How Changing Interest Rates May Affect Your Finances

Article details provided by Jamie Dewese, Wealth Management Advisor

Interest rates fluctuate due to policies set by the Federal Reserve.

When demand for goods and services increases, costs tend to rise, causing inflation, which can prompt the Fed to raise interest rates in an attempt to bring inflation back down to a healthy level.

That can affect the cost of borrowing, monthly loan payments, credit card interest, disposable income, and savings. Understanding how rising interest rates impact your finances can help you protect your bottom line in times of economic uncertainty.

Protecting Your Finances

You can shield your personal finances from interest rate volatility by minimizing or eliminating debt, or opting for low-interest, fixed-rate loans. If you have a particularly tight budget, in a lower interest rate environment, you may consider longer-term loans to secure a reasonable rate over a longer period of time rather than short-term options. This will also result in a lower monthly payment over time to help take some pressure off a monthly budget.

Additional Options Include:

• Refinancing high-interest debt
• Increasing your savings
• Maintaining good credit
• Consulting a financial advisor

Lending and Refinancing Options

According to Wealth Management Advisor Jamie Dewese, refinancing a fixed-rate mortgage when interest rates are low if there’s an option of lowering the rate can be effective. If rates are on the rise, however, Jamie believes that in some cases, an adjustable-rate mortgage (ARM) or short-term loan could provide temporary savings. But you should plan to refinance to a fixed rate later when rates are lower, he said.

Secured loans, such as home loans, may be easier to come by since you’re providing collateral that generally appreciates over time. Personal and auto loans carry more risk due to a lack of collateral and depreciation, respectively.

Impact on Savings Accounts and Fixed-Income Investments

High interest rates generally benefit money market and savings accounts because they provide better short-term yields. If rates begin to fall, you may want to shift from cash to longer-term investments like bonds to capitalize on the lingering effects of high rates before they drop. Increasing the duration of fixed-rate investments at a time when the Fed is signaling that monetary policy is going to be loosening can be a very effective move to secure healthy yields for a longer period of time as the yield curve adjusts with the Fed’s policy changes.

“It’s essential to educate yourself before committing to one type of investment,” Jamie said. “Research the interest being paid on low-risk assets such as money market funds. You may discover other opportunities to get a better return on investments without taking additional risk.”

Interest Rates in Long-Term Financial Planning

The experts at Croghan can help you plan with flexibility in mind and provide insight into low-risk investments like fixed annuities and CDs. We’re well-versed in strategic investment planning to help you adjust your portfolio to accommodate interest rate changes. We can also review debt management, savings optimizations, and tax deductions to offset the potential risks of a high-interest-rate economy.

Contact our Wealth Management Team to learn more about managing your business's wealth during interest fluctuations.