Why Interest Rates Matter

Interest Rates - What They Mean and How They Affect You

On March 21, 2018, the Federal Reserve announced that it will increase interest rates at least 3 times this year, the first of which commenced in tandem with their announcement.

Many people, upon hearing such news, know that it is important, but do not know (or really care?) how it relates to them personally. But, here’s some news for all of us:

Interest rate increases are a very, very big deal.

Think of this vague, mystical term – “interest rates” – as a lever of control that maneuvers the entire U.S. (thus global) economy.

Interest Rates Dashboard

The Federal Reserve has to gauge the health of the economy and then decide if the interest rates need to be adjusted to hit that sweet spot of low inflation and high employment.

OK. So what? I still don’t see how this affects me……..

Do you have a job? Do you have a bank account? Do you have a credit card? Do you own (or want to own) a home? Do you have an auto loan? Does you family have any of these? Do your friends?

If so, then all you have to know is that the Fed’s decision to increase or decrease interest rates affects at least one (in reality, all) of these factors in our lives.

Tell Me More Tell Me More! Did the Fed raise again?

Simply put, when interest rates rise, spending in the U.S. economy declines. When interest rates fall, spending in the U.S. economy increases. For us visual learners:

Interest Rates vs. Money Supply

Eesh. That’s intense. How do they control interest rates again?

This isn’t complicated, but it does take some explaining that I don’t have room for here. Maybe I’ll publish a free e-book that unpacks this.

But for now, just know that the Federal Reserve can’t simply say what the interest rates should be and it magically happens, but they manipulate rates by:

controlling the U.S. money supply → affects banks’ interest rate on loans to each other and to other businesses → affects businesses’ ability to grow → affects amount of money in employees’ pockets (thus spending) → affects amount of sales for all businesses

In essence, the Fed has some pull when it comes to how we live our lives.

Arghh! What should I do?!

Thankfully, the habits we’ve been talking about and building here keep us in a good position regardless of the increase or decrease in interest rates. But, there are a few things we can expect throughout the rest of 2018 with increased interest rates:

 

  • Higher mortgage rates (read: tens of thousands of dollars more over 30 years)
  • Higher credit card rates (read: your debt is now top priority!)
  • Higher auto loan rates
  • Fewer business loans (due to higher rates)
  • Lower business operating budget
  • Lower bonuses, pay raises, promotions
  • Lower hiring by companies

 

 

Stay saving, mis amigos.

 

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