Interest rates are one of the most important financial concepts to understand, yet many people are unsure how they actually impact their day-to-day finances. Whether you’re saving, borrowing, or investing, interest rates play a major role in determining what happens to your money over time.
What Is an Interest Rate?
You probably already know that an interest rate is the cost of borrowing money or the reward for saving it. When you take out a loan or use a credit card, you pay interest on the amount borrowed. When you deposit money into a savings account or certificate of deposit, the bank pays you interest as a reward for keeping your money there.
Interest rates are typically expressed as a percentage and can either work for you or against you, depending on the situation.
When Interest Rates Rise
When interest rates go up, borrowing becomes more expensive. That translates into higher rates on credit cards, car loans, and mortgages. For example, a mortgage payment on a new home could increase significantly if rates have risen since you were last in the market.
On the positive side, higher interest rates can be good news for savers. You may earn more on your savings accounts, CDs, or money market accounts. It is also common to see bonds and other fixed-income investments offering better returns.
When Interest Rates Fall
Lower interest rates make it cheaper to borrow money. This can stimulate the economy by encouraging consumers and businesses to spend and invest. However, it also means that your savings may grow more slowly, and fixed income investments might yield less.
Why Interest Rates Fluctuate
As you’ve noticed, interest rates tend to change over time and trigger speculation in the news. That’s because they’re influenced by economic conditions and are often adjusted by the Federal Reserve to manage inflation, employment, and economic growth. When inflation is high, rates may rise to slow down spending. When the economy slows, rates may be lowered to encourage borrowing and investment.
What This Means for You
Understanding interest rates can help you make smarter financial decisions and take advantage of valuable opportunities. When rates are high, you might focus on paying down debt and taking advantage of higher savings returns. When rates are low, you might consider refinancing loans or investing in long-term growth opportunities.
By staying informed, you can make interest rates work in your favor and protect your financial future. Trying to decide on your next move? Call us to schedule an appointment, and we’ll help you plan for the future no matter what interest rates are doing.
