How Higher Interest Rates Affect Your Finances

When interest rates rise, that means the cost to borrow money is higher, causing a ripple effect felt nationwide. It’s important to pay attention to these changes when you’re getting ready to take a big financial leap, such as starting a business or purchasing a home or car. Interest rate hikes can also affect the cost of goods that you consume everyday like groceries and gas, requiring a close eye on your budget.

How Do Rising Interest Rates Impact Inflation?

The central bank of the United States is the Federal Reserve or “the Fed,” which is tasked by Congress to maintain a stable economy. The fed uses interest rates to help balance inflation rates and the effects of inflation on the U.S. economy. When interest rates are lowered, consumers are more likely to borrow and spend money. Increased spending promotes growth and energizes the economy. Conversely, when interest rates rise, consumers are less likely to borrow and spend, knowing they’re going to pay more in the long run. This helps to contain inflation rates. 

Borrowing Money When Interest Rates Rise

Higher borrowing costs means consumers commit a larger share of their budgets to interest payments. If you’re in the market for a home purchase and rates are rising, you may need to compensate in other ways. For example, knowing interest rates are rising, you may want to put more money toward a down payment. This is one way to lower the amount of your loan and the overall total that that you owe. If you’re already a homeowner, increasing interest rates means it’s probably wise to hold off on refinancing your home unless the current rate is lower than what you received when you purchased your home originally.

How Interest Rates Affect Your Investments

Because interest rates impact all aspects of the economy, you may also be wondering about the relationship between interest rates and investments. When interest rates rise and consumerism slows, this can lead to companies having a decline in sales or deciding to pause plans for growth, which can have a negative effect on the performance of stocks.

While the stock market is not directly affected by interest rate increases, bonds are affected conversely. So, when interest rates rise, bond prices fall. After raising rates, a bond that was originally purchased for $2,000 may see a decrease in market value down to $1,800. But this is only an issue if you plan to sell the bond now. If you hold the bond to maturity, you should still receive the full par value, with the exception of default by the issuer.

As rates rise, fixed annuities become more attractive investments. The higher, stable income they can provide over a lifetime can be an offset to the risker parts of a person’s investment portfolio.

In general, rate fluctuations will likely only cause temporary effects to your investments. If you stay the course and focus on the long-term value, it’s not likely the effects will be drastic.

Protect Your Bottom Line

It’s a good idea to pay attention to what’s happening in the national markets before you make any big decisions with your money. Anticipating upcoming changes can help guide you on the right (or wrong) time to make a financial move. Connect with a Farm Bureau financial advisor to review your financial needs and create a strategy for reaching your financial goals.