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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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!
-
Smart Strategies for Paying Your Child an AllowanceBy giving your kids money to spend and save, you’ll help them sharpen their financial skills at an early age.
-
The Mulligan Rule of Retirement — Seven Mistakes You Can FixUse the Mulligan Rule to undo these seven costly retirement errors. While you can’t go back in time, some retirement choices allow for a “correction shot.”
-
From Pets to Paintings: The Little Things That Can Cause Big Estate TroubleSentimental items might have little monetary value, but their disposition can cause hurt feelings. Talking about who wants what and labeling items can help.
-
The Clock Is Ticking: Take Advantage of These Retirement Tax Benefits While They LastRecent tax changes, including an extra $6,000 deduction for those 65 and older, present a golden opportunity for retirees to reduce their tax bills.
-
I'm a Financial Adviser: This Is Why Unmarried Same-Sex Couples Need an Estate PlanWhen illness or death occurs within an unmarried same-sex partnership, family members can step in and push the surviving partner out. An estate plan is vital.
-
A Financial Planner's Guide to a Stress-Free Adventure AbroadStart by looking at flight/accommodation costs, have a flexible schedule, seek out credit card rewards, prep for health issues and plan to cook your own food.
-
I'm a Financial Planner: This Is How Smart Women Can Plan for Financial Freedom Despite Life's CurveballsProactive planning and professional guidance can help to build your confidence and give you clarity when you're navigating major life transitions.
-
Parents and Caregivers: Don't Miss Your Roth Conversion WindowCaring for a child or parent can mean a drop in income and a lower tax bracket. Why not take advantage by moving money into a Roth account? Here's how it works.
-
Testing the Retirement Waters in Florida? A Partial Plunge May Negate Tax BreaksMost folks know Florida is a tax-friendly state, but they might not know that part-time residents may not qualify, as our cautionary tale shows.
-
Catch-Up Contributions for Higher Earners in 457(b) Plans: What You Need to KnowGovernment 457(b) plans are about to get more complex as new Roth catch-up requirements come into force. Here's how to prepare for the changes.
