Budgeting · March 10, 2022

War, Inflation and Interest Rates: Things You Can Do for Your Finances When the News is Bad

War in Europe. Rampant inflation. Rate hike signals from the Federal Reserve. What should you do when the news is—to put it mildly—not good?


The first rule is simple, according to First Citizens Chief Investment Officer Brent Ciliano and Manager of Institutional Portfolio Strategy Phillip Neuhart: Don't panic.

Historically, the S&P 500 has risen 12.7% on average in the 12 months following a dozen major geopolitical events dating back to Pearl Harbor, Ciliano noted after Russian troops rolled into Ukraine February 24. And corporate profits have barely been dented in those same timeframes, for the most part.

In their monthly Making Sense webinar—released the day before the invasion began—Ciliano and Neuhart said they see inflation moderating toward the end of the year as COVID-19-related supply chain bottlenecks begin to clear, and rising interest rates are unlikely to fully dampen the markets as long as corporate profits remain relatively strong.

History, Ciliano said, makes it clear that the market turbulence of early 2022 is not a rare thing. Neither is a subsequent recovery.

"Market drawdowns are not only common, but they've occurred every year for the last 42 years," Ciliano noted. "And to drive the point home even more, the average intra-year drawdown is an uncomfortable negative 14% per year. But despite this large annual event, markets have finished the year positive 32 out of the last 42 years, or 76% of the time, so please, please, please understand that as uncomfortable as it is to see markets fall like we're seeing today, these types of moves are very much a normal aspect of the yearly market movements."

After you study the markets and take a few deep breaths, you might want to consider taking additional steps to help weather turbulent times.

Make sure your savings level is right

Financial experts generally recommend keeping at least 3 to 6 months of income in accessible savings. Maintaining an emergency fund that's the right size for you is doubly important when the markets are unstable. You don't want to be forced to sell investments when they're temporarily down or rack up expensive credit card debt because your car broke down or your water heater went out.

On the other hand, you don't want to hold too much in cash at a time of rising inflation because your cash will buy less tomorrow than it will today.

Use a calculator to estimate whether to save money or pay off debt. This will give you a clearer picture of whether you'll benefit from putting more money away or using any excess cash to pay down the debts you owe.

Your banker can also help you assess your situation to determine what level of cash you should maintain.

Maximize income from savings

Once you have money in the bank, you'll want to minimize the amount of buying power you lose to inflation. This is where rising interest rates can be your friend. The interest you receive on various saving options—including savings accounts, money market accounts and certificates of deposit, or CDs—are not enough to counteract inflationary pressures this spring, but if rates rise in the general economy the interest paid on your savings will increase as well.

Talk with your banker to determine whether you've reached a point where you should consider deploying your savings into different accounts to maximize your inflation-fighting income potential.

Cut credit card expenses

Cash and savings are particularly important when times are turbulent, but it can be tough to save if you're buried in high monthly credit card payments. If your income is high enough to generate any monthly savings, consider using at least some of the excess to calculate how much to pay down on your highest-interest credit card balances. If you need to maintain balances, your banker may be able to help you find cards with lower rates.

Consider your mortgage situation

It may seem counterintuitive to borrow money in turbulent times, but if your financial situation seems stable and your income can handle the payments, now may be a good time to consider some home lending options before rates begin to rise.

For example, if you have a major home improvement project in mind, a fixed-interest home improvement loan may be worth considering. You can apply for an unsecured loan that's not attached to your house, which means closing costs will likely be less than those for a secured mortgage or loan. You can think of it as a less expensive way to lock in a relatively low fixed interest rate.

On the other hand, if you're not sure you want to borrow today, a fixed-interest home equity line of credit, or HELOC, might be something to consider. You can choose when to borrow and lock in whatever rate is current the day you tap into the account for funds.

Whatever concerns you have in turbulent times, it's a good idea to meet with a banker to discuss the options that best fit your situation. They can either help you directly or put you in touch with other financial professionals who are qualified to handle your needs.

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