The end of the year is a good time to reflect on what may have affected your personal finances this year. We are mostly past the COVID pandemic, but to reduce inflation, the Federal Reserve was diligent about stabilizing the economy by continuing to increase the federal fund target rate. While the Fed may be finished raising rates, it is unlikely to reduce them any time soon.
Higher interest rates have affected our economy in many ways, reminding us to take the time to review our personal finances and plan accordingly.
As you look toward 2024, here are a few items to consider that may help prepare you for a stronger financial future.
Banks do fail
If you have more than $250,000 in any one bank, take the time to understand your Federal Deposit Insurance Corporation coverage limits.
The second-largest bank failure since the financial crisis of 2008 occurred just nine months ago with the collapse of California-based Silicon Valley Bank.
This regional bank, which held more than $200 billion in assets for a mostly tech-focused clientele, was forced to close its doors abruptly last March. The bank had held investors’ deposits for 40 years, shocking the financial industry when it was shuttered by the California Department of Financial Protection and Innovation, which appointed the FDIC the receiver.
The FDIC is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits, examines and supervises financial institutions for safety, soundness, and consumer protection, makes large and complex financial institutions resolvable, and manages receivership.
In the case of SVB, bank depositors were fortunate. Initially, the FDIC stated that they would only have access to their insured deposits on Monday, the next business day. But the vast majority of SVB’s deposits were above FDIC limits. About $150 billion of the bank’s $175 billion total deposits were uninsured.
This time, however, the FDIC made all bank depositors whole. Without this help, many individuals and businesses could have been financially ruined.
Six weeks later, on May 1, the California-based First Republic Bank also collapsed. This failure overtook SVB’s to become the second largest failure in U.S. banking history. The FDIC again stepped in as the receiver to help protect bank depositors, then entered into an agreement with JP Morgan Chase Bank to assume all the deposits of the bank. Again, bank depositors were made whole. By mid-December, three other banks, for a total of five bank failures this year.
To guard yourself against bank failure-related losses, take the time to learn how the FDIC protects your personal bank accounts. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. The FDIC has a calculator named EDIE to help you calculate your personal insurance coverage. This calculator can be found at edie.fdic.gov.
Is your portfolio diversified, and are you comfortable with the risk?
Staying on course with your investments, especially in a volatile market, can be emotionally difficult. It is hard to review your portfolio statements and see a decline in value from the previous month or even the prior year.
Markets typically go up and down, which is reflected in portfolio values changing daily. Because timing the market is impossible, it is best to ignore the news and stay invested in your diversified portfolio, rebalancing when appropriate.
Diversity in your portfolio investment strategy helps to mitigate risk. This means that it is important to strategically allocate and diversify your investments in different asset classes. When the market is down, diversification will not eliminate the risk of portfolio declines, but it may help to manage your overall risk of losses, since different asset classes behave in different ways and are not directly correlated with each other. Often but not always, one asset class goes up while another is down. A diversified portfolio will help reduce the impact of a poor-performing asset class, helping to generate more consistent returns.
Your diversification strategy should be specific to your risk tolerance level. If you have a challenging time responding to portfolio declines, reducing your stock investments and increasing your investment in bonds or other less volatile assets may help.
Interest rates do rise
Learn more about how higher interest rates can affect your finances.
When the Fed raises its federal funds target rate, it is attempting to increase the cost of credit throughout the economy. Higher interest rates make loans more expensive for both businesses and consumers, and everyone ends up spending more on interest payments. This eventually impacts mortgage rates, credit card rates, and personal, student, auto, and business loans. A higher rate means more expensive borrowing costs, and more expensive borrowing costs usually reduce the demand to borrow money.
High mortgage rates cooled the housing market in 2023. According to propertycalcs.com, 30-year fixed mortgage rates peaked this year on October 26 at 7.79 percent. As of mid-December, rates had dropped to about 7.03 percent. In comparison, three years ago, on December 24, 2020, similar mortgage rates were 2.66 percent. A principal and interest payment on a $500,000 mortgage at 2.66 percent was $2,370, versus $3,336 on a loan today. The increase in mortgage rates has priced many first-time homebuyers out of the market.
Now, prospective homebuyers may need to wait for lower rates or save more money toward a down payment. Potential home sellers might be less inclined to list their properties amid lower demand or because they know that the mortgage on their new home will have a higher interest rate than their current loan.
Financial planning a must
Do you have a financial plan in place?
Financial planning helps you address your short- and long-term financial goals. It begins with addressing where you are today and where you would like to be in the future, while identifying a plan to help you establish a successful pathway to meet your objectives. Your plan should provide the foundation to stay on course while you work toward accomplishing each unique goal.
A financial plan can also help you uncover vulnerabilities like not having enough saved in an emergency fund or being underinsured. And it can help you feel more confident and comfortable with the choices in your investment portfolio when the markets go up or down.
That is why having a financial plan is important for people of all ages and economic backgrounds—not just older, wealthier people. Note that a financial plan is not a set-it-and-forget-it exercise, but an ongoing process that changes as your circumstances do.
So, if your investments did not perform as you hoped this year or you are feeling financially pinched by the effects of higher interest rates, addressing your financial plan may be appropriate. Financial planning aims to give you a complete picture of where you stand today, while identifying the changes you may need to make to increase the likelihood of achieving your goals.
2023 taught us not to be complacent with our finances. Banks fail, interest rates rise, and investments can move up and down on a whim. With diligence and proper planning, you can weather these changes and obtain your personal financial goals. When we manage our finances and stay aware of market conditions, adapting to the changes we are presented with should not interfere with our long-term objectives.
Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at [email protected].