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Changes to interest rates can have a drastic effect on everything from mortgage payments and investments returns, to your finances and how best to prepare for them. Find out what these fluctuations entail and how to prepare yourself financially for them.
Low interest rates make loans and credit cards more affordable, while also helping you reach retirement and savings goals by increasing the return from bank deposits.
Borrowing Costs
Rising interest rates have an immediate and visible effect: borrowing money becomes more expensive. Banks usually follow suit when the federal funds rate changes by raising consumer loan interest rates for mortgages, auto loans, credit cards and personal debt - making new purchases more expensive while increasing total debt payments over time.
As the Fed raises rates, consumer spending decreases. This helps lower inflation and balance supply and demand in the economy.
Increased rates also cause businesses to scale back on their expansion plans, possibly leading to slower or even decreased economic growth, depending on how high or low rates are.
Higher interest rates can have serious ramifications on many aspects of financial planning, but it is crucial to take your entire picture into account when making decisions. For example, if your savings account or investments earn higher yield due to rising rates then investing more aggressively could make sense in order to grow wealth faster. On the other hand, if you are in the process of purchasing a home using an adjustable-rate mortgage or have credit card or student loan debt tied to variable rates then waiting until rates decline may be more prudent.
Investment Returns
The Federal Reserve's decisions around interest rates affect many financial products, from savings accounts and certificates of deposit to investments and mortgages. When rates are low, they can stimulate borrowing and spending--benefiting both the economy and improving your personal financial position. On the other hand, when rates rise they often make debt more costly and reduce returns from stocks and bonds investments.
Rising interest rates can lead to inflation, making it harder for your money to purchase goods and services at their original costs. This makes saving for retirement or long-term goals more difficult; however, you can counter the effects by earning an investment portfolio with higher returns than inflation rates.
Inflation and interest rate fluctuations can significantly impact the value of your home, business and investments, so it's crucial that when reviewing assets it takes these into account. Working with Northwest Bank financial professionals will allow you to understand how changing interest rates could alter your strategy - they'll update accordingly. They can also discuss how inflation and rising rates might impede cash flow management strategies which help manage these changes more easily.
Retirement Planning
Retirement planning is a critical element of financial planning, involving an analysis of future expenses and savings to ascertain whether you will have sufficient money for comfortable living after you retire. You also must decide how much to save each month and which accounts should be utilized. Many struggle to save enough for retirement as other goals such as paying down debt or building an emergency fund take priority over saving for it - however it is crucial that early action be taken so as to take full advantage of tax-advantaged accounts and start saving as early as possible!
Lower interest rates make it harder to generate sufficient returns from fixed income instruments like certificates of deposit (CDs) and bonds, but rising rates could boost these returns, helping your savings grow faster towards long-term goals such as retirement.
As inflation threatens your retirement plans, it is essential that you consider its effects. If your savings don't keep pace with rising prices, over time your purchasing power could diminish significantly - this is why regular assessments must take place so any necessary adjustments can be made accordingly.
Savings
Saving is crucial for meeting both short and long-term financial goals, such as purchasing a home, paying for college expenses or traveling abroad. But as interest rates rise and inflation bites deeper into our savings accounts, their purchasing power diminishes with each passing day, decreasing its worth over time.
As inflation-adjusted interest rates drop, your savings gain purchasing power at an increased pace without losing purchasing power. You're then able to use more of what you save toward reaching your goals without fearing loss of purchasing power.
If you're planning a big purchase like a car or home, take note of how rising and falling interest rates affect your monthly payments; this will allow you to decide whether it would be more prudent to make one lump sum payment upfront or finance over time.
As interest rates increase, borrowing costs may rise, potentially having a detrimental impact on your credit health and ability to qualify for loans or mortgages. Therefore, it's advisable to regularly revisit and reassess your budget to ensure you remain on track toward reaching your financial goals.
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