What a Fed Rate Increase Could Mean for You

Since the Great Recession started eight years ago, the Federal Reserve has kept its benchmark interest rate near zero as a way to strengthen the economy. However, according to the minutes from an October 2015 gathering of Fed officials, a rate increase is likely in December. A decision should be announced Dec. 16.

Any economic change brings good news and bad news. Here are a few parts of your financial life that might be affected by a rate increase:

Home sales

Rising interest rates generally put downward pressure on the demand for homes and home prices, at least in the short term. So if the Fed raises rates, you may not see very many “For Sale” signs in front yards for a while.

This might make you nervous if you’re planning to sell your home soon. After all, most people’s wealth is in their homes. But a small rate increase doesn’t necessarily mean that the housing market will plummet. If rates stay near their historic lows, many prospective buyers will realize that they still can afford a new home and will buy one, anyway.

Bonds

Interest rates and bond prices move in opposite directions. When interest rates go up, bond prices go down. If you’re thinking about selling your bonds before they mature, higher interest rates will work against you. However, if you’re holding those bonds until maturity, you can sleep well. You’ll still collect interest, though at a lower rate than you would on newer-issue bonds.

If you own shares of a bond mutual fund, a rate increase will more than likely cause those shares to temporarily drop in value. But fund managers will begin to buy higher yielding bonds, which might help soften the blow. For the future, consider this strategy used by proactive bond fund investors: Stay out of long-term bond funds, which take the biggest beating when rates rise.

Stocks

The effect of rising interest rates on stock prices is a little murkier than its effect on bonds. Stock prices generally decrease when interest rates go up, but that’s not always the case. If we’re in an economic expansion when rates rise, more often than not, stocks go up. Conversely if the Fed is raising rates to “cool down” an overheated economy, stocks tend to go down before rebounding. If you own CDs, their rates will increase immediately if the Fed raises the benchmark.

Hiring and income

By keeping rates low, the Fed hoped to encourage economic growth, which is often measured by employment numbers. If the Fed does raise rates, it would be a signal that employment is recovering, and firms are hiring.

More hiring means more income for everybody. And higher incomes tend to solve other problems, including low demand for housing. Even though a rate hike would mean that it costs more to borrow money, higher incomes help offset these costs.

Higher incomes also mean more spending. More spending means that workers keep their jobs. And the cheap prices that we’re seeing at the gas pump put even more money into consumers’ pockets that they’ll want to spend.

In the Fed’s words, it might be time for a rate increase because there’s been a “tightening of the labor market.” In plain English, that means more hiring and less firing. Ultimately, the Fed’s decision reflects growth — which means that, for you, the good news of a rate increase should hopefully outweigh the bad news.

How Owning a Dog Can Bite You in the Wallet


During the holiday season, many children pester their parents for a puppy. Maybe you’re one of those parents whose kids are trying to convince you that they’ll take care of the new pet, and that you won’t be stuck having to clean up after it or take it for walks.

You might even be starting to consider your children’s pleas. After all, is there a more endearing scene on Christmas morning than an adorable puppy, wearing a bow and peeking out of a box? You can almost hear the kids shrieking with delight.

People tend to make emotional decisions when choosing a pet (we do that with other investments, too). The reality is that the cost of owning a midsize dog throughout a reasonably long lifespan could add up to the price of a down payment on a house or even a year or two of higher education.

Paying up for your pup

In “The Cost of Owning a Dog,” veterinarians Dr. Race Foster and Dr. Marty Smith report how pricey owning a dog can be. Starting with the initial costs (which can be as high as $1,500 and include purchase price, vaccinations, toys, crates, beds, possibly training classes, and adoption fees or payments to the breeder for purebreds), they break down the costs year-to-year over a 14-year life span.

Ongoing costs, which can add up to $200 per month, include visits to the vet, food, and products and services such as grooming, training, boarding and flea control.

