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Carla Fried: Low interest rates may be here to stay; how to adjust

For the past year, interest rates have gone wildly off script, creating opportunity – and perhaps some problems – for your household finances.

A quick recap: In November 2018, the bellwether 10-year Treasury note paid an annual yield of slightly more than 3%. All the chatter was about whether the rate would continue to rise in 2019 or hover around 3%.

As you might have noticed, this key interest rate in fact has spent 2019 falling. A lot – to below 1.5% at one point. As of late September, it had climbed back to 1.8%

Short-term rates also fell, as the Federal Reserve reversed course and lowered its Federal Funds rate. Why? An increasingly cloudy global economic outlook. The trade war that's contributing to slower U.S. growth. Recession fears. The struggles of Japan and major developed European nations to keep their economies growing.

So, it's a smart time to see if there are personal finance tweaks you should consider to make the most of a low rate world.

–Emergency savings. Deposit accounts are likely going to yield less in coming months. That said, there are still plenty of online savings banks that offer accounts with yields of 2%. That's a lot more than the 0.3% average yield for old-school brick-and-mortar banks.

Inflation is currently running at less than 2%, so online banks make it possible to keep pace with inflation.

Of course, the interest rates that banks pay may go lower if the Fed continues to cut its target rate. That can make certificates of deposit (CDs) worth considering. A CD is issued for a set period – six months one year, two years, five years. The interest rate on Day 1 is guaranteed for the duration. The catch (a small one): If you want to take your money out before the CD matures, you will owe an early withdrawal penalty, typically a few months of interest.

A quick search for online savings banks will direct you to sites that list the top yielding CDs, lately, a two-year CD above 2.5%, five-year at 3%. Read the fine print about early withdrawal penalties. Leaving a chunk of your money in a savings account will reduce the likelihood you will ever need to cash out a CD early.

–Unpaid credit card balances. Lower rates should put the brakes on increases in interest rates charged on credit cards. The average rate has risen from around 15.5% a year ago to more than 17%. Still, even paying 14% is not a good deal.

The U.S. may have a year or more until a recession. If you have a solid credit score above 700, you may qualify for a balance transfer deal that will enable you to move your unpaid balance to a card that charges no interest for a year or more. That's time to work on paying down your balance.

–Mortgages. The decline in the 10-year Treasury note rate has sent mortgage rates falling, too. If you're contemplating refinancing (again), keep in mind that setting the payment clock back to 30 years extends your total payment period. If you are 10 years into a mortgage and refinancing into a 30-year, you are effectively signing up for 40 years of payments. Sure, the lower interest rate is going to work in your favor. But it's worth considering a payback schedule for a refinanced mortgage that will get you out of housing debt within the original 30-year – or even 15-year schedule.

–Retirement accounts. If you are saving for retirement, you likely have some money invested in bond funds. The performance of core bond funds, which track an index of high-quality bonds, is going to look fantastic for 2019.

When interest rates fall, bond prices rise. A bond fund's return is the combination of the interest earned (called yield) and the change in prices. In 2019, the price gains have been so big they have more than offset the lower yields. The result is that the average high-quality core bond fund that has a total return (gain) of more than 7%.

But now that yields are once again low, bond fund returns will be very muted if rates stay where they are today. If rates rise, bond prices will fall, which will reduce returns.

That's not a reason to bail on bonds. The main reason to own bonds – they hold up well when stocks are falling – remains in force. Typically, when stocks are crashing, bonds hold their value and often rise in value. But accepting that both bonds and stocks currently are highly valued, and thus have less room to generate strong return over the coming decade, can throw your retirement plan off track. Strategies such as delaying when you claim Social Security, or working a few years longer can help you land in retirement with the income you need.

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