Steve Allocca on Why Now is the Time to Take Control of Your Financial Future

March 20, 2018

We all know there are things in life we have control over and things we don’t – like the weather, the stock market, or the sick kid at school that shared his cup with your kid. I’ve learned that it’s important to acknowledge what we do and don’t have control over in our lives.

Something that neither you nor I have a say in is when the Federal Reserve Board will raise interest rates. A little background: after the last major recession hit, the Fed (for short), which governs the U.S. central banking system, put interest rates near zero in an effort to stimulate the suffering economy and the collapsed housing market. Now that the economy is in better shape, the Fed has been slowly increasing rates since 2015. A lot is said about the downside of these rate increases but let’s take a moment to acknowledge the benefits – for example, higher returns for savers, more lending (albeit at higher rates), and a stronger dollar which, among other things, offers more buying power for those traveling outside the U.S. But if you’re like most Americans, an international trip probably isn’t in your budget right now, so let’s focus on the first two – saving and lending.

Here comes my plea to prioritize your effort to save more. No matter where we are in our financial journey, there is always room to improve our money habits. That said, 57 percent of Americans still have less than $1,000 saved. Does that describe you? That’s ok. You can always start small. I love the 52-week savings challenge because it systemizes your savings strategy. It’s not about putting unspent funds away at the end of the month; rather, it prioritizes the act of saving on a weekly basis. Also, take the time to research a savings account with an above average interest rate so you get the benefit of added savings as your money accumulates.

Now on to lending. In an environment where rates are steadily increasing, lenders are more likely to expand credit to their borrowers. For example, you may notice more credit card offers, or an increase in your credit limit for an existing card. But remember, credit card interest rates are variable. This means your credit card company can (and will) raise your rates in response to the Fed’s rate hike. By law, they are required to give you 45-days’ notice before the new rate goes into effect. Use that time wisely and consider consolidating your debt into a fixed-rate personal loan where you can lock in a low rate that will not change for the entirety of the life of the loan.

Let’s look at a common scenario and examine how the Fed’s rate hikes would impact someone with debt. Let’s call her Jane. Like a lot of Americans, Jane is carrying revolving debt on several credit cards. Paying them off is a goal but her monthly budget only allows for minimum payments and because of the Fed rate hike, her mountain of debt just got a little steeper.

See potential impact here:

To avoid the steep $1,200-dollar increase, when Jane hears about the rate hikes, she decides to take action. Instead of compounding more debt at a variable rate, she takes out a personal loan at a lower, fixed rate to consolidate that debt for a 5-year term. By doing so, she’s proactively getting off of that revolving debt cycle so she can focus on other financial priorities in her life. Her financial future just got a little brighter.

If your story sounds like Jane’s, now is the time to take action towards reducing your debt so you can save more towards your goals. It doesn’t have to happen all at once but the first step is getting off of that credit card hamster wheel.

Ask yourself, what can you do today to make your financial future a little brighter?

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