What Do Rising Interest Rates Mean

The Federal Reserve recently raised interest rates, and while that may not sound like big news, it could significantly impact your finances.

Here’s what you need to know about how The Fed raising interest rates affects your savings, investing, and credit.

In this money and interest rate meme gif, the Sargeant from Brooklynn 99 is screaming "what does it mean" when people start talking about rising interest rates.

When The Fed raises interest rates, it generally means that borrowing costs are going up. This includes everything from credit card interest rates to mortgage rates. If you carry any debt with variable terms, you can expect your interest payments to go up.

Why is that? And what are interest rates?

An interest rate is the percentage of interest charged on a loan or credit card balance. The higher the interest rate, the more you will pay in interest charges over time. So, it’s important to research and compare interest rates before you apply for a loan or credit card.

Here are a few tips to get the best interest rate despite rising costs:

1. Check your credit score

Your interest rate will be based partly on your credit score. So, check your credit score and ensure it is accurate before applying for a loan or credit card. You can get a free copy of your credit report from each of the three major credit reporting agencies once per year at AnnualCreditReport.com.

2. Compare interest rates

Once you know your credit score, you can compare interest rates from different lenders. Make sure to compare both the interest rate and the annual percentage rate (APR), which includes interest and other fees.

3. Look for special offers

Some lenders offer special promotions, such as 0% interest for a certain time period. These can be a great way to save money, so look for them when comparison shopping.

4. Get pre-approved

Once you have found a loan or credit card with a reasonable interest rate, you can get pre-approved. Pre-approval means that the lender has checked your credit score and is willing to lend you the money at the interest rate that they quoted you. Getting pre-approved can help you save time and money when you are ready to make a purchase.

But what if you’re looking to make money through different investment opportunities?

How The Fed raising interest rates impact your investments

When the Federal Reserve raises interest rates, it has a ripple effect throughout the economy.

In general, when interest rates go up, stocks tend to go down. That’s because higher interest rates make it more expensive for companies to borrow money, which can impact their bottom line.

This often leads to investors selling off their stocks, driving prices down even further.

If you’re looking to invest in the stock market, be aware that interest rate hikes can sometimes cause a sell-off.

A woman is holding her head, downtrodden because she lost a lot of money investing. Font says "Ask the money coach: I lost a ton of money in crypto. What's next" with a read now button.

This doesn’t just impact the stock market.

How interest rates impact alternative assets

Sure, acquiring a new home or real estate will be more expensive. But what about things in the metaverse?

One of the areas that interest rate hikes impact is the world of cryptocurrencies and non-fungible tokens (NFTs).

Cryptocurrencies are digital assets that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, which means they are not subject to government or financial institution control.

NFTs are a type of cryptocurrency that represents a unique asset. Kenneth explains, “A non-fungible token simply means whatever digital media is created cannot be reproduced. Basically, it would be like if someone created the Mona Lisa, and it truly could not be copied.”

Many web3 advocates and crypto supporters touted crypto and NFTs as safe from the impact of government interventions like the raising of interest rates. But that hasn’t been the case lately.

Aside from the highly volatile crypto and NFT markets, the values of cryptocurrencies and NFTs are derived partly from their perception of alternatives to traditional fiat currencies. When interest rates are low, investors are often drawn to these asset classes in search of higher returns. However, when interest rates rise, the opportunity cost of holding these assets also increases. This can lead to a sell-off in the crypto and NFT markets as investors seek out alternative investments with lower opportunity costs. That means they’ll lose value.

The interest rate hike by The Fed is just one of many factors that can impact the prices of cryptocurrencies and NFTs. However, it is a significant development that investors should be aware of when making decisions about these asset classes.

If you’re worried about rising interest rates and losing money, a few strategies can help you protect your portfolios.

How to avoid losing money when investing during rising interest rates

There are a few ways to avoid losing money in the markets when interest rates rise. One is to invest in companies that are less sensitive to interest rate changes. Another is to hold your stocks long-term since stock prices tend to go up over time, despite occasional dips or even bear markets and recessions. Finally, you can use stop-loss orders to limit losses if the stock price falls.

By being aware of the risks and taking steps to diversify your investments, you can minimize the impact of interest rate hikes on your financial well-being.

How interest rates impact your saving

In addition, The Fed raising interest rates can also impact your savings. If you have money in a savings account, CD, or money market account, you may see a slightly higher rate of return on your investment. That’s because when The Fed raises interest rates, banks often follow suit and raise their interest rates on savings products.

Generally speaking, the interest rates banks offer on savings accounts rise and fall along with the federal interest rates. So when the Federal Reserve raises interest rates, you can also expect to see banks raise their interest rates on savings accounts.

This can be good news for people utilizing a high-yield savings account. When interest rates go up, it affects how much interest you earn on your savings. For example, if you have $1,000 in a savings account that pays 2% interest, you would make $20 in interest over a year. But if interest rates rose to 3%, you would earn $30 in interest.

Coping with interest rate hikes

If you’re worried about how interest rate hikes might impact your savings, you can do a few things. First, consider using a CD laddering strategy. This means spreading your money across multiple CDs with different maturity dates. That way, if interest rates go up, you can cash in your older CDs and reinvest the funds into a new CD with a higher interest rate.

Another option is keeping your money in a savings account with a variable interest rate. If interest rates go up, your interest rate will also increase. And if interest rates go down, your interest rate will decrease.

Whatever you do, don’t let interest rate hikes deter you from saving money. Even if interest rates are low, it’s still important to have cash in a savings account in case of an emergency. And the more you save, the more interest you’ll earn over time. So keep up the good work, and don’t let interest rate hikes get in the way of your savings goals.

But on the bright side, if you have money in a savings account, you may see a slightly higher interest rate.

Coping with interest rate hikes

The bottom line is that interest rate hikes can impact various aspects of your finances differently. It’s important to stay informed about how these changes might affect you to make the best decisions for your money.

Related Reads

Everything You Need to Know About a Recession

Recession Proofing Your Credit

Where to Get Your Crypto News

How Not to Get Scammed with NFTs

Why We Freak Out with Market Fluctuations

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