Rising Interest Rates
Q: I’ve been reading in the paper that the Fed is raising interest rates. Is this going to have any affect on my personal finances?
A: The Federal Reserve pushed interest rates up a quarter-point to 4.25% last week, which is the highest it has been in over 4 years. As a result the prime lending rate has risen to 7.25%. And the Fed is giving signals that it is not quite yet done raising rates
It will affect everyone in different ways, depending on the state of your personal finances, but there are a few pitfalls to watch out for in these rate increases.
The biggest impact for most individuals will probably happen in the area of mortgages. Adjustable mortgages will certainly reset at higher rates. If you do have an adjustable mortgage, make sure that you evaluate your payments and how high they will be going up. And with the rates going up, don’t expect to refinance any time soon.
Credit cards will certainly be impacted by the rate changes as well. Look for rates to increase. The best course of action is to take your excess cash flow and use it to pay off credit card debt. There aren’t too many investments that will return 20%, which is what you generally lose when you carry balances on your cards. So your excess cash is best used paying off those balances.
If you don’t have the cash to pay off your cards, then it is advisable to consolidate your debt and finance it through lower rate debt, such as second mortgages or home equity loans, while the rates are still reasonable. You will still have to monitor these loans if they are not fixed since in this increasing rate environment adjustable mortgage rates will increase.
On the positive side, for those of you who have savings accounts and money market accounts, you can expect rates on these accounts to increase. This increase will allow savers to earn more money on their cash balances.
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Preventing Identity Theft
Q: My best friend recently had his identity stolen. The thieves spent over $5,000 on his credit card before he realized what happened. What can I do to prevent identity theft?
A: In recent years, identity theft has ballooned into a serious problem for consumers and financial institutions. The resulting mess created on a persons name and credit record by identity thieves can take years to clean up. Many victims have lost job opportunities, have been refused loans, or have even been arrested for crimes they did not commit.
Here are a few measures you can take to protect yourself from identity thieves.
1. Check your credit report annually. You can order a copy of your credit report from Equifax for $9. Check it to see if there is any unauthorized activity occuring.
2. Place passwords on your credit card, bank, and phone accounts. Use a password which involves information which cannot be easily ascertained by thieves (ie mothers maiden name).
3. Don’t give out personal information on phone or internet to unsolicited callers. Identity thieves will call posing as government workers or bank employees to obtain your personal information. Be especially wary about providing your social security number for purposes where it is not necessary.
4. Don’t store financial information on your computer. Update your virus protection regularly, and use a firewall to protect your computer from hackers.
5. Secure your mail and trash from theft and make sure to shred receipts, copies of credit applications or offers, insurance forms, bills, checks and bank statements, and expired charge cards.
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Investments
Q: I’ve recently been considering investing some of my savings. What options are available to me?
Investing is the time honored method of achieving financial independance. Every personal finance plan should account for some investments. Good investing will result in greater assests and greater financial security. Starting investments will require some sort of long term plan based on your age and place in life, your personal goals, and how much risk you are able to undertake. Once you have hammered out these issues, then you can begin planning your investment strategy.
Essentially, investment strategies can be broken down into three different categories: (1) Conservative: invests only in cash, bonds, and fixed income investments; (2) Moderate: invests a portion of assets into growth investments, but also into conservative investments; and (3) Speculative: Invests most assets into investments with high risk.
There are numerous types of investments to be aware of, which are broken down as follows:
Stocks: Investment of shares of ownership in a company.
Bonds: A fixed income security. Bonds are usually issued for a fixed term and return the principal with interest.
Mutual Funds: A collective investment which pools money from many different investors, and invests the money into a portfolio of stocks, bonds, short-term money market instruments, and other securities.
Futures: A contract which give the holder the option (or right) and obligation to buy an underlying instrument at a predetermined time in the future at a predetermined price.
Options: A contract which gives the holder the option to buy a security in a predetermined time for a predetermined price.
So once you have determined your financial goals, you must structure an investment porfolio based upon your needs. It is a good idea to work with a financial advisor to create an investment strategy and to help you monitor your returns.
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