As interest rates increase, everyone is searching for the magic bullet. But remember: The only bullets being thrown this week are coming from Patrick Mahomes and Jalen Hurts and the two Super Bowl quarterbacks know there is no one-size-fits-all solution.
Think about it: Both quarterbacks were considered undersized and overlooked and neither was an immediate NFL starter.
So as rates rise, think like Mahomes and Hurts as the blitz is closing in around them on Sunday: You need to think short, think long, and think smart.
That means leveraging savings accounts, CDs, and money market funds for the short term, using estate planning trusts for the long term, and thinking smarter by paying down debt.
Time to Save
According to Bankrate.com, the average savings account rate is 3.00%, with some institutions offering as much as 4%. According to Schwab, their average money market account is paying around 4.5%, and their average 36-month certificate of deposit (CD) is paying anywhere from 4.2 to 4.75%.
If the money in your emergency account isn’t earning the same yield, we should talk.
Charitable Remainder Trusts (CRTs) and Qualified Personal Residence Trusts (QPRTs) are estate planning options that are more attractive as interest rates rise. Each has twists and turns that require a complete analysis of all facts, so let’s get educated.
A CRT is an irrevocable trust that you contribute stock or other assets. It pays you or a beneficiary income for life or for up to 20 years, and then distributes the remaining assets to one or more charities.
A QPRT is a trust used to transfer a personal residence to trust beneficiaries. It lasts for a term of years, during which the grantor may continue to use the residence as his or her own. As interest rates rise, the taxable gift decreases, making a QPRT a more attractive strategy with higher interest rates.
A higher rate provides a greater charitable deduction because it assumes the money in the trust will grow more quickly, resulting in a larger charitable deduction when the income interest, based on the terms of the agreement, comes to an end.
Pay Down Debt
As inflation rises, so will the rate on loans. Now, this won’t impact a car loan with a fixed rate, but a credit card with variable rates could rise since interest rates on consumer debt tend to move in conjunction with the federal rate.
Focus on your credit cards with the highest annual percentage rate. Many cards can have an APR of 20% +, which is more than twice the rate of inflation, and much higher than the average rate you’d receive from a bank savings account.
Credit card use is soaring right now. According to TransUnion, the average credit card user is carrying a balance of $5,474, up 13% from a year earlier.
As we said at the beginning, there is no one-size-fits-all solution when it comes to money and financial planning is not a hail mary.
Now is a great time to remember that we planned for this, and your long-term strategy was designed with this environment in mind. If you’re concerned about rising rates or if anything mentioned above sparked your interest, let’s talk. Simply click reply to this email.