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A security guard watches outside the door as customers line up at the Silicon Valley Bank headquarters on March 13, 2023 in Santa Clara, California. – US President Biden on Monday sought to reassure Americans about the nation’s banking system, but insisted the emergency measures were not unwarranted. New York regulators took control of Signature Bank on Sunday, putting more banks under stress in the wake of Silicon Valley Bank’s failure last week, the second-largest banking failure in history, with the cost being paid for by taxpayers. Ta. (Photo Credit: NOAH BERGER / AFP) (Photo Credit: NOAH BERGER/AFP via Getty Images) *** BESTPIX ***
The end of the year is a good time to reflect on what has affected your personal finances this year. Although the coronavirus pandemic has largely passed, the Federal Reserve has worked diligently to stabilize the economy by continuing to raise the federal funds target rate to control inflation. The Fed may end its rate hikes, but it’s unlikely to cut rates anytime soon.
Rising interest rates are impacting our economy in many ways, reminding us that we need to take the time to review our personal finances and plan accordingly.
As we head into 2024, here are some items to consider to prepare for a stronger financial future.
banks always fail
If you have more than $250,000 in deposits with one bank, take the time to understand your Federal Deposit Insurance Corporation coverage limits.
The second-largest bank failure since the 2008 financial crisis occurred just nine months ago with the failure of California-based Silicon Valley Bank.
The local bank, which held more than $200 billion in assets for primarily technology-focused clients, was forced to abruptly close its doors last March. The bank, which held investor deposits for 40 years, was shut down by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver, shocking the financial industry.
The FDIC is an independent agency created by Congress to maintain the stability of the nation’s financial system and public confidence. The FDIC guarantees deposits, inspects and oversees the safety, soundness, and consumer protection of financial institutions, provides resolvability for large and complex financial institutions, and administers receiverships.
In the case of SVB, bank depositors were in luck. Initially, the FDIC stated that insured deposits could be accessed the next business day, Monday. However, the majority of SVB’s deposits exceeded the FDIC limits. About $150 billion of the bank’s $175 billion in deposits was uninsured.
But this time, the FDIC has leveled the playing field for all bank depositors. Without this support, many individuals and businesses could have been financially ruined.
Six weeks later, on May 1, California-based First Republic Bank also failed. This failure overtook SVB to become the second-biggest failure in U.S. banking history. The FDIC once again stepped in as a trustee to help protect bank depositors, entering into an agreement with JPMorgan Chase Bank to assume all of the bank’s deposits. Again, bank depositors are now complete. By mid-December, three other banks had joined, bringing the total to five banks this year.
To protect yourself from losses associated with bank failures, take the time to learn how the FDIC protects your personal bank accounts. Standard coverage is $250,000 per depositor and insured bank per category of account holder. The FDIC has a calculator called EDIE that can help you calculate your personal insurance coverage. This calculator is located at edie.fdic.gov.
Diversified investment
Is your portfolio diversified and risk tolerant?
Staying on track with your investments can be emotionally difficult, especially in volatile markets. It is difficult to review a portfolio statement and see a decline in value from the previous month or year.
Markets typically go up and down, which is reflected in the changing value of your portfolio on a daily basis. It’s impossible to time the market, so it’s best to ignore the news and continue investing in a diversified portfolio, adjusting your balance as needed.
Diversity in portfolio investment strategies helps reduce risk. This means it’s important to strategically allocate and diversify your investments across different asset classes. While diversification does not eliminate the risk of portfolio decline if the market is down, it can help manage overall risk of loss because different asset classes behave differently and are not directly correlated with each other. may be helpful. Often, but not always, one asset class will rise while another falls. A diversified portfolio can help reduce the impact of underperforming asset classes and generate more stable returns.
Diversification strategies should be determined according to your risk tolerance level. If you have trouble dealing with declines in your portfolio, you may benefit from investing less in stocks and more in bonds and other less volatile assets.
interest rates will rise
Learn more about how rising interest rates will affect your household finances.
When the Fed raises its federal funds target rate, it is raising the cost of credit across the economy. When interest rates rise, loans become more expensive for both businesses and consumers, and everyone ends up spending more on interest payments. This ultimately affects mortgage rates, credit card rates, personal loans, student loans, car loans, and business loans. Higher interest rates mean higher borrowing costs, and higher borrowing costs usually reduce the demand to borrow money.
High mortgage interest rates have cooled the housing market in 2023. According to propertycalcs.com, 30-year fixed mortgage rates peaked at 7.79% on October 26 of this year. As of mid-December, interest rates had fallen to about 7.03%. In comparison, three years ago his similar mortgage rate on December 24, 2020 was 2.66%. The principal and interest payment on a $500,000 mortgage at 2.66% was $2,370, but on today’s loan it would have been $3,336. Rising mortgage rates have caused many first-time home buyers to exit the market.
People looking to buy a home now may need to wait until interest rates drop or save more money for a down payment. Potential home sellers are reluctant to list their properties because demand is weak or because they know that a mortgage on a new home will have a higher interest rate than their current loan. There may be.
Financial planning is essential
Do you have a financial plan in place?
Financial planning helps you achieve your short-term and long-term financial goals. It starts with thinking about where you are now and where you want to be in the future, while identifying a plan that will help you establish a successful path to achieving your goals. Your plan should be the basis for staying on track as you work toward achieving your unique goals.
Financial planning can also help uncover vulnerabilities, such as not having enough emergency funds saved or inadequate insurance. It can also give you confidence and peace of mind in your investment portfolio choices when the market goes up or down.
Therefore, financial planning is important for people of all ages and economic backgrounds, not just the elderly and wealthy. Remember that financial planning is not something you set up once and then be done with, but rather an ongoing process that changes depending on your circumstances.
So if your investments haven’t paid off as well as you hoped this year, or if you’re feeling the pinch financially due to rising interest rates, it might be in your best interest to work on your financial plan. The purpose of financial planning is to fully understand your current situation while identifying changes needed to increase your chances of achieving your goals.
2023 has taught us not to be complacent with our financial situation. Banks can fail, interest rates can rise, and investments can go up and down on a whim. With diligence and proper planning, you can navigate these changes and achieve your personal financial goals. As we manage our finances and stay aware of market conditions, adapting to the changes we face should not interfere with our long-term goals.
Teri Parker is a Vice President at CAPTRUST Financial Advisors. She has been active in the field of financial planning and investment management since 2000. Email us at Teri.parker@captrustadvisors.com.
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