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This post is from staff writer Richard Barrington.
It would be understandable if today’s 30-somethings feel they were born too late to take advantage of financial opportunities available to previous generations. However, the way the interest rate cycle is playing out, financially responsible 30-somethings might find things falling very much in their favor in the future.
In many ways, the generation now in their 30s might feel they’ve been locked outside a fine restaurant filled with older customers, with the outsiders looking in through the window as those older generations enjoy the bounty of financial opportunities that are no longer available.
Some examples? Try these on for size:
- As of mid-year, short-term CD rates were down to 0.16 percent. Thirty years earlier, they were 9.06 percent.
- In the 1980s, the S&P 500 rose by an average of 12.59 percent a year. In the 1990s, the pace was even hotter, as stock prices rose by an average of 15.31 percent a year. So far in the 21st century, stocks have plodded along at an average annual price gain of 1.02 percent.
- The US unemployment rate spent all of 1998 and 1999 below 5 percent, meaning that employees were in demand and salary offers reflected that demand. Currently, the unemployment rate hasn’t been below 7 percent since 2008, shifting the balance of power squarely over to employers.
Despite missing out on some historical opportunities, people entering their 30s now may find that they have something very important in their favor: a smooth ride through the interest-rate cycle.
A smooth ride through the interest-rate cycle
Two characteristics tend to be true of people in their early 30s: that is the age when most Americans buy their first homes, and their peak savings years are still ahead of them. That may position this generation to take maximum advantage of the interest-rate cycle.
First-time home buyers today are coming into the market at a time when mortgage rates are still near their all-time lows. Meanwhile, since most people in their early 30s haven’t had the time to accumulate much in the way of savings, they aren’t being hurt by the flip side of this low point in the interest-rate cycle, which is negligible returns on savings accounts and other deposits.
Thus, 30-somethings are positioned to take advantage of an historic opportunity in mortgage rates now, and still have time for interest rates to rise before they accumulate much in the way of savings. Contrast this with people who were a similar age in the early 1980s — that generation faced mortgage rates that were often in the mid-teens, and then saw deposit rates all but disappear just as they were approaching retirement.
Making the most of your opportunities
Of course, having an opportunity and taking advantage of it are two different things. Here are some things today’s 30-somethings should do to benefit from the way the interest-rate cycle is playing out:
- Limit your non-mortgage debt. Mortgages are unique in allowing you to lock in an interest rate for a very long-period of time. Other forms of debt — especially credit card debt — are more subject to having rates change with the times, so there is less advantage to taking on this kind of debt at a low point in the interest-rate cycle.
- Protect your credit rating. In order to take advantage of the opportunity in mortgage rates, you need to be able to qualify for a loan. As you will find on many occasions throughout your life, your credit rating is the key to whether you can take advantage of financial opportunities.
- Compare mortgage quotes. Mortgage rates are generally low, but don’t make the mistake of assuming they are all the same. Shopping around can help you take maximum advantage of today’s opportunities.
- Lock in a fixed rate. Don’t play games with history. Sure, mortgage rates were lower a few months ago, but for most of the past 40 years they’ve been much higher. Therefore, history suggests that an adjustable-rate mortgage is more likely to work against you than for you at this time.
- Start saving now. Savings account rates may not be attractive now, but you won’t be able to take advantage of the higher rates that are likely to be available at some time in the future unless you have accumulated savings over the years.
- Shop for savings account rates. As with mortgage rates, savings account rates are subject to a wide range of variation. In particular, once savings account rates start to rise, different banks are likely to move at very different paces. Shopping around will help you choose one of the banks that is leading the charge toward higher rates, rather than getting stuck with one that is lagging behind the trend.
To be sure, today’s generation of 30-somethings have seen their share of challenges. However, if they make the right moves, they may prove to be very pleased with how things timed out for them.
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