Trey and Sara R. from Mobile, AL ask: Hi Mitch, my wife and I are wondering if/how the Federal Reserve interest rate increases are going to affect our household budgeting. Should we be expecting interest rates to go up across the board, which may also mean earning more on our savings as well? Thank you for your time.
Mitch’s Response:
Thanks for writing. You ask an important and timely question, and the short answer is yes – you should expect to see some changes in your day-to-day budgeting. Interest rates are shifting for both borrowers and savers in the current environment, and I’d expect to see rates move even higher in the next few months.1
Let’s start with the borrowing side of the equation. Interest rates on credit cards have already seen a notable shift. Back in March, the average APR (annual percentage rate) on a credit card was 16.17%, and as of now, it has jumped past 18%. As a sidebar piece of advice here, I strongly urge you and all readers not to maintain any balances on credit cards that charge interest. If you have that kind of debt, it’s best to pay it off first before you contribute to any savings or retirement plans.
More Rate Hikes Are Ahead. What Does This Mean for Your Investments?
To help you protect your investments during times of uncertainty, I recommend reading our new guide that puts the current environment in the context of the past 70 years. You’ll get insight on:
- How stocks have performed historically in the midst of rising interest rates
- A brief history of Fed rate hike campaigns, and why they mattered
- Plus, more information and context to help make sense of the current environment so you can respond appropriately
If you have $500,000 or more to invest, download our free guide, The Federal Reserve is Raising Rates. What Does This Mean for Stocks?2’ today!
Another area where we’re seeing rising rates is in the mortgage market, where the average rate on a 30-year fixed mortgage has now crossed 6% for the first time since 2008. 30-year mortgage rates were as low as 3% to start the year, so we’ve seen a dramatic shift here. Higher rates are causing some would-be buyers to pull out of the market, which has led to a slowing in existing home sales. It is also resulting in what are known as “golden handcuffs” for would-be sellers, who are reluctant to sell since any new home purchase would potentially be financed with a much higher interest rate.
Finally, anyone considering the purchase of a new car should closely check the interest rate being offered. Much like credit card and mortgage interest rates, the rate on car loans has also climbed steadily over the course of the year. In the last six months, the average car loan rate has climbed from under 4% to just over 5%.
On the flip side, savers could also see higher interest rates offered on deposits and for products like Certificates of Deposit, or CDs. Unfortunately, however, yields on savings deposits tend to rise much more slowly than rates on the borrowing side, since banks do not have a ton of competition for deposits. Even still, savers can expect better than the basically 0% they’ve been earning in savings accounts for years. At a quick glance, many savings accounts are now paying about 2% annually on deposits.
So, what can investors expect in the months ahead? There isn’t an exact answer, but to help you protect your investments against rising interest rates, I can help you!
I recommend reading our new guide that covers the history of the Fed raising rates to better help you with your financial planning going forward. You’ll get insight on:
- How stocks have performed historically in the midst of rising interest rates
- A brief history of Fed rate hike campaigns, and why they mattered
- Plus, more information and context to help make sense of the current environment so you can respond appropriately
Disclosure
1 Wall Street Journal. September 23, 2022. https://www.wsj.com/articles/how-fed-rate-increases-hit-americans-monthly-budgets-11663757847
2 ZIM may amend or rescind the guide “The Federal Reserve is Raising Rates. What Does This Mean for Stocks” for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the guide “The Federal Reserve is Raising Rates. What Does This Mean for Stocks” for any reason and at ZIM’s discretion.
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