As expected, the Federal Reserve hiked the short-term interest rate by one quarter of point at its March 2017 meeting. It marked the second time the rate was increased since December 2015 and it was only the third increase in a decade. Because the economy appears to be picking up some steam, the Fed is anticipating at least two more rate increases in 2018.

Small incremental increases in the short-term rate don’t necessarily have a direct impact on consumers. However, long-term rates have also been increasing due to a stronger economy and the prospect of higher inflation. Those are the rates tied to mortgages, loans and savings accounts that do affect your pocketbook.

What’s Behind Rising Interest Rates?

Near the end of 2016, the economy finally exhibited some long-awaited signs of strength. Before the election, long-term bond yields began to rise for the first time in awhile. Because mortgage rates are directly linked to long-term bond rates, they also jumped. Since the election the stock market has soared to record highs, which has driven bond yields even higher. The stock and bond markets are reacting to the optimism for a growing economy and the prospect of higher inflation that tends to accompany it. If the current trend continues, consumers can expect higher interest rates to impact their personal finances in the coming years.

Mortgage Rates Going Higher

In late 2016, mortgage rates, which had been hovering near historic lows, saw their first significant increase in several years. The average 30-year rate jumped from 3.4% just before the November elections, to a tick above 4%. Mortgage rates are linked to the Treasury bond rate, which began to rise at the first signs of a strengthening economy. A better than expected jobs report for February 2017 pushed the long-term rate up higher.

Morgage rate trends – last yearIf you already hold a fixed-rate mortgage, you won’t be affected by rising rates unless you have plans to refinance your loan. Now would be the time to refinance as there is no telling how much higher rates will increase. If you hold an adjustable-rate mortgage, you can expect your interest costs to increase, so now would be a good time to lock in a lower rate. For new homebuyers, mortgage rates are rising, but they are still attractive compared to a decade ago when they were near 7%.

Consumer Debt Will Be More Costly

If you hold any type of debt with a variable rate, you can expect your interest costs to creep up from now on. Most consumer loans with variable rates adjust once a year, while credit cards with variable APRs can adjust at any time.

Now would be the time to pay down your higher interest credit card debt or look for opportunities to transfer your balance to a 0% interest credit card for twelve months or longer and pay down the debt more quickly. Personal loans from a bank or credit union are typically issued with fixed rates for the term of the loan, so an increase in interest rates will not impact them. If you are uncertain how your consumer loan or credit card will be impacted by rising rates, you should contact your creditor to find out.

Savings Deposits Will Gain Traction

The good news is that savers will finally see an increase in their savings rate. The bad news is savings rates aren’t expected to rise very quickly or very far, at least for a while. Generally, rates on savings deposits tend to lag behind the increases on long-term rates.

Right now, banks are sitting on huge piles of cash, so they don’t feel the need to raise deposit rates to attract new money. The rates on money market accounts and CDs with longer maturities may rise a little faster than savings accounts.

Long-Term Investments Should Be Diversified

Rising interest rates have a direct impact on bonds. When the yields on bonds increase, their value decreases. However, bonds held to maturity are still redeemed for full value. If you plan on selling a bond in this environment, you are likely to receive less than its value today.

If you own a bond mutual fund, you are likely to see a decrease in share value, but, as the fund adds newer, higher yielding bonds, you should also see an increase in the fund’s yield. Risk adverse bond investors should consider rolling a portion of their portfolio into short-term bonds or short-term bond funds, which aren’t as sensitive to interest rate changes.

Equity investments, such as stocks, stock exchange-traded funds and stock mutual funds, can be a little trickier. Generally, higher interest rates and inflation can have an adverse effect on some stocks. Higher interest rates increase the cost of borrowing for companies which can limit their growth. Higher inflation can also increase costs for companies, which can eat into profits.

However, during a period of economic expansion, which is driven by higher corporate earnings, stocks should perform well. It is when the economy starts to overheat that higher interest rates and inflation can spike, causing stock prices to fall.

Regardless of the interest rate environment, the key to sound, long-term investing is to make sure your portfolio is well-diversified with a range of different assets. Stocks tend to perform well when bonds aren’t and vice versa, so it is recommended that your portfolio be balanced with a mix of both.

Time to Recalibrate Your Personal Finances

Increasing interest rates are a normal part of the economic cycle. Borrowers have benefited greatly, but people who rely upon yields for their savings or income have struggled. As it does with some regularity, the economic cycle is shifting to where it will begin to favor savers over borrowers. Although you are not likely to see the kind of spike in rates experienced in the 1970s and 1980s, it would be important for you to assess your current financial situation to determine how it will be affected by rising interest rates.

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We parents know that teaching our kids about personal finance is something of real value for it will help them learn to manage their own finances successfully through their adult life. In fact, looking back when we were kids, don’t you wish we’ve been taught more about money? Well, now that you’ve learned more about managing your personal finances better, you’d want your children not to make the same mistakes you did, right?

