With the Fed’s tapering mission in full swing to stop pumping cash into the economy and goal to start hiking rates in 2015, don’t be penny wise- and a pound foolish with your purchases on credit. Watching the debt side of your balance sheet can be more important to your long-term financial independence and sustainability than watching the asset side alone. As stated in the book Millionaire Next door, “a great offense and poor defense translate into under accumulation of wealth.”
While the current low rate environment has been painful for retirees seeking income, many consumers have still not yet taken full-advantage of “locking in” new purchases or refinancing existing high rate loans or revolving credit lines- which was part of the goal of the Fed’s “easy money” program. Refinancing a high-interest rate credit card balance, home loan, equity line of credit or student loan into a new lower rate program should be a no-brainer.
With 30-year mortgage rates just above 4.3% and the ability to get a car loan near 3%, now would be the time to batter-down and buy a house or car if you are in the market (and need) to do so. With the Fed’s “dot plot” trajectory pointing to a possible rate hike by or before June of 2015, consider that it could cost you a couple thousand dollars per year more just in debt-servicing- to purchase and finance the same items a year or two from now.
Big ticket items people may consider to “lock in” today on credit could include paying for major home repair, college tuition bill, medical bill, plastic surgery, an engagement ring or even an upcoming wedding. You could also put a large unpaid IOU to the IRS on credit if needed.
This is not to say that you should buy things unwarranted or rush to get married this year for the sake of saving money for you and your honey. While we may hopefully never again experience having to pay a 20% interest rate for a home loan like folks did in the early 1980’s, don’t procrastinate. While money can’t buy you love or happiness, keeping your debt servicing payments as low as possible may lower your household stress and increase your cash flow over time.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.