How to Take Advantage of the Low Interest Rates

Interest rates have been at record lows for a while. Actually, they are near zero and have nowhere to go but up. For illustrative purposes, a graph of the 30 year fixed mortgage rate shows that we have gone a long way since the 1980s when the rate was upwards of 17.5%. (Source: Yahoo Finance)

The Federal Reserve has maintained the interest rates low in an effort to stimulate the economy by discouraging saving and encouraging borrowing Chairman Ben Bernanke said last month that while the U.S. economy has improved, it still needs support from the Fed to help lower unemployment. Bernanke says that short-term interest rates will stay near zero until unemployment falls to 6.5 percent. Forecasters expect that won’t happen sooner than 2015. (Source: NPR News)

Do you feel like you should be doing something to take advantage of the interest rates at record low? Probably.

Whether you want to save, spend or invest, consider your options and choose the strategies that best suit your particular financial circumstances. Here are five tips for low-interest-rate periods:

1. Consolidate debt. With interest rates at historic lows, it makes sense to consolidate debt into one low-interest loan. For example, if you have outstanding balances on several credit cards, consider transferring those balances to one credit card with the lowest interest rate. If you qualify, it may be a good time to apply for a home equity line of credit to consolidate debt or make a home improvement.
2. Shop around for credit cards with the best interest rates. You may be able to get one with better terms than the one you are currently using. Or, ask your credit card issuer to lower your interest rate to make it more competitive.
3. Make large purchases now. If you’ve been thinking of making a major purchase like a house or a car, today’s low-interest rates make it a good time to finance big-ticket items. However, make sure you have a good credit record and can pay off the loan before applying.
4. Order a free copy of your credit report. Review the report carefully to verify its accuracy and dispute any errors. Errors in your credit report may affect your credit score, and higher credit scores can mean lower interest rates. If your score is lower than you’d like, pay down your balances and pay bills on time to raise your score. Read more about What to do if you are a victim of identity theft.
5. Keep saving. Just because standard savings accounts aren’t paying a lot of interest now doesn’t mean you should stop saving for your future. Your savings will still accrue, you’ll be less likely to spend it and you know it will be safe. If you can afford to lock up your money for a while, longer-term Certificates of Deposit (CDs) typically pay the highest interest rates. Specifically, Market Linked CDs are an extremely effective and popular solution as they are the only financial product that combines the guaranteed return of your principal and the protection of FDIC Insurance with the potential to earn reasonable rates of return.

In conclusion, although interest rates are at historic lows, it is important to ensure that whatever your strategy is, it makes sense in your particular situation. It’s probably not a great idea to buy an overpriced home now just because mortgage rates are low. Neither is it a good idea to acquire more debt just because it is cheaper to do so.

In any economic environment, the strategy that will ultimately bring you closer to financial freedom is one that focuses on debt elimination and creating tax-free income.

Til Debt Do Us Part

We have all heard the statistics – 50% of marriages in the US end in divorce. It’s a shocking and a very discouraging statistic and one that has not changed much in the past three decades, according to recent data from the National Survey of Family Growth (NSFG). Marriage counselors and divorce attorneys will confirm that most couples list financial issues as a significant cause for their failing marriage. Especially in difficult economic times as the present, arguments over money can really bring most couples to at least alienation, if not worse. And without a doubt, one of the worst offenders from the money troubles category is debt. It is stressful and overwhelming.

But with the right approach, it can be managed.

Forget the blame. It does not matter much whether you are working towards repaying debt that you have accumulated together as a married couple or debt that one of you brought into the marriage. Concentrating on the fact that one of you brought more debt to the marriage is not productive and will not help repay those debts faster. Pointing the finger will not get you far either. Instead of thinking “Your debts will ruin us. You should really repay those debts as fast as possible!” say :” Let’s see what we can do to repay the debts as fast as possible so we can concentrate on our long term financial goals”. Remember you are now a team. Your spouse is not the enemy, debt is!

Create your family’s financial plan together. No goal is successful without a plan. This is particularly true when your goal is to be financially free and repay your debts. To create a plan which will be followed by both partners, it needs to include input from both of you. Your family’s financial plan needs to be realistic and something you could follow with your partner long term. Remember that your family’s financial plan is not something set in stone and is an ever evolving plan that helps you get on the right track.

Choose the right person to manage the finances. Although in some families both partners are very financially savvy and frugal, in most couples one partner is naturally more inclined to be a saver and planner than the other. Sometimes opposites attract and it is not uncommon for two individuals who are on the very end of the financial management spectrum to form a successful union. If one of you is naturally more inclined to being a better money manager, it is an easy choice to delegate managing the finances to that person.

Practice common sense debt management. It is really quite simple – live within your means (below your means is even better), save, create a financial plan and follow it. For more detailed discussion on common sense debt management, see my previous post Do’s and Don’ts When Getting Out of Debt.

Be transparent and communicate. It is not always easy to try and explain to your partner why it is important for you to buy a certain thing. It is very normal to have different priorities and disagree on discretional spending but one of the worst things a couple can do is lie to each other about spending and acquiring more debt. If you feel like you need to hide your purchases and are unable to explain them to your partner, then maybe that purchase is a case of emotional spending versus something you really need. When tackling debt, you and your spouse, as a family should be a united front and keep the lines of communication open. Being transparent will give you an opportunity to identify if there is a need for your financial plan to be adjusted.

Being debt free is much more than just a goal. It’s a way of life that can make a ton of difference in your family dynamics.

So, don’t be a statistic! Don’t let debt ruin your marriage!