What Should You Do?

For the first time in years, the Federal Reserve is back in interest rate-raising mode. This policy shift is part of the Federal mandate to keep inflationary pressures in check. As inflation and interest rates rise, there are some personal finance steps that may make sense to consider:

Put Cash to Use
What’s one asset sure to lose value in an inflationary environment? Cash. That is, after all, what inflation means; our dollars are losing purchasing power. Having enough cash set aside for emergencies is important, but once that box is checked it’s also important not to have too much. Monies above and beyond a base emergency fund and any near-term liquidity needs are best put to use in other places, such as paying off debts and investing in more appropriately matched asset classes.

Pay Off or Refinance Variable-Interest Debts
If you have a balance on a floating rate home equity line of credit or other revolving debt, one of the most productive uses for your cash may be to pay it off sooner rather than later. In a rising rate environment, these debts will only get more expensive. Using excess cash to pay them off now will help prevent the monthly cash flow burden from getting out of control. If you don’t have the cash to pay them off, a refinance into a fixed payment, fixed interest rate loan that pays down principal can provide a predictable structure to reduce the debt over time.

Take Advantage of Series I (Inflation-Adjusted) Savings Bonds
The U.S. Treasury sells what’s known as Series I Savings Bonds, or I-Bonds. These are purchased online directly at treasurydirect.gov. The bonds have two interest rate components: The first is a fixed rate for the life of the bond. The second is an inflation-adjusted rate that resets every six months. With inflation at multi-year highs, these bonds are currently yielding 9.62% through October 2022. To add icing on the cake, this interest isn’t taxed at the state or local level. Bonds must be held for at least a year, and cashing them in before five years means forfeiting three months’ interest. Each person can electronically purchase up to $10,000 in Series I bonds per year. Cash above and beyond a well-funded emergency account, or for any need further than 12 months out, can be a great way to take advantage of the current inflationary environment.

Invest Monies Intended for Long-Term Goals
For long-term goals, it makes sense to have long-term investments. A broadly diversified stock market portfolio has historically worked well as a hedge to protect against inflation. Long-term is the key phrase here. That means, for life goals that are many years out, such as retirement for younger workers or education funding for children, equities can be a productive place to invest.

Construct a Fixed-Income Portfolio to Meet Your Liquidity Needs
For investors nearing or already in retirement, or with needs for funds in the next few years, higher interest rates allow for the construction of investment portfolios designed to meet income and other liquidity needs. Interest rates on CDs, Treasuries, Corporate, and Municipal Bonds are all significantly higher than they were just months ago. A savvy investor or trusted financial advisor can use these fixed-income vehicles to build what’s known as a fixed-income ladder, spacing out and matching maturity dates to liquidity needs, and repurchasing higher-rate investments as lower-rate investments mature. This type of structure helps take advantage of rising rates and avoids the downward pressure they can have on long-dated fixed-income or fixed-income funds.

Nobody likes to pay more at the grocery store or on their monthly loan payments. These are the negative effects of inflation and higher rates. Rather than focusing on the negative, and what we can’t control, take actions that make the most of the current environment.

Disclaimer: This article is generalized in nature and should not be considered personalized financial, legal, or tax advice. All information and ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.

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