The Federal Reserve has pushed short-term interest rates close to zero in a move to stimulate the economy and get the recovery back on track. Now the Fed says it intends to keep rates low until mid-2013. Will low rates mean boon or bust for your finances? And how can you survive and even prosper in this environment?
For savers, including many retirees, low rates are like a slow and agonizing form of torture. Savings and money market accounts earn virtually nothing, CDs return 1%, and locking up your money for ten years in a safe, government bond barely pays 2% per year, and that’s before taxes and inflation take their bite.
How to survive and prosper: Don’t fight the Fed. If earning income is your goal, reduce cash, move away from CDs and government bonds, and search out higher rate corporate bonds, preferred stock, foreign bonds and even high dividend stocks. There are plenty of good income opportunities out there if you’re willing to think outside the box.
For others, low rates are a bonanza, letting them save thousands of dollars locking in rock bottom loan rates on mortgages, cars, and other purchases. Holders of adjustable rate mortgages are seeing payments go down, not up. Corporations and even the U.S. Government benefit by obtaining low cost financing.
How to survive and prosper: If you need to borrow, and have the creditworthiness to do so, now is an incredible time to lock in ultra-low rates. Look into refinancing your house, car or other debt, lowering rates and shortening the length of the loan to pay off debt faster.