| The media has been running stories about potentially rising interest rates for many years, but rates have remained close to record lows since the last recession. Most recently, however, interest rates have indeed started to trend upward as predicted, and this trend may reasonably continue in the coming years. This begs the question of whether rising interest rates will harm your finances or benefit them. The answer is that they can affect your finances in both ways. A closer look at how interest rates affect you will help you to position your finances for optimal benefits.
The Impact on Your Debts
Interest rates directly impact the cost of your debts. If you have a fixed rate debt, such as is common with a home or a car loan, rising interest rates will not affect these debts until you refinance your home or buy a new car. You also may have adjustable rate debt, such as is common with credit cards and some loans. The rates on these debts will rise as the market rates rise, and this means that your monthly debt payments will increase. If you carry substantial debt with an adjustable rate, you can generally expect your budget to feel burdened. Furthermore, high interest rates can be costlier when you apply for new financing in the future.
The Impact on Your Assets
On the other hand, rising interest rates can be beneficial for you if you have specific types of assets. For example, savings accounts and money market accounts are directly tied to interest rates, and you will benefit from a higher yield on these accounts. CD rates and bond rates generally will improve substantially as well, and this means that you can enjoy a higher yield on relatively safe investments. Stocks and mutual funds may be hit for a short period of time until corporations adjust their finances. Understanding how your assets are tied to interest rates is important if you want to take full advantage of rising rates while minimizing your financial risk.
How to Position Yourself to Benefit From Rising Interest Rates
As you can see, in the most basic sense, rising interest rates benefit your assets and are detrimental to your debts. Interest rates typically do not increase overnight, and you can likely expect a very slow increase in interest rates over the course of several years or more. With this in mind, you have ample time to re-position your finances to take full advantage of the situation. Make an effort to pay down debt balances. Take out new debt strategically. For example, now may be the time to purchase a home so that you can lock in a low interest rate with a 30-year fixed term. Eliminate adjustable rate debt, if possible. In addition, prepare to take advantage of rising interest rates with strategic CD and bond purchases. You may even invest in rental real estate now. You can lock in a low fixed rate mortgage on your rental property, and you can enjoy the income stream with affordable financing for decades.
Interest rates are a critical component to personal finances. By understanding how interest rates impact your financial well-being and by paying attention to expert insight regarding changes to interest rates, you can better position yourself to improve your financial situation in the years to come. |