It has been a long time since we have been in a rising interest rate environment and common questions arise as to how to best react especially given the volatility of the equity markets etc.

Certainly, if you have credit card debt, you have seen the interest rates creep up on those balances and your first goal should be to rid yourself of that debt as quickly as possible. However, what if you have no credit card debt but have a mortgage, car loan, etc. at very favorable fixed rates. It is not uncommon for folks to have 30 year mortgages at 2.5% and auto loans at 1.9% etc. Should you pay extra on those to pay them off earlier?

The quick answer is no. Rising interest rates also mean a better return on your money. It is likely you can find CDs (certificates of deposit) with interest rates higher than 3%. This means you will get a better return on your money from the CD savings than you would by paying down debt with a favorable interest rate.

As interest rates continue to rise, so will savings rates and the arbitrage rate (savings rate – debt rate) will only improve over time. If you look beyond CDs to bonds or dividend yields, the situation gets even better.

To sum it all up: KEEP your very low interest rate loans and take advantage of rising rates of return on investments to maximize wealth.