Here are their total estimated costs for a 50-pound dog throughout its 14-year lifetime:

  • Low estimate: $4,242
  • Medium estimate: $12,468
  • High estimate: $38,905

As your dog ages, it’s not uncommon for it to develop a hip problem, allergies or some other illness, leading to the higher estimates. Because of modern medical technology, veterinarians can now perform once unheard-of operations and procedures on suffering dogs and cats, significantly increasing both their life expectancy and their owner’s happiness. However, these latest procedures can be costly. The authors write that they routinely saw clients who spent over $2,000 on a single veterinary problem.

I should mention that the authors live in the Midwest. If you live in a more expensive city, such as New York or Los Angeles, expect the costs to be even higher. Of course, most of us won’t end up spending nearly $40,000, but some might spend even more.

>> MORE: How pet owners can prepare for financial emergencies

Pets vs. retirement savings

At these totals, it makes sense to consider whether owning a pet can actually have a significant effect on your current financial situation. Spending $5,000 for an emergency pet visit, for example, can deplete short-term savings or cause you to go into debt by putting that bill on a credit card. Paying off this debt could even affect your long-term financial goals if you can’t afford to make retirement plan contributions because of the vet bills.

One way to help keep these bills from getting out of hand would be to buy pet health insurance. This type of insurance can help alleviate the financial burden of caring for the animal members of your family. A multitude of pet insurance companies exist today, all varying in services covered, cost, customer service and claim reimbursement. Like any other insurance coverage, you’d need to compare the benefits they provide and the cost of the insurance premium, the deductibles and the copays.

Apart from the cost analysis, there is another factor that might be the single most important item on the ledger: your time. Plain and simple, dogs take a lot of it. Walking, feeding, cleaning up, training and even home repairs are part of the time commitment. If you’re not willing or able to spend a significant portion of your free time with your dog, you may want to consider getting a less-time-consuming pet instead. Or maybe consider not getting a pet at all.

Make no bones about it (I couldn’t resist): Owning a dog can add up to big investment dollars. Before putting your finances at risk, make sure that you can truly afford a dog.

Stay Diversified and Don’t Get Hurt

Recently, several clients have asked me why their account has not “made any money” this year. My answer is always the same:  “There hasn’t been the kind of money to make like we’ve made the past couple of years.” That is, unless you had the foresight twelve months ago to put all your money into an International Small Company mutual fund which has yielded about 8% year-to-date returns. Except for nominal returns in bonds, most of the other market segments have produced flat to negative returns in 2015.

Does this mean your investments are bad investments? Of course not.  It just means that it’s been a tough year for markets in general. China’s stock market plunged back in June, and in the past couple weeks, it seemed as if the markets were anticipating the Federal Reserve Bank raising its benchmark interest rate.  Energy stocks, in particular, have taken a very big hit (but cheap energy prices have been good for our pocket books). None of what I’m describing is unusual. Markets, like everything, tend to cycle.  After all, the markets have been on a pretty good run since 2009, so we were due for a flat or negative year.

We can’t predict the economy, and we for sure can’t outguess the markets.  So, how do you minimize your risk in a flat or negative year?  The best thing to do is to hold as many diversified asset classes (international, domestic, real estate, small and large companies, etc.) as possible.  And that’s precisely how your portfolio is designed–to protect you in times of uncertainty or volatility.

The discipline of having a broadly diversified portfolio helps us avoid the faulty idea that there is a trend of higher returns in last year’s best performers.  Look, stocks aren’t human.  They are inanimate and do not have a memory!  If we try to predict trends or invest all of our money into one company, chances are we’re going to get hurt.

So let’s stay disciplined and stick by your well-diversified portfolio.  Let’s focus on the long-term and not speculate or gamble with your money.  Or, worse, make decisions based on today’s headlines or Wall Street hype. Of course, if you want to discuss “tweaking” or rebalancing your portfolio, we can sit down together in the New Year.  You can reach me at:  216-292-8700 or email me at:  jeff@silawealthadvisory.com.