As a financial advisor, I am often asked about how the rising interest rates affect the financial well-being of average Americans. Simply put, interest rates are the cost of borrowing money, and any changes in them can have a significant impact on various aspects of personal finance. Learn about how rising interest rates can affect your financial situation in terms of loans, savings, investments, and more.
Why Do Interest Rates Fluxuate?
One of the reasons the Federal Reserve raises interest rates is to curb inflation. Inflation is the rate at which the prices of goods and services increase over time. When inflation is high, the purchasing power of your money decreases, and you may need more money to buy the same goods and services. Therefore, rising interest rates can help keep inflation in check and preserve the value of your money.
Why has the Interest Rate Risen Recently?
Now, let’s understand what caused interest rates to rise recently. Since the onset of the coronavirus pandemic in the spring of 2020, inflation in the United States has been painfully high. The onset of a global pandemic caused major supply chain disruptions. This is combined with significant political unrest in the world as Russia is at war with Ukraine. The result is that the prices of consumer goods and services increased, making everyday life more expensive. Therefore, the only tool the government has to offset this trend is to make money more expensive to borrow by raising interest rates.
How Rising Interest Rates Affect Your Personal Finances
Loans
Higher interest rates mean that borrowing money becomes more expensive. This can impact mortgages, car loans, personal loans, and credit card debt. For instance, if you have an adjustable-rate mortgage (ARM), your interest rate may reset to a higher rate, making your monthly payments go up. Similarly, if you have credit card debt, the interest rate on your balance may increase, making it harder to pay off the debt. Therefore, it’s crucial to consider the impact of rising interest rates on your loan payments and adjust your budget accordingly.
Savings
While higher interest rates make borrowing more expensive, they also make saving more lucrative. For instance, if you have a high-yield savings account, you may earn more interest on your savings as interest rates rise. Nevertheless, it’s essential to shop around for higher-yielding savings accounts or CDs to take advantage of rising interest rates and make more money from your savings.
Investments
Rising interest rates can also affect investments in various ways. For instance, when interest rates rise, the bond market tends to decline as the fixed interest payments become less attractive. This can impact your bond investments and your retirement portfolio. Moreover, rising interest rates can impact the stock market as well. When interest rates rise, companies may face higher borrowing costs, which can lower their profits and stock prices. Therefore, it’s important to review your investment portfolio and consider adjusting it based on the impact of rising interest rates on different asset classes.
Conclusion
Overall, rising rates can have both positive and negative impacts on your financial well-being. While higher interest rates can make borrowing more expensive, they can also make saving more lucrative. However, rates can impact your investments, which can affect your retirement portfolio and the purchasing power of your money. As a financial advisor, I recommend that you review your financial goals and adjust your budget and investment portfolio based on the impact of rising interest rates. It’s also crucial to stay informed about the economic outlook and the Federal Reserve’s monetary policy to make informed financial decisions. For more information and advice on how to adjust to rising interest rates, contact the financial experts at Tostrud & Temp