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Tips on How To Handle Interest-Rate Hikes and High Inflation Part 1

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Jacqui Kearns Chief Brand, Strategy, and Wellbeing Officer AffinityFCU
By: Jacqui Kearns
Chief Brand, Strategy, and Wellbeing Officer

Date: April 21, 2022 

In March, the U.S. Federal Reserve (Fed) raised1 interest rates by 0.25% and announced plans to increase rates six more times in 2022 alone. Monetary policy impacts the lives of Americans in many ways and can cause significant stress and anxiety. Affinity Federal Credit Union would like to take some of that stress off the shoulders of our community members. In this two-part blog series, our first post will provide strategies for savers dealing with interest-rate hikes and high inflation, while the second will offer advice to borrowers in the same circumstances.

What are interest rates and how do they impact you?

An interest rate is the percentage of principal charged to the borrower on a loan provided by a credit union or bank. This rate2 has a ripple effect across all financial products that earn or pay interest, and on the economy as a whole. The Fed controls interest rates and adjusts them as the economic environment changes, in an effort to achieve the ideal economy. As the cost of borrowing goes up or down for credit unions and banks, the increase or decrease is passed along to consumers, many of whom may struggle to afford higher rates.

The direction of interest rates is a reflection of how the economy is performing. If rates are rising, it typically means the economy is doing well and the Fed needs to slow the pace of economic activity to prevent overheating (inflation). If rates are falling, it usually means the economy needs a boost. Now that we're emerging from the coronavirus pandemic, consumers are looking to spend more. This demand for goods and services is positive in some ways, but is also contributing to empty grocery store shelves, higher gas prices and rising inflation.

If you're a saver and looking to maximize your returns, a three-account structure works best:

  • Checking account: Keep your day-to-day cash in your checking account. When choosing a checking account, focus on features — no/low fees, no/low balance requirements, no ATM charges, foreign ATM fee rebates and perks like reward points or loan discounts. Affinity offers checking accounts3 that include these benefits. The pros of a full-featured checking account will likely outweigh any interest you might earn on checking balances — especially if you link checking to a liquid savings account.
  • Savings account: Cash balances above what you need to pay bills or have quick access should be kept in a savings account where you can earn interest and transfer the money to/from checking as you need. The number of transfers and withdrawals (or combinations of them) from savings accounts is limited by federal banking regulations — typically to six per month. As with your checking account, you should shop around for savings accounts that offer the best features. Affinity4 is a good place to start!
  • Certificate accounts: Cash balances you don't expect to need for a while should be kept in certificate accounts, which pay higher rates. Keep in mind that these accounts are subject to interest forfeitures if you withdraw money before the certificate maturity date. Choose the term that makes sense for you. You might even consider “laddering” your CDs by opening multiple certificate accounts of varying maturities, based on when you'll need the cash.

In the next installment of this Affinity blog series, we'll provide targeted advice for borrowers amid the current challenging economic environment. Keep an eye out for part 2!

This information is for informational purposes only and is intended to provide general guidance and does not constitute legal, tax, or financial advice. Each person's circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments.

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