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 interest 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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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 7.23%, 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 adviser to discuss your options.
No matter whether interest rates are rising or falling, working with a financial adviser 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!
-
The Y Rule of Retirement: Why Men Need to Plan DifferentlyIf you have a Y chromosome (because you're a guy), following the 'Y rule of retirement' can help you transition to this new life stage with grace.
-
Retire on This Island for Mediterranean Living on the CheapThis independent nation has a lower cost of living and more visa options than many of its Mediterranean cousins.
-
I'm a Financial Professional: It's Time to Stop Planning Your Retirement Like It's 1995Today's retirement isn't the same as in your parents' day. You need to be prepared for a much longer time frame and make a plan with purpose in mind.
-
An Attorney's Guide to Your Evolving Estate Plan: Set-It-and-Forget-It Won't WorkWhen did you last review your will? Before kids? Before a big move? An update is essential, but regular reviews are even better. Here's why.
-
For a Richer Retirement, Follow These Five Golden RulesThese Golden Rules of Retirement Planning, developed by a financial pro with many years of experience, can help you build a plan that delivers increased income and liquid savings while also reducing risk.
-
Time for a Money Checkup: An Expert Guide to Realigning Your Financial GPSEven if your financial plan is on autopilot, now is the perfect time to make sure it's still aligned with your goals, especially if retirement is on the horizon.
-
Five Things to Do if You're Forced Into Early Retirement (and How to Reset and Recover)Developing a solid retirement plan — before a layoff — can help you to adapt to unexpected changes in your timeline. Once the initial panic eases, you can confidently reimagine what's next.
-
Five Ways to Adapt Your Charitable Giving Strategy in a Changing World: An Expert GuideEconomic uncertainty, global events and increasing wealth are shaping the charitable landscape this year. Here are the philanthropic trends and some tips that could help affluent donors optimize their impact.
-
I'm an Estate Planning Attorney: These Are the Two Legal Documents Everyone Should HaveEvery adult should have a health care proxy and power of attorney — they save loved ones time, money and stress if a sudden illness or injury leaves you incapacitated.
-
I'm a Financial Professional: Here's My Investing Playbook for Political UncertaintyFor successful long-term investing in a politically charged environment, investors should focus on economic data, have a diversified portfolio and resist reacting to daily headlines.
