While driving into work this morning, the morning news was reporting on speculation that the Federal Reserve Bank (FED) might announce that they will begin raising interest rates sometime next year. Since the prime bubble burst in 2008, we’ve been enjoying very low interest rates. I say enjoying, but in reality if you are a saver and not a spender, you have not been happy at all about the historically low interest rates.
As I was listening to the news story, I had two questions. How do all of these interest rates work and how do they affect me? Let’s tackle the questions one at a time.
What determines the interest rate we pay?
Your bank ties the amount of interest you pay to the interest rate set by the FED. Typically your bank will set a Prime Rate that is 3% higher than the FED interest rate. On top of the Prime Rate, your bank will add additional interest based upon the risk of the loan. This additional interest represents the bank’s profit margin.
What will an increase in interest rates mean to someone like you and Me?
If you have a lot of debt, you could potentially see a big increase in your monthly payments. The increased payments are a result of increased interest rates for variable rate loans like credit cards and Adjustable Rate Mortgages (ARMs). In the end, carrying the debt you already have is likely to become more painful.
If you are a saver, you will finally see an increase in the amount of interest the bank offers you on your savings accounts.
In either situation, the rates are not going to change overnight. Any increases in the FED’s interest rate will be tied to the condition of our slowly recovering economy.
The big question is what should you do?
If you are a saver, just keep on saving. Any increase in interest rates can only help you. You will enjoy getting a better return from your savings accounts.
If you are a spender and have a lot of debt or already have a tight budget, then you need a plan:
- If you don’t already have a budget or spending plan, make one. Apprisen has a lot of tools and advice on how to put one together. Properly managing your money will show you the health of your finances in black and white. A spending plan will also give you the direction you need to set goals and stick to them.
- You need to pay down your debt so that you won’t feel a big impact from increased interest rates. If you need advice on how you can manage your finances and pay down your debt, you can get free financial advice from Apprisen by calling 800.355.2227 or by chatting online now.
- If you have an Adjustable Rate Mortgage (ARM), you need to read your mortgage closely to see how increased rates will affect you. If necessary, you should look into converting over to a fixed rate mortgage.
- If you are planning to make a big purchase like a new home or a car, think about buying sooner than later. Rising interest rates will mean larger monthly payments. Act soon to lock in a lower interest rate and save yourself a lot of money.
We know that higher interest rates are in our future. We just don’t know how soon or how fast interest rates will grow. We’ve been forewarned, so now is the perfect time for us to take control of our personal finances, create a plan, and pay down our debts.