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How to Prepare Personal Finances for Rising Interest Rates

The Federal Reserve has been in the news a lot this year for raising interest rates in response to inflation. However, what do rising interest rates mean for your personal finances? Good personal finance management means being prepared for uncertainties and setbacks. In this article, we’ll provide specific tips for planning your personal finances in the context of rising interest rates.

What is the Fed and Why Are They Raising Interest Rates?

You’ve probably heard that “the Fed is raising interest rates”, but what exactly does that mean for the average person? Let’s break it down.

The Federal Reserve is the central bank of the U.S. Among other responsibilities, the Fed conducts monetary policy for the nation, which includes setting interest rates to promote low and stable inflation.

Lower interest rates encourage people and businesses to borrow and spend money. Higher interest rates rein in that economic activity by making it more expensive to borrow money.

In March 2020, at the beginning of the COVID-19 pandemic, the Federal Reserve lowered its benchmark interest rate to support spending and lower the cost of borrowing. Most notably, mortgage interest rates fell to historic lows, prompting many homeowners to refinance their loans into a lower interest rate, while buyers could suddenly afford to borrow more for their home purchase.


So far this year, inflation has hovered around 8%, meaning that the costs of food, energy, and other goods and services are that much higher in 2022 than in the previous year. The Fed is responding to this inflation by raising their benchmark rate to make borrowing more expensive, essentially putting the brakes on a hot economy.

The Federal Reserve meets eight times a year to discuss monetary policy and make any changes to their benchmark rate. The Fed is expected to continue making rate hikes through the end of 2022.

As the Fed increases its benchmark rate, average rates on mortgages, car loans, credit cards, business loans, and other credit accounts also increase. If you’re carrying a credit card balance, expect to pay more in interest. If you want to take out a new loan–to buy a car or house, for example–expect the interest rate to be higher than in years past.

One silver lining to these rate hikes is that interest rates for savings accounts and CDs should also increase. So, it’s a good time to grow your savings.

Now that you understand why interest rates are rising, let’s look at specific ways to prepare and adjust your personal finances.

 

1.  Pay Off as Much Debt as Possible

Take inventory of your current debts. Any loans with a fixed interest rate, such as your mortgage or car loan, will not see an increased interest rate, so you can keep making the monthly payment amount. However, if you have an adjustable-rate mortgage, you’ll probably see an increased interest rate and higher payment amount.

Do you have any revolving credit accounts with variable interest rates, such as credit cards, overdraft lines of credit, or HELOCs? This is where you will feel the pinch of rising interest rates and these are the accounts to prioritize with debt payoff. Decide to start with either the lowest balance or the highest interest rate and focus on paying as much as you can toward that account (while making minimum payments on everything else) until you get the balance to zero. Then move on to the next one.

 

2.  Rethink Your Savings Strategy

On the flip side of feeling the strain of interest rate increases on your debt accounts, you’ll have the opportunity to take advantage of higher interest savings rates on savings accounts, money markets, and CD accounts. Think about opening a Certificate of Deposit (CD) account to grow your savings or, at the very least, put your funds into a high interest Money Market account. This is also a good time to increase the amount of money you put into your emergency savings funds.


3.  Lock in Your Mortgage Rate Now

Most people nowadays do have a fixed-rate mortgage, but if you happen to have an adjustable-rate mortgage, consider refinancing into a fixed-rate mortgage before rates increase again. A fixed-rate mortgage also offers a stable monthly payment amount, which can help you keep your budget on track amidst other more volatile spending categories such as groceries.

 

4.  Streamline Your Budget

Do you have a budgeting habit? A budget is a roadmap for your finances that helps you track where each dollar goes. With a regular budgeting practice, you can align your spending with your values, eliminate waste, and stay on track with savings and other goals.

An easy exercise to streamline your budget is to review last month’s checking account statement. Are there subscriptions you no longer use and can cancel? How many times did you eat out or order takeout? Collecting this data will empower you to make adjustments that reflect where you actually want your money to go.

 

5.  Look For Deals and Discounts

If you’re feeling a pinch from the higher cost of borrowing money, try to save money on everyday items you’re buying anyway. For example, try a discount grocer instead of your usual store. Shop in bulk or buy the store brand. Review store’s weekly sales flyers and stock up on favorite items while they’re on sale.

 

6.  Consider Additional Career and Income Opportunities

In addition to recession-proofing your finances, recession-proofing yourself and your skills is another important aspect of preparing for long-term financial stability. The best investment you can make in your financial future is in yourself. For example, consider additional training, education, or certifications for your career or learn a new skillset to open up new opportunities. The more marketable skills you have, the more jobs you’ll be qualified to do, which helps to secure your job security in the long-term.

You can also diversify your income source by adding a side hustle such as a part-time job, freelance gig, or selling homemade goods.


Grow Your Savings with North Cascades Bank!

Ready to start growing your savings? Open a Personal Savings, Money Market, or Certificate of Deposit account today! Questions about which account is right for you? Contact us or visit one of our locations in Chelan, Omak, Okanogan, Brewster, Twisp, Grand Coulee, Waterville, Wenatchee, or East Wenatchee, WA. Since 1986, North Cascades Bank has been meeting the banking needs of the North Washington communities we serve.