5 Taxpayer Tips to Budget for Interest Rates
February 11, 2019 (Investorideas.com Newswire) The Federal Reserve sets interest rates according to the strength of the economy. These rates impact the interest you'll pay on your mortgage, personal loans, credit card, IRS tax debt, and much more. With two interest rate increases expected in 2019 and another predicted for 2020, budgeting for the changes ahead is crucial. Implement the following money management strategies to ensure you're not pinching pennies when interest rates inevitably rise.
Educate Yourself About Changes Ahead
Interest rate rises are rarely surprising. Finance experts typically predict when rises will take effect and how much they'll rise by long before they're enacted. Make reading finance magazines and blogs part of your regular routine to stay abreast of the economic climate and how you can expect it to impact interest rates. When you know interest rises are ahead, you can formulate the right finance plan for dealing with them.
Make a Budget and Revise It
Making a realistic budget and sticking to it is always the best way to avoid overspending. Creating your budget is as simple as listing your income and your expenses. Your expenses should never exceed your income. If they do, you can't afford your lifestyle. Identify areas where you can trim your expenses in order to maintain good financial health.
When you hear an interest rise is imminent, revise your budget. Alter your mortgage and loan repayment amounts in line with the expected hikes and see whether you can afford the changes. If you can't, make adjustments early. Cutting back is always difficult. Reducing your expenses before you need to will make it feel like second nature once the interest rate rises take effect.
Focus on Clearing Debts
Interest rate rises impact debts. The smaller your debt, the less interest rates will affect you. Prioritize clearing your debts, starting with high-interest debts from credit cards, tax debts, and personal loans first. Once you eliminate credit card debt, try to only spend as much as you can comfortably repay during the interest-free period. Some debts, like mortgages, take more time to clear. However, making extra payments or paying more than the minimum balance can shave years off these large debts.
Consider Fixing Your Mortgage
Variable mortgages are subject to interest rate changes. Fixed mortgages charge a set interest rate, no matter what decisions the Federal Reserve makes. The fixed interest rate is typically higher than the variable rate at any given time, but if you lock in a low fixed rate you can be ahead when interest rates rise. Budgeting is also easier when you know exactly what your mortgage repayments will be.
Consider predicted rate rises to decide whether to fix a new mortgage or switch a variable mortgage to a fixed one. Some penalties may apply for switching, and these should also be factored in.
Build Up Your Savings
More than three in five Americans don't have enough savings to cover a $1000 emergency. Generating savings before interest rates rise ensures you have enough money to cover increased payments. Experts recommend households have enough savings for between three and six months' worth of expenses.
Just like death and taxes, interest rate rises are inevitable. Budgeting for them will help you manage your money better when the Federal Reserve raises interest rates.
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