working interest rate

What higher interest rates mean to your retirement and your business.

Let’s face it, inflation and higher interest rates are creating a huge challenge for American businesses this year.  Instead of the typical one to two percent inflation rate of the last couple of decades, we have experienced a devilish spike—from 5 percent in May of 2021 to 8.6% in May 2022—according to data company Statistica.  As a result, the Federal Reserve has deemed it appropriate to raise the prime interest rates for banks to 4.75% as of this writing. This has translated into bank loans,  including home mortgage rates, ballooning from around 2.5% at the beginning of the year to a current high of 6.2% and more, with further increases promised in order to slow the economy and put a damper on inflation.

Of course, all this is terrible news for the real estate industry, as well as for small businesses and their customers. Higher interest rates mean higher carrying costs for debt. However, it unfortunately also translates into many lenders tightening their rules. As a result, many businesses simply don’t qualify for loan capital they may have easily secured just a few short months ago when rates were lower.

It also means the cost of consumer credit has increased. Today’s customers may be less inclined to purchase your products on credit, as the goods now cost more, even if you have not increased your prices.

Enter the double whammy: increased costs leading to price increases.  Supply shortages, dramatic increases in the cost of fuel, and inflation have driven up the bottom line cost of nearly all goods and services.  Many industries are also paying more in wages due to labor shortages and the prolonged impact of the pandemic. When your prices increase, you also risk a decrease in sales, as consumers rethink their buying decisions.

It is a vicious cycle that many business owners—particularly anyone under 40—may never have experienced before, as the last time we had this sharp of an inflation bubble was in the early 1980s. Back then, mortgage rates rose to 14%!

As a business, this may mean spending a bit more time doing some planning and rethinking as to the way you maintain and build your business. For some, this may be a requirement for survival.  For others, it is simply good business.  Sit with your accountant and talk about your plans, your expenses, and your buying habits. Cutting expenses and streamlining your operations can sometimes mean the difference between having a profit or a loss at the end of the year. Outsourcing, for example, is often an excellent way to find efficiencies and save money. From non-essential services to processes that drive your company, savings can almost always be found. For example, many companies have decided to outsource their payroll, bookkeeping, and accounting functions to a remote third party. In doing so, they can reduce internal headcount, reduce fraud opportunities, and find faster—and better—financial data for their business. Other outsourcing opportunities, such as services that support your operations (like millwork, machining, or printing) may reduce your costs while improving your delivery cycle.


Lower Demand Requires Promotions

If you are experiencing a downturn in sales, it may be necessary to replenish your sales development and marketing operations. Today’s digital world means customers are in control of the conversation. If you are not already doing so, it is essential to tune into the social and business networks that impact your business. From LinkedIn and Facebook to your local business networking organizations, now is the time to invest in building your business, so you stand out from your competition.

Your Retirement

No doubt that retirement plans, which rely upon growth in the stock market and the dividends from profitable companies, will be impacted in the coming months. While inflation and interest rates hurt values and buying power, they also squeeze the profits from the large companies and force future growth plans to become conservative or even flat. That means every dollar you place in your retirement plan has to work harder in order to maintain the percentage of portfolio growth you require for your future retirement.  If you have not done so yet, you might want to check with a professional to examine your current retirement assets and risk assessment to determine if changes are in order. Rebalancing a portfolio is necessary periodically, particularly when wide swings in the market take place, as well as when the economy experiences a large shift such as the marketplace we are currently experiencing. There are also alternative investment strategies that you may want to investigate in or to balance your overall risk and ensure you have the nest egg needed when you are ready to retire.

This may not be a time of “easy money”, however, it is most certainly a time to respect the learned advice from professionals on new strategies you should consider to keep on pace for a successful future.