After all, it’s not something kids learn and just pick up in school, and, until they get to be grown ups and discover for themselves firsthand what budgeting, saving and spending are all about, they’d be totally clueless as regards the challenges and benefits that come with managing money.

What makes us write about this topic is the ABNormal Return’s blog post about prioritizing your life. Kids should be our number one priority and their education especially their financial education should come second.

The Important Things You Should Teach Your Kids

The experts say that financial education should begin as early as possible in one’s life. So, if you happen to be a mom or dad with school age children, you can start teaching and helping them to build skills in soundly managing money. What follows are the three important aspects regarding money they need to know about:

1) The Values And Benefits Of Learning How To Save

The minute your kids learn how to count and get to be familiar with figures, you should go about teaching them the fundamentals of saving and the value of money. Encourage them to save coins in a clear crystal jar while making them understand how small amounts have a way of summing up to larger amounts … something they can set aside for a rainy day or for something that’s really important.

Those cute, nice and attractively colored piggy banks are a great idea, but kids don’t get to see how the money is piling up. A tall transparent jar should do the trick. Last week there were just several dimes and quarters, this week the pile is just a bit higher. Spend a little time talking to them about this and make a big deal out of it. It’s not going to hurt either to bring them along when making a deposit at the bank. It’ll reinforce their learnings about saving.

The money habits you are able to develop in your kids today will mold their financial future, that’s why it’s imperative that you put them on the right track early on.

For kids who are older, urge them to save part of their school allowance for something they may want to buy but can’t afford just yet, like maybe a new game toy or those NBA celebrity cards. It’ll be a good idea to put up a chart with a running tally on the fridge to sort of update them on how much more they’d need to save to get that item they want.

2) Spending Responsibly

Most of the kids may not have too big a problem saving, but spending responsibly might just be a struggle. Surely, you’re not unfamiliar with that typical scenario where your 6 year old boy makes a scene at the supermarket after telling him he can’t have the toy he has set his heart on. This is where and when it’s important for you to teach and make your children see and understand about wants and needs.

Help them to recognize that wants are oftentimes and most likely, unnecessary compared to needs. Make them see that as regards these things, it is important to prioritize.

For older kids, let them handle their own school allowance and learn to decide what part of it they’d want to spend on something that has caught their fancy. They’ve got to see and accept that if they spend all of it on one occasion or one item, they’re not going to get it back.

In other words make them see that if they buy this new video game, then they won’t have the money to get that beautiful pair of sneakers they’ve gone nuts over. They’ll learn fast and spend smarter the next time around.

3) Budgeting

Of course, with saving and spending, budgeting naturally comes.

The most basic principle – that of never spending more than what you earn (which in this case is the school allowance you give them) – should be taught to them and deeply embedded in their minds. Once they get this through their heads, it’ll force them to budget, so they’ll meet their saving and spending goals.

It’s always good to set an example. Those cute little eyes are watching. Out to dinner or the supermarket or, in just about any place where you’ll have to shell out money?  Create opportunities where you can demonstrate the benefits of budgeting. At the end of every month, when you and the better half are likely to be discussing obligations, payments and savings, get them into the picture. They’ll be much more likely to follow the healthy examples you show them when they’re all grown up.

Looking For Great Values

The other thing that could do wonders for your kids as they grow older is for them to get into the habit of always looking for value. Before they run to the shopping mall to binge on the latest fads with their birthday money gifts, show them how much further those greenbacks can go if they’re just a little patient and wait for those items to go on sale.

The same thing goes for spending on name brand items.

All things being equal (quality, flavor, taste, etc.) there’s no reason to pay a premium for one label over another. Most consumer studies involving respondents, tasting blindly branded grocery items versus store brand or generics, have found that there wasn’t any discernible difference between them. And you save an estimated 25% going with the store labels.

Today’s Money Is Worth More Than Tomorrow’s Money

You’re smart enough to know that those dollars you’ve got in your bankbook today are worth more than the same amount you might get down the line, because of its potential for earning, not to mention inflation a couple of years from today. This is why your kids should learn early in life to put their money to work. And so, they should at the very least, stash and save in that crystal jar whatever cash they get on their birthdays and graduations. You can then, as they grow older get them a bank savings account, even if the money earns only a few dollars interest each year.

There is a research finding that parents today appear to be more preoccupied with teaching their children about sex more than about money. Don’t let go of the sex education, but impart the finance lessons to your children with keen interest. They’ll carry these through their lives and should make a great difference.

Sure, teaching them some of these principles about money will require you putting in some precious time and perhaps, on occasion may not even spell smooth sailing, but if you want your kids to understand how to manage their money well, when they’re out there chasing careers and already making their big bucks, going by these smart guidelines should be well worth it.