I spent all last week attending an in-person exam review class on insurance, taxes, estate, education and retirement planning, social security, investments, and some economics. On the day the Fed raised rates, we were reviewing this very topic, so I thought I'd break it down in this week's blog post.
First of all, if you don’t know, the Federal Reserve is the central banking system of the U.S. It’s main goals are to:
- Maintain long-term economic growth
- Maintain price levels supported by the economy
- Maintain full employment
The way they do this is either by easing or tightening our money supply and raising or lowering interest rates.
Although inflation is usually defined as 2 quarters or six months of declining GDP (and that’s happened already), there are a few other factors, like unemployment rates going up and inflation, interest rates and spending going down.
However, that’s not what’s happening.
Instead, there’s still a modest growth in spending. The unemployment rate remains low, and inflation is still super high, at 8.3% (August 2022).
If you didn't know, inflation is the increase in prices. It’s when our grandparents or parents talk about how much a loaf of bread or going to the movies cost back in their days, compared to today.
What have you seen go up in prices lately? (Gas, food...)
While I was in the review class last week, I stayed at a hotel down in Orange County, and I ate out for all of my meals.
The class was held on the University of California at Irvine’s campus, so my lunch choices were pretty limited.
I had “fast” food, for the most part.
Did you know a Sofritas/Veggie Bowl and a drink at Chipotle is between $11.80-$14.60? (Not sure why I was charged different amounts for the exact same thing but that’s another story.)
Back when I was in college (Ha! Do I sound old or what?), a bowl of rice, beans, veggies, pico de gallo and guac would’ve cost around $6-$8, and I went to school in NYC. I mean, how do these college students do it today?
So it’s this increase of prices that led the Fed to increase the Fed Funds Rate from 3 to 3.25% last week. Their goal is to reduce inflation from 8.3% down to 2%.
They’re also planning to sell off more government and mortgage-backed securities, so it may be a good time to look into government bonds, which, as you probably already know, are generally way less volatile than equities (stocks).
So, what else can you do? Because the mind doesn't like uncertainty, I want to give you a few ways where you have control.
First, since interest rates are going up, it’s a good time to pay down high interest rate credit cards, or perhaps (if you think you can pay them down in the time allowed and you have a decent credit score), transfer balances from high interest rate credit cards to a 0% card or to a bank loan with a fixed interest rate. Credit card APR's are averaging 21.59%, and this number may continue to go up.
The good news with interest rates going up -- savings rates will also go up! So, now is a great time to shop around for high yield savings accounts. Because of the rate adjustment last week, most banks will increase their savings rates, and they may even offer a new account bonus!
(If you’re a client or a member of the Financial Freedom for Creatives Club, then you have a list from me of the highest yield accounts, so start there.)
If you have debts paid off, I would recommend that you start saving.
If we do end up in a recession, that could mean less work available, and I want you to be prepared.
Most financial planners and advisors talk about having at least 3 months saved up.
For us, my friend, that’s not enough.
If your income isn’t always the same from month to month (and if you’re in my world, it most likely isn’t), we need AT LEAST 6 months of emergency savings.
Based on your risk tolerance levels, 6 to 12 months of NECESSARY expenses saved up in an easily accessible, high yield savings or money market account (make sure it’s the kind that’s insured), will give you that much time to look for the next job, gig, client, or weather any storms that may or may not happen.
I’m always here to help support you. If you want to make sure you’re getting yourself financially set up, comment below, and I’ll send you a link to schedule a 30 minute call with me.