Interest Rates are climbing across the board. What does this mean to you? How will it cost you, or more positively stated, how can you benefit? Since interest rates impact your finances in many ways throughout your life it’s important to know how, so you can make wise decisions along the way.
The Federal Reserve sets what’s called the Federal Fund Rate. Competition through normal market conditions then drive changes throughout the rest of the financial world. Not sure how interest rates impact your personal finances? Here are just a few examples: savings accounts, mortgages, credit cards, auto loans, insurance products, bonds, inflation, your purchasing power, and ultimately the stock market.
The Good news about rising interest rates:
- Savings Accounts - Rates are going up for the first time in a long time. Whenever the Fed raises rates, you should make more money on the interest in your account.
- CDs and Annuities - Higher rates mean savers and retirees may see more interest income.
- Loans - Banks may be willing to lend more, which helps individuals buy more things and/or invest in their homes or businesses. This helps boost economic growth.
- Mortgages – The monthly payment on a new mortgage increases as interest rates rise. This means your purchasing power is reduced; you can’t afford as much house. This can slow demand for higher priced homes (while increasing demand for mid-priced homes).
- Auto Loans – These loans get more expensive too. Promotional 0% loans are less likely.
- Credit Cards – The rates on most credit cards are already high and they change when the Fed changes rates. The best strategy is to avoid this type of debt altogether, but if you do have credit card debt, do all you can to pay it down as fast as possible.
And the Ugly:
- The global stock market is more volatile this year due to a variety of factors, but investors watch the Fed’s rate changes as a signal about the strength of the economy (and the Fed expects to continue to raise rates in 2018). With the economy strong and unemployment low, this can create uncertainty regarding inflation. If inflation begins to rise the Fed is likely to increase rates even further (to cool a potentially overheated economy), which incents investors to buy bonds over stocks. All said, this means stock market returns may be lower (than the recent past) and/or more volatile. Key point - this is all part of a normal economic cycle. It’s normally unpredictable.
With good information you can make prudent financial decisions throughout your life. If you are unsure of what to do in your situation, seek help. Wise advice goes a long way toward helping your family achieve your financial goals. It begins with a meaningful conversation.
Life’s a journey––navigate it wisely!