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How Do Interest Rates Affect Your Finances

Everyone seems to talk about interest rates, especially right now because they are historically very low.  However, two decades ago, they were extremely high.  But the real question is how interest rates affect your finances?  Here is the breakdown of you are affected.

When you’re Saving

If you’re saving money, the current interest rate definitely affects savings accounts.  If interest rates are low, you will get a lower interest rate on your money.  If interest rates are high, you will get paid a higher interest rate on your money.

You get better interest rates on long term savings, like CDs, but then you will be locked in when rates rise back up, making your future returns worth less.  When rates are low, it is best to keep money in the short term rates, so that you can take advantage when they rise again.

When you’re Borrowing Money

If you’re borrowing money, low interest rates are a blessing.  Having low interest rates means the amount of interest you will pay on your loan will be less.  Right now, with interest rates being historically low, you can save a lot of money by refinancing any money you’ve borrowed in the past.

However, when interest rates rise, the amount of interest you will pay on your debt will go up unless you have a fixed rate loan.  This put individuals who have variable or adjustable rate loans at a disadvantage.

When you’re Investing

When you’re investing, interest rates can play a little havoc with your portfolio.  If you’re invested in stocks, low interest rates typically boost the stock market because cheap capital allows companies to boost their bottom lines, which in turn boosts shareholder returns.

However, if you invest in bonds, low interest rates typically raise bond prices while lowering bond yields.  If you need the fixed income, this is a bad thing.  If you speculate in prices, this is a good thing.  However, as interest rates rise in the future, bond prices will fall, especially on long term bonds.  That is why it is a good idea to only hold short term debt.

Post by Robert

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