6.03. Around this time last year, the 30-year fixed was 3.38%.

If you put off buying a home or refinancing, you may miss out on a low interest rate. Use this time to lock in a lower rate and get any long-term debts under control to avoid headaches down the road.

Sudden increases in interest rates can scare even the most money-savvy individual, but having a plan and adjusting as you go can help alleviate some of these fears.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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