Impact of Higher Interest Rates on Couples With Pooled Finances – | Vette Leader

Financial matters can be complicated when you are a couple. If you don’t come together to make decisions about how your common affairs should be handled, conflict can arise. With rising inflation and rising interest rates, it is all the more important to make quick and positive decisions.

And if you’re like many consumers who have borrowed to make up the shortfall, you also have to deal with higher and more expensive debt. In July 2022, the Federal Reserve increased interest rates by another three-quarters of a percentage point, causing the APR to rise further.

Now it’s time to review your finances with your partner. As you do so, there are steps you can take to weather this storm together. You might even get closer.

How rising interest rates affect household budgets

In June 2022, inflation hit a 20-year high of 9.1 percent. The impact is felt across almost all goods and services, with some common spending exceeding the average. The US Department of Labor’s July 2022 Consumer Price Index showed the cost of meat, poultry, fish and eggs rose 11.7 percent, fruits and vegetables rose 8.1 percent, and household cleaning products rose 11.3 percent. Utility (pipeline) gas service rose a staggering 38.4 percent.

The pressure that such rising costs can create is enormous. Incomes have not kept pace with inflation, so less money is available. If you were used to having more than enough to cover your household expenses, you may be experiencing an awkward pinch. But when you’ve just come through, the pain can be profound.

“Spending has increased and most people haven’t adjusted their budgets accordingly,” said Shmuel Shayowitz, president and chief lending officer at Approved Lending in River Edge, New Jersey. “There’s a lot more stress. Couples need to be open about their bills and expenses. I’ve found that households are usually on autopilot and people get into a routine, but they have to adapt to the new circumstances. That is serious.”

Communicate about money and adjust your actions

Danny Kofke, a content creator for a financial wellness company based in Atlanta, Georgia, says he and his wife communicated about their household budget so they could make the necessary adjustments.

“Our older daughter is starting college this year and we have to pay tuition and other costs,” says Kofke. “Now my wife and I are discussing food prices. She comes back from the grocery store and spent $250, and I’m like, “What did we buy?!” The bill is much higher than it used to be.”

Kofke and his wife, who have combined finances with all connected bank and credit accounts throughout their 22-year marriage, have taken action.

“We can’t control the economy, but we can control our spending,” says Kofke. To make the numbers work, he and his wife have begun cutting unnecessary items from their budget, including shutting down satellite TV. It all adds up, he says, explaining that if they don’t need it, they get rid of it.

How to manage merged finances

Making changes when you’re single can be easier than when you have a partner because you don’t need a buy-in. If you want to cut back on spending or forgo a vacation because inflation and interest rates are driving those costs up, and you’re willing to wait it out, you can.

However, your partner may not have the same level of commitment. To avoid conflict while staying on the same page, Shayowitz recommends setting up a formal 90-day or quarterly meeting where you simply discuss your goals and aspirations.

“Make it a macro review,” says Shayowitz. “Talk about all the things you want or need to do in your life. It doesn’t have to be a bill-by-bill discussion. When you focus on your goals, you will naturally also focus on what is standing in the way of achieving those goals.”

You can make the process of refining a budget effective by figuring out what each of you is passionate about. “There are certain things that you might not want to compromise on, and that’s okay,” says Shayowitz. “Now you need to save or release that money. Discuss how you will do it.”

If necessary, separate your finances

In times of financial stress, merged accounts can be difficult for couples. Each person can see the ebb and flow of money, which can lead to micromanagement. After that, arguments can ensue, with each pointing fingers at the other for overspending.

For this reason, Shayowitz says setting up separate bank accounts can be best.

“Couples can find them very helpful,” he says. “You can have a joint operating account where most of your income goes, and then a spillover account for each of you in your own name, where there are no questions or judgements.”

With this system, you can pay the household bills from the funds of the business account and then use the individual accounts for your specific interests.

How rising interest rates affect credit cards and couples

Budget changes can also help you avoid debt. Many are leaning on credit cards more than in the past. The 2022 report by the Federal Reserve Bank of New York’s Center for Microeconomic Data shows a 13 percent year-over-year increase in credit card balances, the largest increase in two decades.

And if your credit cards have variable APRs, expect rate increases. On July 20, 2022, the average interest rate on an adjustable rate credit card was 17.25 percent, up from 16.4 percent three months earlier. So if you take debt with you, financing fees will also be higher.

The Fed’s rate hike is also affecting new credit card accounts. So if you and your partner are in the market for a loan product, be prepared. The better your credit score, the more likely you are to qualify for lower rate cards.

Even though you’re half of a couple, you don’t have to combine your credit cards. You may want an individual account in just one person’s name. Most loan issuers allow you to add authorized users so your partner can use the account. Kofke and his wife share a single personal credit card, with one as the authorized user. With this regulation, both have access to the credit line and can manage it together.

Or you can opt for a joint account. This can be useful if you want the account to be a permanent part of your individual credit reports, or if you cannot qualify for the account on your own.

Whichever situation you choose, think about the right card for both of you and know that your actions with your account – whether separate or shared – can affect the other person. If you reach a balance that causes payments to escalate, you will have less money available for your merged bills. And when your credit score drops because you start missing payments, it impacts your combined goals, such as: B. buying a house or car.

Consolidated finance and debt management in times of interest rate hikes

If you haven’t talked about credit card management yet, don’t hesitate. One of you may be more inclined to weave your way out of inflationary problems and into expensive debt.

“The instant gratification of spending money will be very short-lived, but the payback will have ramifications for years,” says Shayowitz. “Make sure your partner is aware of the fact that borrowing money today affects your future. Helping them realize that they can give up something they want in order to avoid debt can add to the pressure.”

Remember, it’s about refocusing the conversation so it’s about goals. Will the additional charges on the credit cards help you achieve them or hinder you? Concentrate on this question.

If you’re already in debt and interest rates are rising, don’t waste time creating a repayment plan. Cutting expenses is great if you have room in your budget to cut it, but you may want to put more money into the fund by taking on a side hustle or a part-time job. Then, when you have the money, apply it to your credit card balance.

“I like the debt snowball method,” says Kofke, referring to the strategy of paying off your smallest debt first, and then applying the payments you used to the next smaller debt. “You build momentum because you see results quickly. When you do it together, it’s empowering. You achieve a goal that strengthens your bond. You can celebrate together!”

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