What rising interest rates mean for you

The Federal Reserve raised the benchmark interest rate four times in 2022, including increases of 0.75% in both June and July, and interest rates are likely to be on the rise. will resurrect.

When the interest rate changes, there are real effects on the way businesses and consumers make purchases. To understand how interest rates affect your personal finances, you need to understand exactly how they work.

What is an interest rate?

A interest rate it is the price you pay for borrowing money. Common examples include a mortgage, a car, or student loans or credit cards. When a lender lends money, they benefit from the interest paid. Ultimately, these fees will affect the total price you’ll pay once you’ve paid off the loan. Because no two loans are exactly alike, it can be difficult to decide which type of loan is best for you. Before you borrow, make sure you understand how the interest rate will affect your final payment amount.

Why is the Federal Reserve raising interest rates?

Interest rates are considered those of the Federal Reserve. main tool to combat inflation. The Federal Reserve can speed up or slow down the economy by moving interest rates up or down. When inflation is too high, the Federal Reserve generally raises interest rates to help slow the economy and reduce inflation. When inflation is too low, the Federal Reserve lowers interest rates to stimulate the economy and help inflation rise. By raising interest rates, and in turn making purchases more expensive, the Federal Reserve hopes to reduce Americans’ willingness to spend money to combat rising inflation.

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How Interest Rates Can Affect You

No matter your age, whether you’re buying your first home or approaching retirement, rising interest rates can affect you.

While the key interest rate isn’t tied directly to your mortgage rate, those looking to buy a home right now are suffering the most. Mortgage rates have been rising along with inflation throughout the spring and summer. Take a $400,000 loan as an example of this increase. A few months ago, that loan payment would have been about $1,700 per month. Today, however, the payment has increased by almost $800. With this dramatic rise and rising house prices, Mortgage applications are down almost 15% this time last year.

If you’re looking to buy a home or car and want to save money, try to secure a long-term loan rate as soon as possible before they go even higher.

If you’re past the days of buying new homes and thinking about retirement, interest rates could affect you, too. Interest rates have no direct influence on the stock market, but can cause it to fluctuate. The increase in rates has a significant effect on bond portfolios. When rates go up, the price of bonds goes down. Any long-term bonds you own can feel this impact significantly, while short-term bonds may be less affected. In the meantime, if you’re considering an annuity, higher interest rates could work to your advantage.

The bottom line

Having a diverse portfolio that includes stocks, bonds, and cash equivalents is your best tool for maintaining growth through rising interest rates. Of course, before making any major investment decisions, meet with a financial advisor to discuss your options.

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It doesn’t matter if interest rates are going up or down, working with a financial advisor is always a good idea. From building your retirement savings to planning your financial future, they are the experts. Don’t be afraid to ask questions. It’s your money and they want to do what’s best for you!

Founder and CEO, Drake and Associates

Tony Drake is a CERTIFIED FINANCIAL PLANNER™ and the founder and CEO of Drake and associates in Waukesha, Wis. Tony is a representative for investment advisers and has been helping clients prepare for retirement for over a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and appears regularly on television stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them create a solid plan for their retirement.