SAN ANTONIO – For the third time this year, the Federal Reserve has raised interest rates.
Fed policymakers raised the federal funds rate a quarter percentage point from 2 percent to 2.25 percent. The rate helps determine rates for mortgages, credit cards and other consumer borrowing.
Looking ahead to 2019, Fed officials expect at least three rate hikes will be necessary, and one more in 2020.
But USAA Advice Director Matthew Angel said that when looking at major financial decisions, don’t let changing rates be the primary factor that drive you to a decision you may regret later.
"You want to make sure you have a solid emergency cushion of savings and take into account how stable your financial situation is before making any major purchases," he said.
So how could these ongoing rate hikes affect you?
A bump in the Fed interest rate shouldn't change the rate on your existing fixed interest car loan, Angel said. For new loans, rates may start to trend up over time. While everyone wants to get a low rate on the car loan, focus on the overall affordability of the car based on your budget. Zero percent or other low rates can be dazzling, but car prices vary dramatically and can significantly impact your bottom line. Everyone’s situation is different, but shoot for 15 percent or less of your take-home pay as a good starting point for car expenses, including payment, insurance, and maintenance costs.
Consider it may be time to make a long-term borrowing decision, like buying a home, Angel said. Today’s affordable home can change tomorrow, and even small increases in interest rates can really impact the monthly payment for a home. Consider if you bought a $200,000 home, putting 20 percent down payment on a 30-year mortgage. Going from a 4 percent rate to 5 percent rate on the mortgage could increase your monthly principal and interest a little under $100 monthly. That can add up to a very large sum over the life of the loan.
Consider reducing debts now, Angel said. Variable interest rates on credit cards or other types of consumer loans may not go up overnight, but will tend to trend upwards over time. Paying them down now can save you from future pain later on. Fixed rates on most existing student loans typically won’t change with Fed interest changes, although some student debt rates can and do change over time.
Rates that you earn on your personal savings account will likely not go up right away, and may take some time for you to see increased earnings, Angel said.
Finally, Angel recommends getting a financial checkup, having a financial plan and reviewing it annually with a qualified professional.
"With changing interest rates there may be other things you can do to impact your long term plan, and if it’s been a while since you had a checkup, let this be a good motivator to give your plan a review," he said.