Interest rates are unpredictable. They can throw your financial plans into disarray and cause you a lot of stress. To protect yourself against this unpredictability, it is important to pay down as much of your debt as possible. A lower debt is easier to pay, even when interest rates are high. Let us look at a few ways you can prepare for a rise in interest rates.
1. Cut Your Expenses and Use the Savings to Pay down Your Debt
To cut your expenses, you need to first track where your money is going to. What are you spending most of your money on? This involves tracking all your expenses for a couple of months. This exercise is important since you cannot know where to cut if you do not know what you are spending money on. The next step after tracking is to trim or cut every non-core expense. With the accruing savings, start by paying down the most expensive debt, the one with the highest interest.
2. Consolidate High-Interest Debts
Consolidate credit card debts into a lower interest loan, but don’t reduce your payments. Consolidating your high-interest debts will reduce your debt and result in a faster debt repayment in spite of fluctuating interest rates.
3. Avoid the Temptation to Accept a Big Mortgage or Line of Credit
The bigger the mortgage, the more costly it is to pay back. When added up, the interest can be extremely punitive. It gets worse when interest rates rise. Always go for a mortgage loan you can afford and negotiate for the best possible rate. Also, pay as much down payment as possible to lower your debt and interest.
A line of credit refers to the maximum amount of loan you can borrow. Don’t be tempted to ask for the maximum amount you can get as this will increase your indebtedness and make matters worse should interest rates rise.
4. Avoid Overborrowing
It is important to have your most important goals in sight at all times. Before you borrow or pile on more debt, ask yourself how it will affect your key life goals. Giving yourself this reality check reduces your appetite for loans and protects you when interest rates rise.
5. Look for Ways to Raise Your Income
The key to clearing your debt and paying less interest is paying down your debt. You can’t do this if you don’t have the funds to do so. Try your best to engage in activities, such as a new side hustle, to increase your income. Make sure the new income goes to reduce your debt instead of splurging it on new stuff.
6. Have an Emergency Fund
One of the reasons people get to pile on more debt is to meet the cost of emergencies. To avoid resorting to this default, always have some funds set aside just in case.
7. Opt for Fixed Interest Loans
If you are in a market where interest rates are volatile, you may want to go for fixed interest loans. With a fixed interest rate, you are certain of the amount you will pay every month irrespective of fluctuations in the market. A variable rate loan is good in a stable market when interest rates are consistently low, but they can be very punitive when interest rates rise.
An unplanned loan can be highly stressful, especially in a market where interest rates are consistently on the rise. There are, however, ways you can navigate around debts and benefit, rather than get punished, for taking out a loan. The key thing is to try to pay a loan as quickly as possible. This way, even when interest rates are on the rise, they won’t lead you to financial ruin.