Strategies to position yourself to weather economic uncertainty
With interest rates rising and fears of a prolonged recession growing, many people are looking for ways to put more money in their pockets each month for added financial security. One question CWA clients are asking more and more revolves around paying off big debt like a home mortgage.
So, in this current economic environment, with inflation at historic numbers, is now the time to absolve what is most likely your largest personal debt?
Rising interest rates actually makes paying off a mortgage lower on the priority list, according to Financial Planner David Forbess.
“The first thing I do with my clients,” says David, “is to try to ease their mind in times like this. There are things we can do to help make you financially secure during an inflationary period, but paying off a fixed rate mortgage is typically not one of them.”
The operative term here is fixed. The vast majority of people on a secured rate mortgage have refinanced their way into a sub 3.5% territory over the last few years. When you factor in the tax deductions a mortgage provides, the effective borrowing rate drops to around 1.5% to 2%. Even for those who recently purchased a house and are in the mid 5% range, David would still not prioritize paying off the mortgage loan.
“There’s no financial incentive to pay off the well-structured, long-term debt that a fixed rate mortgage provides,” David says. “Emotionally, yes, there is incentive, but in terms of making your money work the hardest during these inflationary times, there are other areas that will make a bigger impact.”
With a fixed debt loan, the interest rate and payment essentially stay the same, save for minor fluctuations in property taxes and insurance. Meaning your fixed debt becomes cheaper as costs rise, making it an ideal hedge against inflation.
Of course, an Adjustable-Rate Loan (ARM) is a different story. If your mortgage is an ARM, David recommends looking into refinancing as soon as possible or talking to a planner about whether simply paying off the loan works more in your favor.
While David stresses that every financial situation is unique and talking to a trusted CPA or financial planner should always be step one, there are some general guidelines that he suggests will make the most impact on your cashflow.
- Build your emergency fund, which is typically three to six months of expenses in case of disaster striking you or your family.
- Pay off bad debt like credit cards, which likely has a variable rate that creeps up over time, leading to an even bigger bill than expected. After that, consider paying off your auto loan and saving (rather than spending) the amount you would have put toward this payment.
- Maximize your savings goals like maxing out your 401(k) and IRA contributions.
- Address student loans, this is lower on the priorities list because student debt is not only a loan with a fixed rate, it’s more of an investment than a loan, David said.
If there are still excess funds after all the above savings goals are met and the debt is serviced, first of all, congratulations! So, is now the right time to put those extra funds toward paying off your mortgage?
“Maybe,” David said with a smile. “The reality is, every situation is different with different variables, which is why it’s so important to have a financial planner or CPA help you create a paydown strategy that works for your unique needs.”
Ready to make a plan to shore up your financial goals now and into the future? CWA can help you make the right decisions to put you on the best path to financial freedom. Contact the CWA team to schedule a complimentary consultation with a CWA Advisor.