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How to Prepare Your Finances for Rising Interest Rates

How to Prepare Your Finances for Rising Interest Rates

May 12, 2022

The first half of 2022 has faced a significant amount of volatility in the stock market. 40-year high inflation rates, the Russian attack on Ukraine and post-pandemic adjustments caused market downturns and uncertainty in the economy. 

During periods of high inflation, the Federal Reserve hikes interest rates, which makes loans more expensive to help cool down and stabilize the economy. They do this by adjusting the range of the federal funds rate, a.k.a. the interest rate banks charge each other for overnight loans to meet liquidity requirements. As the cost of borrowing between banks rises, so do loan costs for businesses and individuals. This causes more saving and less borrowing across the economy, reducing economic activity and inflation, as individuals are encouraged to save more and spend less.

We have seen the impact of rising interest rates already, with mortgages being a great example. In April 2021, the 30-year mortgage rate averaged 3.14%; now, we are seeing rates over 5%, which increases new buyers’ monthly payments and reduces their overall buying power. All lines of credit, including car, business and equipment loans get more expensive as well.

Generally, higher interest rates have a negative impact on the stock market, as the cost of doing business increases for companies and fear is shared amongst investors, making individuals more likely to sell their stocks. It is difficult to predict the exact effect that interest rate hikes will have on the market because asset classes are impacted differently. For example, financial stocks tend to do well, as higher rates mean higher margins, while technology stocks often struggle with high borrowing costs. Keep in mind, the stock market prices in rate hikes well ahead of general investors, meaning we can’t time the market. This is why is it so important to have a diversified investment portfolio with a long-term strategy.   

Fortunately, dentists can take preventive steps to ensure that rising inflation does not affect their overall productivity. A few steps to consider to help minimize the effects of rising inflation is to raise your fees, renegotiate your loan rates, negotiate discounts with your dental supply and dental lab representatives and even ask your CPA to review your profit and loss statement compared to this time last year in order to make recommendations at this halfway mark in the year. 

Here are four action items to consider in today’s rising interest rate environment: 

Monitor High-Yield Savings Accounts and CDs

As interest rates rise, so do the yields that savings accounts and CDs pay. Keep an eye on your APY (annual percentage yield). The more the Fed raises rates, the more your APY will increase, and you should shop around to make sure you are receiving a strong interest rate on your savings. Higher interest rates can raise costs for borrowers, but it can also mean higher yields for savers.

Review Your Investments and Strategy

Bonds are very sensitive to interest rate changes because as yields increase, bond prices invertedly decrease, as new bonds become available with higher interest payments. If you are invested in bonds, review your holdings to determine if they still fit your risk tolerance and consider short-term over long-term bonds.

If this year’s market downturn caused you significant stress and worry, it’s time to revisit your investment strategy. Don’t panic sell; instead, review your goals and timeframe to asses if your investments match. Fully fund your emergency fund, so you do not have to pull from your investments during downturns. When markets are down, it is a great time to buy stocks “on sale.”

Inspect Your Debt

More than 80% of dental school students in the class of 2020 took on dental school loans, according to the ADEA. Variable rate and new fixed-rate loans will rise, so review your interest rate type on all debt to see if you will be impacted. Try to pay down any variable rate loans. If you are considering taking out a loan, sooner may be better than later. 

Check-In on Your Employees

A recent survey from John Hancock found that 72% of workers admitting to worrying about their personal finances at work and one in three doing that more than once a week. Offering financial wellness programs and encouraging employees to participate in employer benefits, such as a retirement plan, can help reduce employee stress and improve work performance. Fostering a comfortable, open and encouraging workplace shows you care about your employees and helps your practice in the long-run.  

In uncertain economic environments, as we have seen this year, it is important to focus on what you can control – your savings rate, practice and priorities. Dentists can make sure that the effect of rising inflation is minimized in their practices, and steps taken at this point of the year can go a long way in ensuring practice success. Don’t make long term-decisions based on short-term events. Most importantly, tune out the noise. Spend time with loved ones, focus on what you enjoy doing and stop obsessively checking your portfolio.