What Rising Interest Rates Mean For You

With inflation continuing to grow, the Federal Reserve’s battle against it isn’t ending
anytime soon. This means higher interest rates making it harder for families and businesses to
borrow money. Balancing inflation and interest rates is a complex issue, and it has a big
influence on your wallet.

The Federal Reserve has now raised the benchmark interest rate 11 times since March 2022,
including its 0.25% increase on Wednesday. When the interest rate changes, there are real-
world effects on how both businesses and consumers make purchases. To understand how
interest rates affect your personal finances, you need to understand exactly how they work.

What Is an Interest Rate?

An interest rate is the price you pay to borrow money. Common examples include a mortgage,
car or student loans or credit cards. When a lender loans money, they profit off of the interest
paid. In the end, these rates will affect the overall price you pay once the loan is paid off.
Because no two loans are exactly alike, it can be hard to decide which type of loan is best for
you. Before you borrow, make sure you understand how the interest rate will affect your final
payoff amount.

Why Does the Federal Reserve Raise Interest Rates?

Interest rates are considered the Federal Reserve’s main tool for fighting inflation. The Fed can
speed up or slow down the economy by moving interest rates lower or higher. When inflation is
too high, the Federal Reserve will typically raise interest rates to help slow the economy and
bring inflation down. When inflation becomes too low, the Federal Reserve lowers interest
rates to stimulate the economy and help move inflation higher. By raising interest rates and, in
turn, making purchases more expensive, the Federal Reserve is hoping to slow Americans’
willingness to spend money to combat rising inflation.

How Interest Rates Can Affect You

No matter your age, whether you are buying your first home or getting close to retirement,
rising interest rates can affect you.

While the key interest rate is not tied directly to your mortgage rate, those looking to buy a
home right now are hurting the most. Mortgage rates have been rising, with the current average 30-year fixed interest rate at 7.28%, according to Bankrate. Look at a loan of $400,000
as an example of this increase. In spring 2022, the payment on that loan would have been
around $1,700 per month. Today, however, the payment has increased by almost $400.

If you’re looking to purchase a home or a car and want to save money, try locking in a long-
term loan rate as soon as possible before they increase even more.

If you’re past the days of purchasing new homes and looking toward retirement, interest rates
could also be affecting you. Interest rates are not a direct influence on the stock market, but
they can cause it to fluctuate. Rising rates do have a significant effect on bond portfolios. When
the rates go up, the price of bonds goes down. Any long-term bonds you have can feel this
impact significantly, while short-term bonds may be less impacted. Meanwhile, if you are
considering an annuity, rising interest rates could be beneficial for you.

The Bottom Line

Having a diverse portfolio that includes stocks, bonds and cash equivalents is your best tool for
maintaining growth through rising interest rates. Of course, before making any major
investment decisions, meet with a financial advisor to discuss your options.
No matter whether interest rates are rising or falling, working with a financial advisor is always
a good idea. From accumulating your retirement savings to planning your financial future, they
are the experts. Don’t be afraid to ask questions. It’s your money, and they want to do what is
best for you!