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Financial Planning for Fall 2022

Financial Planning for Fall 2022

September 19, 2022
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How to prepare your financial plan for rising interest rates. 

 

In the last year the mainstreet economy has come roaring back. Along with travel and sectors of the economy impacted by COVID.  Consumers are starting to dip into large amounts of COVID related savings.  (Over $2.4 trillion) and reducing their savings rate.  From an average annualized rate of around 7.2% per year the last 10 years to 5.0% in June of 2022.  

 

Part of this drop can be explained with consumers making up for lost time and opportunity.  From delayed life events such as weddings to travel.  The other factor impacting the savings rate is higher inflation. Particularly in energy and food.  According to the US Bureau of Labor Statistics year over year inflation on food was 11.4%, energy 23.8%.

 

The primary effort to address inflation is underway at the Federal Reserve.  This year the Fed has rapidly raised short term interest rates in an effort to slow down economic growth, slow down lending and reduce inflation.  The result of these efforts can be seen in the bond market and products tied to the bond market. 

 

Examples include:

 

1) Higher mortgage rates.  30 year mortgage interest rates averaged around 3% a year ago. Today, the average 30 year mortgage rate is around 6%. 

 

2) High yield savings accounts.  While they cannot keep up with inflation today. High yield savings accounts are once again paying over 2% in interest per year vs. 0.50%.  

 

3) Investment grade bond prices are having one of their worst years in over a decade. Investment grade bonds are down over 15.07% year to date. Yields are up over 2.5%.

 

4) Home prices in hot real estate markets are starting to come down, higher interest rates are reducing the borrowing capacity of home buyers.  (Example Seattle, and San Francisco are down over 7% YTD.  Some markets are seeing homes sit on the market longer, along with increases in price cuts.) 

 

What can you do to prepare for rising interest rates?

 

1) Review and update your planned spending / budget.  Think about your planned spending over the next 1-3 years.  Think about how you can put your finances in a position to reduce or eliminate your need to borrow money. 

 

Higher interest rates mean, future financing costs will be higher.  If your financial plan depends on debt or you have a major purchase you need to finance, it could get more expensive. 

 

Examples include: buying a new car, higher education cost, completing a home remodel, planned / unplanned repair of major system in your house (AC/HVAC, plumbing, appliances, roof) or moving / buying a new house,

 

2) Recency Bias is going to get more expensive.  I know what you might be thinking.  Your last 5 major purchases you were able to complete with cheap debt, perhaps 0% interest.  Looking forward your financial plan will assume higher risk if you think such favorable terms will be found indefinitely.  Debt cycles are complicated, and being humble to the reality that rates could go higher and stay higher for much longer than our recent experience is a wise move. 

 

The chart below provides a great visual on where interest rates have been the last 5+ decades.  In short we have been on a 40 year wave of declining rates.    

 

3) What if future rates are not higher?  If we move forward with the expectation rates will be higher and we are wrong, it just gives us more options and financial flexible when our major expense(s) occur.

 

Want to know more about rising interest rates specific to your financial situation? Book a meeting today. 

 

Get Ready for Open Enrollment 

 

Are you ready for open enrollment? Are you ready to review your health, life, disability and retirement benefits?  Let's get a meeting scheduled in October or November to review them. Send over as much as you can via secure email or upload to the Shared Folder in your eMoney vault. We love reviewing employee benefits. Time is limited so be sure to get on our calendar ASAP. 

 

Book a meeting to review your employee benefits this fall 

 

At Sterling Edge Financial we take open enrollment very seriously. 

 

The employee benefit choices you made a couple of years ago, could be woefully inefficient for your financial plan today.  It is common in our review process to find decision points that have major financial consequences.  Our process seeks to deliver the following:

 

1) Enhanced clarity and understanding of what your benefits provide.  

2) An understanding of which benefits provide the most value for you and your financial plan today and over the next year.    

3) How to manage and select benefits when you have several options at your employer or between your employer and your spouse's employer.  

4) Opportunities to leverage your benefit selection to capture additional tax deductions, credits and long term benefit for your financial plan.

 

Fear, Falling CEO Confident - FedEx CEO 

 

Heading into fall 2022 there are more negative headlines, financial concerns and pressures.  There are a lot headwinds continuing to challenge the equity markets.

  • As of writing this the Federal Reserve is expected to raise interest rates another 0.75%.  
  • Current rate of a 30 year mortgage is over 6%
  • The CEO of FedEx believes we are heading into a world wide recession. The CEO went on to say in an interview on CNBC transportation is seeing a significant slow down across Asia and even in the United States. 
  • China's economic growth is stalling, projected to grow at its lowest rate in 4 decades. With continued COVID challenges and youth unemployment over 20%.
  • China's real estate market is stalled, and may require substantial and ongoing support from the state to stabilize or restore consumer confidence.
  • Geopolitical risk and global trade continue to deal with fallout from the war in Ukraine and enhanced Chinese aggression and posturing in the South China Sea. 
  • Google and Apple have both announced they will start to shift manufacturing away from China to India.  

What about the positive

  • Focusing on the long term, current 2023 & 2024 earning estimates for the S&P 500 are favorable. With consensus analyst estimates for S&P 500 earnings over 25% higher in 2024 vs today.   

Fear, Risk and Uncertainty

 

If you have fears, concerns or questions heading into fall 2022 or the start of 2023, please schedule time for a review.

 

Confidence in Cash Flow Based Financial Planning 

 

Sterling Edge Financial provides current and ongoing financial advice by way of Cash Flow Based FInancial Planning. Our financial planning recommendations, strategies and solutions are provided on an individual basis to our clients specific opportunities, constrains, challenges, personal values, financial behavior, financial capacity and needs.  

 

Our mission is to empower our clients to make more informed financial decisions.  We know our clients have hundreds of financial questions, concerns and ideas that warrant detailed discussion, clarification, examination, discovery and evaluation before a worthy and valuable recommendation or strategy can be considered or proposed. 

 

If you are not a client of Sterling Edge Financial and would like to learn more, schedule an initial consultation or complete a Financial Wellness Survey today.

Public Service Loan Forgiveness Deadline is October 31st. 

If you need help or have questions, please attend our upcoming webinar or schedule a meeting today.