By summer of last year interest rates had fallen to a 45-year low, sparking one of the greatest boons in real estate in recent history. In June 2004, the Federal Reserve, led by Chairman Alan Greenspan, reversed this trend by raising interest rates for the first time in several years. Since then, the fed has raised interest rates 6 times and is expected to raise rates again. In fact, the consensus of Wall Street analysts is that the fed will continue to raise rates throughout this year and next. If this trend proves correct, how will your pocketbook be affected and what are the smart moves you should make now?
The raising of interest rates by the fed should have the desired effect of slowing down our economy. In fact, there are already signs this slowdown is happening. The slowdown of the economy, in turn, reduces expectations for stock market returns, as corporations must pay more to finance operations and growth. If stocks are likely to underperform their historical expectations, this might be a good time to turn your attention to your current debt load. The following are a few things you need to consider nowadays:
â€¢ Mortgage rates. As I write this, you can get a 30-year mortgage for about 5.5%. If you own a home with a mortgage, review your rate. If it exceeds 6.5%, consider refinancing. If you have an adjustable rate mortgage, you need to do some homework and figure out if this is a good time to switch to a fixed rate loan. If you are renting, this may be your last opportunity to buy a home with low interest rate financing.
â€¢ Equity line of credit. Many people have borrowed money on their home with an equity line of credit, using the money to finance everything from home improvements, auto purchases, and consumer loan consolidation. But as interest rates continue to rise this year and next, the interest rates on these loans will also rise. Consider using extra cash to reduce your equity credit line.
â€¢ Credit cards. The average interest rate on credit card debt is 13.5%. In addition, most credit card issuers retain the right to raise rates simply by giving you notice. As rates rise, so do interest rates on your credit cards. Therefore, one of your first priorities should be to reduce your credit card debt.
â€¢ Consumer loans. Review consumer loans (eg, your auto loan) to determine how much interest you are paying and whether the company has the right to raise the interest rates. Some will be fixed, others will not. Focus your attention on paying off the ones with the highest rates and the ones that allow the company to raise interest rates.
In a year when we expect the stock market to deliver, at best, mid-to-high single digit returns, paying off debt may be your best investment for 2005. Be sure to prioritize your debts so that you first pay off debts with the highest, nondeductible interest rates.
is the founder of the Welch
Group, LLC, which specializes in
providing fee-only wealth management
services to affluent retirees
and health care professionals
throughout the United States. He is the
coauthor of J.K. Lasser's New Rules for Estate
and Tax Planning (John Wiley & Sons, Inc;
2001). He welcomes questions or comments at
800-709-7100 or visit www.welchgroup.com.
This article was reprinted with permission from
the Birmingham Post Herald.
Stewart H. Welch III, CFPÂ®, AEP