What the rising interest rates mean for consumers

Borrowing costs have risen swiftly so far in 2022, as the Federal Reserve raises interest rates in an effort to cool down an economy that's facing inflation rates at 40-year highs.

Elevated interest rates have significant financial implications for consumers, especially when it comes to household expenses, investments and retirement planning.

Household expenses have likely risen so far this year, not only because of inflation, which is rampant throughout our economy, but also because of higher interest rates and borrowing costs.

If you have credit card debt, chances are the interest rate you have been paying has risen, as credit card interest rates tend to increase during times when the Federal Reserve raises interest rates. Rising credit card interest rates result in higher monthly payments for any outstanding credit card debt. The best rule of thumb when it comes to credit cards is to pay off the entire balance each month. Many credit cards offer the ability to make a "minimum payment," but that's typically a small fraction of the entire balance owed. By only making the "minimum payment," interest expenses will start to accrue.

Prioritize credit card debt reduction. Getting out of credit card debt means allocating as much money as possible toward the payments until the entire balance is paid. This may involve reducing expenses in other areas of your budget to to allocate some extra cash to your debt payments. The faster you can pay down your credit card debt balances, the less of a financial impact you'll notice from rising interest rates.

After all, credit card debt is expensive and the interest payments are not tax deductible, as is the case with most interest payments on mortgages.

Reducing credit card debt will also help to increase your credit score, which is a vital measure of your financial health.

Secondly, it's important to reexamine your savings efforts during a rising rate environment. Do you have an emergency savings fund that includes enough cash equal to at least six months worth of living expenses? An emergency savings fund is meant to help cover expenses in the event of an unexpected job loss. Accumulating an emergency savings fund may be more difficult during a rising interest rate environment, but as recession fears increase, it's vital that you start to take steps to set aside money for emergencies.

In addition to an emergency savings fund, it's important to make sure you're also saving for retirement. Many use their employer's 401(k) plan. With a 401(k), many employers will match your contributions up to a certain threshold. It's optimal for you to contribute up to the amount that your employer contributes because that is an investment return of 100%.

Money in a 401(k) is usually invested in mutual funds. Even if you don't see market returns right away, your assets increase thanks to the employer match. You may also be able to contribute additional money to your 401(k) - beyond the employer's match - a maximum of $20,500 for those under age 50.

Finally, rising interest rates may affect how your investments are structured. Certain areas of the stock market may perform better than others during times of elevated interest rates, such as commodities and value stocks, especially ones with strong dividends.

Your financial adviser can help structure your investment portfolio to withstand higher interest rates.

It's not just the stock portion of your investment portfolio that may need adjustments. The bond portion of your portfolio may also need some changes, as rising interest rates can depress bond values.

As difficult as higher borrowing costs and rising interest rates can be, a few financial tweaks along the way can help you navigate these uncertain times.

Teresa Jacobsen is a private wealth adviser at UBS Private Wealth Management, based in Stamford.