Worried about all the ways the Fed interest rate could impact your finances? That’s totally natural, considering the Fed and its interest rate hikes have dominated headlines for months.
Many people get spooked when interest rates come up. Rising rates can raise a lot of questions: Will rising interest rates impact your finances by making mortgages too expensive? Could you miss out on your chance to borrow while it’s still cheap to do so?
These questions are valid when talking rate hikes, but making decisions based on news headlines alone can be problematic. They could lead you to act from a place of fear or paranoia instead of acting based on rational thinking and your long-term financial plan.
So will rising interest rates impact your finances? Maybe not as much as you think. Here’s why:
Your financial plan is a strategy for the long haul
Building wealth usually requires a long-term plan. That could mean a plan spanning 20, 30 or even 40 years.
“One way to achieve success is to create a long-term strategy and actually stick with it,” says Eric Roberge, a certified financial planner and owner of the financial planning firm Beyond Your Hammock.
You may be caught up on how rising interest rates will impact your finances today, but a long-term strategy revolves around bigger trends rather than day-to-day or even year-to-year fluctuations. “You don’t want to plan long term and then change every time you get spooked by a headline,” Roberge says.
Let’s say you want to buy a house in five years. “There’s probably a reason your goal is to buy in five years,” Roberge says. “Maybe you don’t have enough saved yet and you need that time to build a down payment. Maybe you’re not sure where you want to live long term. Just because interest rates are rising, that doesn’t change the realities of your current situation.”
If you want to make a small adjustment to your plan, like buying a home in the next six months instead of the next 12, you may consider pulling the trigger sooner depending on your financial situation.
But altering your entire plan because you’re thinking of all the ways the Fed interest rate could impact your finances? “That’s crazy,” Roberge says.
Focus on your goals despite market activity
When contemplating how rising interest rates will impact your finances, remember: Talk about rising interest rates is just talk. Until the Fed actually raises rates.
“The Fed’s plan is to raise interest rates multiple times in 2017, but we don’t actually know that this will happen,” says Bill Nelson, advisor and owner of financial planning firm Pacesetter Planning.
Nelson believes a long-term plan should account for changes in rates. “Expect interest rates to fluctuate up and down,” he says. He also suggests making your financial plans about your goals, not current events.
“Make decisions based on what you’re looking to accomplish with your money,” Nelson says. He explains that your financial goals can help you determine where you should save or invest. The factors he tells his clients to focus on? The time frame of the financial goal and your personal appetite for risk. That means questioning the ways the Fed interest rate could impact your finances is not necessarily part of the decision-making process.
Nelson also points out the Fed could always hold interest rates steady for longer than the headlines suggest. “[The Fed] could even decrease rates this year,” he says.
If you’re focused on your goals and what you can control to achieve them—like automating your savings to set aside a specific amount each month ahead of a large purchase—then fluctuations in rate may not dramatically impact your plan. Debating the ways the Fed interest rate could impact your finances won’t have to keep you up at night.
Delay gratification to maximize gains
Nick True likes to talk about how behavior and habits impact long-term wealth on his blog, Mapped Out Money. Being disciplined enough to stay on track, he says, is key.
“By letting current rates dictate decisions, you’re chasing short-term wins and instilling overarching bad behavior,” True says.
Say, for example, you empty your investment accounts (which you’ve earmarked for long-term wealth building) to buy a home now because you’re concerned about how rising interest rates will impact your finances. You may get the short-term win: becoming a homeowner sooner rather than later and before mortgage rates may have the chance to rise.
That immediate “win” could come at a long-term cost: missing out on the chance to earn returns on your investments. You’ll also reset your savings timeline and may miss out on the power of compound interest, which works best over time.
Other reasons not to panic about rising interest rates
If you’re still worried about the ways the Fed interest rate could impact your finances, here are a few additional points to consider:
- Rising interest rates won’t impact fixed-rate loans that you already have. Your monthly payments on fixed-rate mortgages, car loans and student loans will remain the same.
- You may want to think about consolidating or refinancing from variable-rate loans to a fixed-rate loan if you’ve already noticed your payment go up.
- APRs on credit cards may go up, but the specific interest rate you receive if you apply for a new card also depends on your own credit score.
The one thing rising interest rates might change about your financial situation
So there is one way the Fed interest rate could impact your finances and money management: It could encourage you to save. And to save more.
When interest rates rise, money you borrow may become more expensive to repay. But, you can expect to see high-yield savings accounts and savings vehicles like certificates of deposit (CDs) and money market accounts increase their interest rates, too.
That means savers can earn a little more for every dollar, so take advantage. Contribute more to your savings account, emergency fund or accounts where you’re saving up to fund your financial goals.
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