Trending
Interest rates play a pivotal role in our financial lives, influencing everything from mortgages and car loans to savings accounts and credit card debt.
The financial landscape is constantly evolving, so it’s important to continually digest how the current landscape is impacting the consumer. A year ago in May, the Federal Reserve set their target interest rate above 5%, and have been raising interest rates through various interest rate hikes over the course of the year. In turn, the consumer has had to adapt to not only a higher cost of living due to rising inflation, but also a higher interest rate environment. Now, as we look to the Federal Reserve for upcoming interest rate cuts, let’s take a look at how higher interest rates have impacted the consumer over the past year, and strategies to keep in mind.
1. Borrowing Costs
When interest rates rise, borrowing becomes more expensive. For those considering big-ticket purchases like homes or cars, this means higher monthly payments. Existing adjustable-rate mortgage holders may also experience increased payments as their interest rates adjust upwards. It’s crucial to factor in these potential costs when planning major financial decisions.
2. Savings and Investments
While higher interest rates might make borrowing more costly, they can also benefit savers and investors. High Yield Savings accounts, certificates of deposit (CDs), Treasury notes and bills, and other fixed-income investments often yield higher returns in a rising rate environment. This is great news for those with substantial savings, as they can expect better returns on their cash.
3. Credit Card Debt
On the flip side, if you carry credit card debt, a higher interest rate environment can be detrimental. Credit card interest rates are often variable and tend to rise alongside broader interest rate trends. This means that paying off credit card balances promptly becomes even more important, as carrying a balance will result in more significant interest charges.
4. Refinancing Opportunities
For those with existing loans, a higher interest rate environment can reduce the incentive to refinance. However, it’s essential to analyze the situation carefully. If you have a fixed-rate mortgage, you’re shielded from rate hikes. But if you have an adjustable-rate mortgage, it might still be worthwhile to explore refinancing options if rates remain relatively low. We have also seen clients explore 0% interest rate credit cards that are still available as a financing option on for upcoming goals and expenses.
5. Flexibility and Planning
The key to thriving in a higher interest rate environment is adaptability and thoughtful financial planning. Create or update your budget to account for potential increased expenses, save more diligently, and consider refinancing or consolidating high-interest debt to lower your interest costs. We’ve seen interesting articles from consumers stating that they are finally feeling the sting of inflation and higher cost of living. If you too are feeling the impact of inflation and higher interest rates, it may be time to revisit your budget and spending.
A higher interest rate environment is a financial landscape that impacts us all, whether we’re borrowers, savers, or investors. Understanding how it affects your wallet and taking proactive steps to adjust your financial strategy can help you navigate these changes successfully. Stay informed, make prudent financial decisions, and seek advice from financial experts if needed to ensure that your wallet remains resilient in the face of rising interest rates.
Related: May Financial Planning Checklist: Your Ultimate Guide