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A recovering economy could mean higher rates

There's plenty of talk on Capitol Hill about the new administration's economic stimulus plan. If everything stays on track, $825 billion could start flowing through the economy in February. If it does, many economists think the world's largest economy could begin shaking off the recession near the end of 2009.

But an economic about-face may require big changes in your financial strategy. Here are a few tips on how to prepare for a recovery.

Interest rates: So long as the economy remains in the doldrums, interest rates are likely to remain low. But an economic recovery could mean higher rates on everything from savings accounts to credit cards. "If we're at the bottom of the cycle, and things look like they might improve, there will be pressure for interest rates to rise," says Cliff Michaels, president of Institutional Investment Advisors Corp., a New York-based independent financial planning and investment management firm.

If the economy does indeed take a turn for the better, Michaels offers this advice: "Switch your spending and your balances over to a credit card with a low fixed rate, lock in your mortgage or home-equity rates, and get out of any adjustable-rate loans."

Mortgages: Despite a recent jump, interest rates for fixed-rate mortgages (FRMs) are still at historic lows across the country: Oregonians can get a 5.25% 30-year FRM from Key Bank (KEY); Nebraskans can get a 5.5% 30-year FRM from Tier One Bank (TONE); and Virginians can get a 5.06% from Provident Bank of Maryland (PBKS). Rates are even lower on a 15-year FRM, but tighter lending restrictions mean not everyone will qualify for the best rates. Check out for rates in your area.

Deposit accounts: Rates on most deposit accounts, such as savings and money market accounts, will rise and fall along with interest rates. But some, like certificates of deposit (CDs), require that you lock in a fixed rate for a set period of time. To keep your money accessible, consider laddering your CDs. "Aim for six-month intervals," says Michaels, “but don't bother buying anything shorter than 12 months -- the interest rates aren't good enough." Instead, consider buying 12-month, 18-month and 24-month CDs, which should free up money if an economic recovery fuels higher interest rates . (For more on laddering CDs, read).

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