The economy is shifting. Interest rates are rising, the stock market is volatile, and some experts have even forecasted that we’re on the verge of another economic crisis, similar to the one in 2008. With that in mind, how are people dealing with their personal finances in the coming year? Here are a few trends.
In December of last year, the Federal Reserve voted unanimously to raise the interest rate by 0.25%. It’s their second rate hike in as many years, with a forecast of three more in 2017. This means several things for the average consumer.
Higher interest rates for banks means higher mortgage and credit card rates for us. In 2015, when the interest rate was still near zero, the average mortgage rate for a 30-year, fixed-rate mortgage was around 3.66%. Currently, it’s 4.33% and has been steadily on the rise all year.
Therefore, one trend for those looking to buy a home in the coming year will likely be to get a fixed rate mortgage, in order to lock in the current interest rate and guard against future increases.
As of last year, 44 million people in this country had a combined total of $1.26 trillion in student loan debt. The average amount of debt for students who graduated in 2016 was over $37,000 and rose 6% over the previous year.
Several of the Presidential candidates proposed plans to fix these astronomical numbers going forward, including Donald Trump. His policies could have a significant impact on the student loan market. Though none of it has become law yet, the President has in mind a number of reforms to the borrowing process for students.
One of the biggest changes is the desire to implement an income-based repayment system. Rather than having fixed, monthly payments, which borrowers may have trouble covering during times of financial hardship, payments would be a percentage of their monthly income, regardless of how much or little they make.
Then, after making these payments for 15 years, they’d be eligible for loan forgiveness. If this plan goes through, we could see a significant increase in student debt in the foreseeable future, with borrowers not being afraid to take out more under the new repayment system.
The rising interest rates affect far more than mortgages and credit cards. They also have an impact on our investments. A large, sudden rate hike will cause temporary panic in the markets, resulting in plummeting stocks for a short time. When the rate increase was first announced, the DOW dropped over 150 points, while S&P 500 went down 0.8%.
But the effects of the increase itself are more subtle, and take longer. Over time, it leads to less disposable income, which in turn makes businesses suffer, ultimately causing stock prices to drop. However, it can take several years for that to happen, and isn’t necessarily a 2017 personal finance trend.
What it could affect this year, though, is bond yields. As interest rates go up, bond prices go down, particularly for those with a longer time to maturity. The ultimate result, which we’ve been seeing already in Europe and other parts of the world, is negative bond yields—i.e. getting back less on your investment than what you put into it. Meanwhile, the bond yield rate for this country has dropped to 0%, and could even go lower.
Bonds have long been considered a safe haven for long term investors. Therefore, negative yields can be particularly detrimental to those saving for retirement. If things continue on this trend, which is likely, people will have to find a different avenue when building their nest egg.
Gold is another “safe haven” investment. If your stocks lose value suddenly, having holdings in gold will give you a cushion, so that you don’t lose everything. Of course, some experts have voiced concern that gold hasn’t been doing well lately either, but their fears are unfounded.
After a great showing at the beginning of last year, gold’s spot price took a sharp decline, ending with its longest decline in 12 years. However, this year, gold prices are already on the rise again, and many experts peg it as the investment with the biggest turnaround potential.
That’s why, particularly as bonds become less reliable, gold IRAs are going to become a significant trend for those saving for retirement in 2017. As a physical asset, gold isn’t subject to inflation, like the dollar is, but retains its buying power over time. Its value is also not tied to the markets, making it a great safe haven. In fact, its price tends to go up as stocks go down, so in today’s volatile market, gold is a smart choice, which will protect you against upcoming market volatility.
Time will tell which of these personal finance trends continue throughout the year. The markets can be difficult to predict, and are often influenced by freak occurrences and other world events. However, those sudden fluctuations are usually short lived. Long term trends are easier to see, and easier to plan for, if you know what to look for. If you plan your personal finances carefully, you’ll be able to get through whatever volatility 2017 has in store, relatively unscathed.