This Week In Your Wallet: What A Rate Hike Means For You
And away we go! When Janet Yellen and the Federal Reserve’s Open Market Committee gather on March 14 and 15 (yes, next week) you can expect interest rates to rise by a quarter of a percentage point. This will likely be the first of three interest rate hikes this year.
Why now after so much hurry up and wait? The New York Times notes we’re riding a “wave of economic optimism that started with the election of President Trump.” Three rate increases this year, Yellen notes, will bring the rate close to “neutral.” In other words, the Fed won’t be aiming to encourage people to borrow anymore — for the first time in over eight years. This means consumers with good credit scores will likely still have access to loans and lower interest rates, but those with a rockier history should plan on shelling out more in interest payments (and working on their credit). If this is calling out to you, you’ll find our advice for how to improve your credit score here.
Home Sweet Loan
If you — like so many of us — were fooled into thinking spring had sprung (it was 70 degrees in my neighborhood last week before dipping back down to 13), you know the home buying/selling season is right around the corner. If you’re on the fence about buying a home, you’ll want to perform a self check-in to make sure you’re financially ready. MONEY has questions to ask yourself, including the state of your credit score. You can check it at SavvyMoney.com, and while you’re at it, check all three of your credit reports for any errors at AnnualCreditReport.com. (Both of these are free.) Afterward, to get an accurate read on your financial picture, work on calculating the cost of the loan and your debts as compared to your income and assets. You want the amount of home-related debt you take on to be less than 28 percent of your income, and your total debt to be less than 36 percent. Finally, if that checks out, get pre-approved for a loan — this will help show you’re a serious buyer in a competitive market. Shop around — at your bank, but also others — to be sure you’re getting the best mortgage deal.
Trick Yourself Into Thinking Long-Term
Have you ever gotten a raise, tax refund or windfall that you ended up, well, blowing instead of putting it towards your financial future? I’m pretty sure if I asked this in a crowded room, I’d see a lot of hands in the air (including my own). Don’t blame yourself. Humans naturally gravitate toward short-term thinking rather than long-term. But you can use these behavioral economics tricks to help you do the latter. First, Forbes notes, once you find out you’ll be coming into some cash, decide in advance how you’ll use the money. You’re able to think more clearly ahead of time, while in the moment, you could experience “present bias” that might cause you to pick up that pair of shoes. Second, set up automatic transfers so the money actually gets into the long-term accounts you want to fund. Money Rule #11: If you can’t see it, and you can’t touch it, you won’t spend it.
Spend, Save, Give
I’d be hard-pressed to find a parent who doesn’t feel at least a little uncomfortable discussing money with their kids from time to time. But here’s the thing: Like making perfect pancakes, it gets easier the more you do it. It’s important to start early — studies show a kid’s money habits are often formed by age seven. The good news is there’s a vehicle that will teach a kid money management better than a single conversation ever could, and that’s allowance. CNN Money has tips for how to get started: Begin when the child enters first grade, increase the amount with age and give your child responsibility for budgeting the money to buy the things they want. Oh, and this is key, don’t bail them out when they blow it (which they will). If you do, you’ll be bailing them out for years.
Have a great week,
Jean
