Interest Rates Rising (& Falling): What Does This Mean For You?
Inflation, increase in prices, interest rates hikes - there's quite a lot to take in now that the pandemic is simmering down.
As of writing this article, the US Federal Reserve is ramping up interest-rate hikes.
Why do they keep doing this?
First, we need to understand that Inflation and interest rates tend to move in the same direction because interest rates are typically used by the Federal Reserve (the US central bank) to manage inflation.
Inflation is typically referred to as an increase in the cost of living. This is an indicator that an economy is growing. However, if it is growing too fast, with prices rising faster than our wages, then the government may raise interest rates. In doing so, borrowing becomes expensive and people often see themselves spending less and saving more - which slows down the economy, eventually decreasing inflation.
Hence, it's not uncommon to see headlines of inflationary pressures accompanied by a rise in interest rates.
But what do all these mean for the everyday investor?
Essentially when interest rates go up, this means your loans will get more "expensive" to repay. Let us consider - if you have a 10 year car loan, and if the interest rate goes up, you're paying much more for a loan you took earlier due to paying a higher interest rate.
This can also affect your personal loans and mortgages, too.
I know how scary this can sound. Ultimately, it feels like it's not just the price of everyday goods that are going up but wanting to make ends meet can get difficult.
What can you do in your power to control these increases?
Here are two ways:
1. Be careful of your cash flow
With the fear of inflation going so high and an impending recession, it's important for you to evaluate what you have - in cash.
To do so, you need to:
Check how much cash you have
Control your expenditure
Find ways to earn more
Not sure how else to handle your personal finances, including cash, during inflation? Read this article: 3 Tips to Safeguard Your Personal Finance in the Midst of Inflation
2. Plan as much as you can
The idea here is to always stay one step ahead. While it's virtually impossible to plan for EVERY scenario, knowing what's happening in the market and parking your money safely in low risk options can help you cushion the possible increase in inflation, interest rate and recession.
As a financial consultant, I can tell you that there is no one-size-fits-all answer to how to handle all these market situations.
What I can do for you is listen to where you stand and find options that work for your situation. Feel free to drop me a message or email if you need help with your personal finances.