Should rising interest rates change your financial priorities?

September 21, 2022

An interest rate increase can be a good time to review your budgeting, savings, and investment strategies.

High inflation continues to dominate headlines, impacting consumers, businesses and investors alike. One of the levers the Federal Reserve (the Fed) can pull to counter high inflation is to raise short-term interest rates. After years of keeping the rates near or at zero, the Fed increased rates several times in 2022, with additional rate hikes expected into 2023.

With short-term interest rates affecting everything from how much your savings earn to how much you pay to borrow money, it’s no surprise that rate hikes also change how you approach your financial goals.

With more interest rate increases on the horizon, consider reviewing your investment, budgeting and saving priorities.


Review your asset allocation

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.


Prioritize your debt

As interest rates increase, so does the market rate for consumer debt. Re-assess your debt with these considerations in mind:

  • Fixed-rate loans. While fixed-rate loans won’t change, adjustable-rate loans will likely get more expensive. You may want to consider fixed-rate products when rates are on the rise to lock a lower rate in. For example, if you have a home equity line of credit (HELOC), check to see if your interest rate is variable, as HELOC rates frequently are.
  • Credit card interest. Most credit card interest is adjustable, meaning it’s determined by market rates. If interest rates increase, your credit card interest payments probably will, too. Paying down higher-interest rate debt should be a bigger priority because it will begin to cost you more.
  • Savings. If you have extra padding in your emergency fund, you may want to consider using some of it to pay down debt. Any money you have in a savings account is likely earning less than two percent in interest. The returns you’d get from keeping the money in your savings accounts is almost certainly less than the money you’d save by eliminating your debt and avoiding higher interest payments.
  • Home loans. If you want to be a homeowner, stick to your plan regardless of rates. If you want to buy in five years, don’t rush the process because of interest rates. 


Shift your saving strategy

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.

  • Change your savings account type. If you’re using a regular savings account, consider a money market savings account. These accounts may require minimum balances or have other restrictions but tend to pay more in interest than a basic savings account.
  • Create, or add to, an emergency fund when your financial circumstances are good. This can be a safety net if the economy slows or your situation changes.


Nothing is certain

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.


Learn how we can work with you to create a financial plan that reflects—and evolves with—your financial goals.

Related content

Effects of inflation on investments

How do interest rates affect investments?

Key components of a financial plan


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