Interest rates affect everything from how much your savings earn to how much you pay to borrow money. So it’s no surprise that when interest rates rise — or fall — your approach to money management might change.
Here’s how rising rates could affect your financial priorities.
Generally, when interest rates rise, you can expect bond and commodity prices to fall, potential losses in the stock market, and a higher interest rate on savings accounts, money market accounts and certificates of deposit (CDs).
If you’re nearing retirement, a shift to bonds and other fixed income investments can be a smart choice as you can generally expect lower risk (albeit with lower growth).
Interest rate fluctuations affect investments in different ways, and keep in mind that diversification does not guarantee returns or protect against losses and can help mitigate some, but not all, risk. A financial professional can help you navigate investment decisions with different models and outcomes to determine whether to reallocate or keep your portfolio as is.
Learn more about how interest rates affect investments.
As interest rates increase, so does the market rate for consumer debt. Re-assess your debt with these considerations in mind:
Consider using the same strategy for saving money that you do for debt: Stick to your plan.
Generally, people save for goals, such as an emergency fund or a home, and not for the interest their savings account will return. Still, there are smart ways to potentially capitalize on rising rates without changing your priorities.
The uncertainty of rate changes is one reason financial professionals recommend using your personal goals to help determine how you manage your savings, debt and investments.
Interest rates can play a factor in the choices you make, such as how quickly you pay down debt or your asset allocations, but your personal circumstances and goals are a bigger priority than their next move, up or down.
Managing your finances can be a balancing act, but it is possible. Read more in How to balance money.