Interest rate hikes and YOU!

Hey smartypants,

There’s been a lot of chatter about the FED announcing interest rates going up - and this is going to affect everything financial. It will affect YOUR WALLET, let’s talk about that so you can prepare for rising interest rates, save money, and do really well when others are freaking out because they don’t understand what’s going on.

 

I made a video about what you should do with rising interest rates - check it out!

 


As with all things personal finance is personal, I don’t know you or your situation, so this is for educational and informational purposes only. You’ll need to talk to a financial professional to figure out what’s your best move. Check out my hilarious video on how to choose a financial professional.



 
 

What happened? What is the FED rate?

The FED raised its benchmark federal-funds rate by .25%. I KNOW - this isn’t exactly edge-of-your-seat information BUT IT IS IMPORTANT!

The federal-funds rate is the cost for banks to lend money to other banks. Thus, all other interest rates are based on this one - credit cards, car loans, mortgages, savings accounts, all of it. And this has serious ripple effects across the globe.

It’s like, if Beyoncee, or name your pop idol, started wearing neon lipstick, everyone else would do so because she sets trends. Yes, I just compared the FED rate to Beyonce. 

The FED is looking at raising interest rates six more times this year, so whatever changes to your money happen with this teeny increase is a shadow of what’s to come (*spoooooky*). They’ve signaled - so this hasn’t happened yet and may not happen - that the interest rate will be raised to about 2% by the end of the year.

Now, Beyoncee is wearing neon nailpolish and jewelry and maybe dyed her hair neon purple (that would look amazing) - - and so is everyone else, because she did it first.

They’re doing this to help calm down inflation. Inflation is super complicated, but this *usually* works by reducing spending and borrowing and increasing savings. So if you’ve been hit hard by rising prices due to inflation, this *should* help you save money there.

Before you go thinking 2% interest rate is INSANE, here’s a historical graph of the effective federal funds rate showing you where the rate was just before the pandemic:

The interest rate was about 2% pre-pandemic. See how in the past few years it’s been bonkers low. Yeah. It’s gonna be fine. 2% isn’t that much.

When you look at the effective federal funds rate over the past 70 years, it’s been all over the place, so don’t think this is unprecedented or that 2% is high. What was unprecedented was how low it’s been since the Great Recession.

So, the important bit is what will rising interest rates do to your money? How can you prepare and thrive?

Here are my 5 things you can expect rising interest rates to affect:

  1. The BIG effect rising interest rates will have on your money - Cost of borrowing is going to increase. Let’s talk about the different ways people borrow money that may affect you.

    1. Credit card borrowers will see this almost immediately (if you carry a balance)

      1. Likely won’t have much of a difference on your minimum payment but it will, in time, cost you a lot more in interest

      2. So, if you were looking for a sign to get out of credit card debt, consider this it!

    2. Cost of homebuying is going to go up - but it takes much longer for the fed rate to affect the cost of homebuying, especially compared to how fast you’ll see it on your credit card statement.

      1. Even if you feel like you’ve been priced out of the market, this should help as the increase in interest rates should slow down how fast homes are appreciating.

      2. This may be good or bad depending on if you’re buying or selling

    3. For student loans, this doesn’t affect loans you currently have with fixed interest rates. 

      1. New loans or loans with variable interest rates, however, may be affected. 

      2. Congress will set the 2022-2023 interest rate in a few months, so we won’t know until then.

      3. New private student loan interest rates will probably increase.

      4. If you have a variable rate private student loan, your interest rate almost assuredly will go up.

    4. If you’re a small-business owner, and you know you’ll need to borrow money in the near-term, the next few months may be the time to lock in favorable terms before the cost of borrowing increases

    5. If you have a HELOC with a variable interest rate, your interest rate and payments are going up

      1. Some banks will let you convert a variable interest rate HELOC into a fixed rate, you may want to look into this

    6. Basically, If you have a variable interest rate on anything, every time the FED rate goes up, your interest is going to go up

  2. The second effect rising interest rates will have on your money: You’ll need a higher credit score to borrow money

    1. Banks will make fewer loans, so they will be more selective in who gets the loans.

    2. Thus, the credit score required to borrow money from banks is going to increase. 

    3. For example, if a bank would lend to anyone with a 650 and higher before the interest rate increase, now you may have to have at minimum a 680. Every bank has different lending standards, if you get rejected at one, try another.

  3. Third effect rising interest rates will have on your money: You’ll make more money from interest in your savings account…probably

    1. With this caveat: this happens in normal times and we are in anything but normal times

    2. Because savings rates are at their highest since WWII, banks don’t have much of an incentive to increase interest rates on savings accounts, so although historically, savings rates do go up, we’ll have to see on that.

    3. BUT a very safe savings vehicle, the CD, will probably increase their interest rates. 

    4. You may want to consider moving money from savings to a CD 

      1. Know that CDs lock your money in for the agreed on duration.

      2. As interest rates rise over the next year, so will CD rates and if you lock your money in a CD now, you won’t get the better rates it *looks like* the FED will be implementing over the next year

  4. The fourth effect rising interest rates will have on your money: value of your retirement and investments may go up. Or down. We’re in weird times.

    1. Generally, when interest rates rise, consumers buy less, which reduces companies’ profits, which makes the stock less desirable, so the price of the stock goes down.

    2. However, over the past few years, the market has not been responding to the changes in a way that, according to history and economic modeling, it should.

    3. So on the news that interest rates were going up, the stock market also went up

    4. Either way, the reason I’m including this and what you need to know, as Jill Schlesinger recommends in her book “Dumb things smart people do with their money” stick to the plan you made when investing. If you said you’d put in $100 a week, keep doing that. If you said you’d sell when your stock hit $X, do that. Stick to your plan.

  5. The fifth effect rising interest rates will have is, ideally, lowering inflation. I would be remiss if I didn’t mention that it may also cause a recession.

    1. So - yay, rising costs for goods will settle down! Boo - potential for recession!

    2. Inflation is very, very complicated. Consider it like weather forecasting two weeks from now.

      1. Sure, we have historical data and know what the weather is doing now and can make an informed guess as to what it’ll do in two weeks, but who knows? Butterfly flaps its wings in Indonesia, Peoria gets a blizzard. 

    3. Although, usually, raising interest rates does cool down a market, rising interest rates too fast can cause a recession like that in the late 70s and 80s. And that’s scary and something to watch out for.

      1. What you need to know is that our inflation has very different causes than the inflation of the late 70s and 80s when the FED rate went bonkers

      2. So, yes, recession could occur - let me be very clear, I don’t think it will - the FED has learned a lot from history and has many refined methods to make sure this doesn’t happen. That said, they’re humans, they’re fallible, and the future is a vast unknown.

      3. I recommend the NY Times podcast The Daily, “Inflation Lessons from the 1970s” - from Wed March 16th, 2022. as well as Make Me Smart podcast “The Not-So-Easy Thing about Taming Inflation” from Wed March 23rd, 2022.


My prognostications for your money. 

  • It’ll cost more to borrow, so if you know something is coming up, consider getting the money now OR if you have a variable rate loan, try to get that converted to a fixed rate

  • You’ll need a better credit score to borrow money

  • You’ll make more in interest from saving money

  • Stick to whatever your financial plan is when it comes to investments and hold on for the ride.

  • Inflation *should* calm down so your dollar will go farther.


Thanks for reading!

Cheers,

Kate

Kate Moody