Financial planning is always an important aspect of managing personal and small business finances. However, during periods of increasing interest rates, it becomes even more critical to have a well thought out plan in place.
We all know interest rates are increasing, but what does that mean for us in Santa Maria?
Interest rates are the cost of borrowing money and the return on saving money. When interest rates increase, the cost of borrowing money goes up, making loans and credit card debt more expensive. On the other hand, interest earned on savings accounts and other investments will also increase, providing better returns.
Individuals should begin by assessing their current financial situation. This includes looking at current debt levels, savings, and overall income. By doing so, individuals can determine whether their current financial situation can withstand higher interest rates.
For small local businesses, it is important to review their cash flow and determine if they will be able to maintain their operations while paying higher interest rates.
Once individuals and small businesses have a clear picture of their current financial situation, they can begin to explore their options for managing increased interest rates. This could include refinancing existing loans to find lower interest rates, or paying down high-interest debt.
If you own a home, obtaining a home equity line of credit may help pay down personal debt. Everyone needs to focus on their personal cash flow, spending habits, and debt pay down prioritization.
Small businesses may want to consider alternative forms of financing, such as lines of credit or factoring. A line of credit can help businesses manage short-term cash flow needs, while factoring allows businesses to sell their accounts receivable to a third party at a discount in exchange for immediate cash. Both options can provide businesses with the cash they need to continue their operations while paying higher interest rates.
Another important consideration for individuals and small businesses is to prioritize saving. During periods of increasing interest rates, savings accounts and other low-risk investments become more attractive as they may offer better returns. By prioritizing saving, individuals and small businesses can take advantage of the higher interest rates and help protect themselves from the impact of higher borrowing costs. This should happen after you pay down your highest interest rate debt.
It is also important to have a solid budget in place. A budget can help individuals and small businesses track their spending and identify areas where they can cut back. By cutting unnecessary expenses, individuals and small businesses can free up cash to pay down debt or build up savings.
Santa Maria is fortunate to have strong, community-engaged financial institutions. They can help you with basic budgeting and financial analysis, just ask them for help.
Assessing your personal and/business financial situation, exploring options for managing increased interest rates, prioritizing debt reduction, having a solid budget in place, increase savings where possible, will help you navigate this challenging economic environment and emerge stronger and more resilient.
This commentary was written with assistance from ChatGPT.
