A Baby Boomer’s Perspective on Higher Interest Rates

Better Investing

What's Hot

2 Types of Black Marks Might Vanish From Your Credit File SoonBorrow

6 Ways the Obamacare Overhaul Might Impact Your WalletInsurance

7 Dumb and Costly Moves Homebuyers MakeBorrow

This Free Software Brings Old Laptops Back to LifeMore

Obamacare Replacement Plan Gets ‘F’ Rating from Consumer ReportsFamily

Beware These 12 Common Money MistakesCredit & Debt

21 Restaurants Offering Free Food Right NowSaving Money

17 Ways to Have More Fun for Less MoneySave

House Hunters: Beware of These 6 Mortgage MistakesBorrow

30 Household Uses for Baby OilSave

25 Ways to Spend Less on FoodMore

Nearly Half of Heart-Related Deaths Linked to These 10 Foods and IngredientsFamily

5 Surprising Benefits of Exercising Outdoors in WinterFamily

10 Ways to Save When You’re Making Minimum WageSave

Boost Your Credit Score Fast With These 7 MovesCredit & Debt

7 Painless Ways to Pay Off Your Mortgage Years EarlierBorrow

The Most Sinful City in the U.S. Is … (Hint: It’s Not Vegas)Family

The True Cost of Bad CreditCredit & Debt

10 Companies With the Best 401(k) PlansGrow

This Scam Now Tops ID Theft as the No. 2 Consumer ComplaintFamily

6 Stores With Awesome Reward ProgramsFamily

6 Ways to Save More at Lowe’s and The Home DepotSave

6 Healthful Treats for Your DogFamily

New Study Ranks the Best States in the U.S.Family

Thousands of Millionaires Moving to 1 Country — and Leaving AnotherGrow

Strapped for College Costs? How to Get the Most From FAFSABorrow

6 Overlooked Ways to Save at Chick-fil-AFamily

Ask Stacy: What’s the Fastest Way to Pay Off My Mortgage?Borrow

Where to Sell Your Stuff for Top DollarAround The House

8 Ways to Get a Good Price on a Shiny New AutoCars

Ask Stacy: How Do I Start Over?Credit & Debt

Secret Cell Plans: Savings Verizon, AT&T, T-Mobile and Sprint Don’t Want You to Know AboutFamily

30 Awesome Things to Do in RetirementCollege

14 Super Smart Ways to Save on TravelSave

The Rich Prefer Modest Cars — Should You Join Them?Cars

You’ll Soon Pay More to Shop at CostcoSave

10 Ways to Save When Your Teen Starts DrivingFamily

Boomers have lived through very high and very low interest rates. We've seen enough to know that current rates won't last forever. But which way will they go next?

The following post comes from Gary Foreman at partner site The Dollar Stretcher.

If you’re a baby boomer, you’ve seen your share of interest rate changes over the years. We were raised in an era where a passbook (with a real pocket-sized book listing deposits and withdrawals) earned you a whopping 3 percent. We also saw mortgages in the 12-plus percent range during the late ’70s and early ’80s. Now we’re seeing CD rates of 1 and 2 percent.

So it shouldn’t be any surprise to us that interest rates will continue to change. In fact, shame on us if we ignore history and assume that rates will continue to stay at this level for the indefinite future.

But which way will they go? And will they move very far?

Lots of experts are trying to answer those two questions. I think two facts and a little common sense can give us a pretty good feel for what the future might bring.

There are two reasons why I’m pretty sure that interest rates will rise. Perhaps not more than a percent or so, but still higher than they are today.

First, the experts are predicting that the G7 governments will need to borrow $8 trillion during the next year. And they think that between the amount they’re borrowing and their newly lowered credit ratings, cost to borrow will increase nearly 40 percent (source: Bloomberg).

Second, the American consumer seems to be pulling out his credit card again. For the last three years we’ve been paying off consumer debt. But it appears that consumer spending is beginning to grow again. Economists are predicting 2 to 3 percent growth in the economy in 2012. Most of that growth will come from consumers. Since the average consumer isn’t getting raises in this economy, the only way they can spend more is to borrow more.

Combined, that means there will be a greater demand for borrowed money in 2012. We all know that increased demand without increased supply means a higher price. In this case the higher price is a higher interest rate.

The Federal Reserve and central banks are trying to keep rates down worldwide. But that’s not easy in this environment. If rates are too low people with money won’t lend to governments or other individuals.

The alternative for governments is to increase the supply of money by printing more of it. But that would cause inflation. And since we boomers remember the ’70s we know that means higher interest rates.

Bottom line? I’d expect rates to increase a bit over the next 12 months.

So what’s an aware boomer to do? First, get rid of any variable-rate debt. Think credit cards, credit lines against your house, or any other loan where they can increase the rates without your permission.

Pay them off if possible. If not, consider shifting loans to fixed instruments (like your home mortgage).

The key is to not be in a position where the interest payments on your loans can go up each month if rates rise.

On the flip side, protect your investments and retirement accounts. Loaning money for long periods of time at today’s rates is foolish. I was a financial planner in the ’80s. Frequently I had people come in with corporate and municipal bonds that were paying a fraction of the high rates of the day. They were willing to sell the bonds until they found out that they were only worth about half of the face amount. The only way to get the full value out was to wait until they matured, often a decade or more in the future.

What happened? They committed to loaning money at 5 or 6 percent for 20 or 30 years. New bonds were offering 2 or 3 times that interest rate. So no one would buy their bonds unless they were deeply discounted.

Now is the time to check your investments and retirement accounts to make sure you’re not in a position to fall into the same trap. Sure, if you can get an extra percentage point on a three-year over a 12-month CD you should take it. But don’t commit to long time frames at today’s rates.

And if you have long-term bonds, consider getting rid of them. That also goes for the zero-coupon bonds that will mature later on. They’re often found in retirement accounts as “target 20xx” bonds or funds. Talk with your broker or financial planner if you’re unsure what you own.

Follow The Dollar Stretcher on Twitter.

Stacy Johnson

It's not the usual blah, blah, blah

I know... every site you visit wants you to subscribe to their newsletter. But our news and advice is actually worth reading! For 25 years, I've been making people richer without making their eyes glaze over. You'll be glad you did. I guarantee it!


Read Next: Considering a Fixer-Upper? 15 Ways to Avoid a Money Pit

Check Out Our Hottest Deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 1,975 more deals!