Instead of babbling ad-nauseum about why rates should or should not be cut, lets take this from the angle of since we are here now, what should people do to minimize the (financial) pain and maybe take advantage of what we are given…
First and foremost, with interest rates being higher, the obvious “must do” is pay off (or pay down) revolving debt aka credit card, home equity, or any other variable rate interest debt. A year or so ago, home equity loans made sense and credit cards didn’t hurt as much. Today with rates for both up significantly, paying em off is huge. Managing debt is a big part of maximizing one’s finances so this one looms large.
Next…. money sitting in bank savings (in most cases) makes almost zero return. The banks and savings repositories are feasting on the masses who don’t look closely at their statements. Many of us keep cash balances in the bank as a “just in case”. Because rates are up, we should be looking at alternatives. Hypothetically, for one who holds a $30,000 savings balance at the bank getting one percent, that equates to about a $300 a year return. Moving these balances to a 5 percent yield takes that to $1500 a year of interest return. Alternatives like Treasury direct, 6-month CD’s, high yield money markets, and short duration bond funds can get (approximately) such rates. (source Bankrate). Within the portfolios we manage, the cash portion is at the lowest level in 20 years as we have shifted fixed income into bonds and funds that generate higher yield.
One by product of rising interest rates is that “big ticket” items are highly impacted when financing costs go up. Case in point is that about 80 percent of new cars are financed while 50 percent of preowned cars are financed. The sales of these are dependent on their customers getting financing. When rates rise the costs to the consumer go up impacting the demand for cars. It seems counterintuitive but this could be a good time to make such purchases. As of this writing, Subaru, Nissan, Mazda, Hyundai, and Ford offer some type of near zero or low-rate financing (source…Carfax). With sales down, the negotiation power has moved from the seller to the buyer, especially for those with solid financials and good credit.
Higher interest rates are akin to higher cost of money. Most businesses use debt as part of their capital structure so higher cost of funds coupled with lower consumer demand puts pressure on them. This can (and often does) yield better buys for the consumer over time. This impacts most retail-based businesses. The message here is it can pay to shop for bargains and negotiate mid cost items. Many companies use their affinity/loyalty programs as a means for discounting so check out those avenues. Every firm, from McDonalds to Louis Vuitton to American Airlines has a program, many as simple as using their phone app. Worth signing up and getting the deals.
Last, while travel and leisure pricing has not dropped across the board, costs now vary considerably. While Americans still hit the open road (or friendly sky) post covid, the economic weakness has made for bargains IF one is open to flexibility in their travel plans. Going somewhere to “get away” during peak times is still pricey but travel during off peak times has dropped noticeably. Companies (airlines, hotels, cruise operators, restaurants) are making their money on peak times but scramble to break even on others. Because of the economy, the price differences are wide and lead to lots of bargains.
The closing thought is that “higher for longer” doesn’t mean “higher forever”. Interest rates are economic result of policy decisions. One would expect the pendulum to swing and the economy and inflation to slow. Eventually, rates should come down. Probably not to the levels we saw in 2020/2021 but lower than today. Until that happens, take advantage of what presents itself. If and when rates drop there will be opportunity as well (think refinancing of debt) so staying nimble and using opportunity is what it’s all about.
As always, we are here for you and would love to hear any feedback you have. If you need anything, don’t hesitate to reach out.
Ed, Frank, & Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
cell 610-745-1931
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