The US Federal Reserve holds eight meetings through the year, and as shifts in the economy impact your money, now’s the time for you to pay attention. Any fluctuation in the US Fed rate, similar to India’s repo rate, has a bearing on how money moves within the country. That being said, experts are of the opinion that unless the Federal Reserve increases rates over 2.5%, the Indian economy has the wherewithal to absorb the increase and continue functioning as per usual.
Nonetheless, note that an increase in the rates does affect India, as markets are linked to one another in more ways than one, and also because the rupee is pegged against the dollar. An increase in rates will create an inflationary environment, and also nudge the RBI towards increasing the repo rate.
While this is a broader overview of the impact on the Indian economy, here are five things you should prepare yourself for should the US Fed increase rates.
Repay Existing Debt As Soon As Possible
An increase in the federal rate increases the repo rate, which will in turn increase the rate of inflation, and the cost associated with repaying debt fairly quickly. So it is in your best interests to clear any debt that you hold, by way of loans, credit cards, and lines of credits available on home equity at the earliest, to avoid a spike in charges affecting your finances.
Taking New Loan? Be Prepared For Higher Interest Rate
As the cost of availing debt is likely to rise quickly in response to a possible hike in the federal rates, be mentally and financially prepared for a hike in interest rates in the near future, which may mean higher marginally EMIs and lower savings.
Give Saving Your Undivided Attention
Given the fact that the cost of borrowing funds is going to increase, shift your attention to building your savings while reducing your dependency on instruments like credit cards for your everyday expenses. Besides, while borrowing money will become expensive, the rate of interest offered on savings will rise slowly and steadily too, making it a silver lining worth focusing on.
Keep A Close Eye On Your Credit Score
With higher interest rates, there’s greater strain on your income, and therefore there’s a higher chance of defaulting on your existing debts and financial commitments. Always have an eye trained on your credit score. Look into ways through which you can clear your debt, and also do so on time. For instance, if you have a loan that seems expensive to repay, approach the lender for an extension on your tenor. This will help keep your credit score intact while tackling the possible issue of excessive outstanding dues and additional expenses owing to defaulting on payments.
Address Your Investments With Care
If the Federal Reserve increases rates, you may be tempted to make changes to your investment portfolio immediately. While agility is of essence when tackling your outstanding debts, when it comes to long-term investments, the approach should be quite the opposite. Long-term investments, especially in market instruments, will recover in due course of time. Besides, if you have a diversified portfolio, there isn’t any reason for you to panic and commit to knee-jerk decisions. Typically, you will have the backing to take a shift in your stride. Especially when you invest in stocks, a possible increase in the Fed rates is factored into your stock price, at least to a certain extent, making it extremely manageable.
That being said if you’re invested for a short term, or need money in the next 3-5 years, shift from risky, volatile instruments to safer ones. This will reduce your risk and ensure your immediate needs are taken care of. If the market plummets, you can still turn it into an advantageous situation by buying when prices are low, and selling when they rise. However, do so slowly and don’t part with all your money at once.
To generate inflation-beating returns consider investing in commodities that benefit from an inflationary environment such as precious metals (gold and silver). Invest in them directly, through gold bullions for example, or indirectly, such as in gold mining funds.
These are the five areas that you may need to focus on in the coming few weeks. But before you make any decision pertaining to your finances, be sure to seek the advice of an expert and research all your options thoroughly. A second opinion will help you do what’s best for your money.
The writer is CEO, BankBazaar.com