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Do rising interest rates mean you should reprioritize your financial approach?

When interest rates are increasing, you may want to think through how you balance saving, debt and investing.

Tags: Debt, Interest rate, Investing, Savings
Published: February 06, 2020

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 may affect your priorities.

Managing investments based on rate changes

Generally, investors shift more money away from stocks and toward fixed income investments – like bonds – as interest rates increase. 

“Bonds, and things that are safer, are a little bit more attractive when interest rates rise,” says John Falk, vice president at U.S. Bancorp Investments.” However, your investment plan should be tailored specifically to your personal situation. “Don’t look at the market, rather determine if you are 'on track financially to hit your goals,'” Falk says. 

A shift to bonds can be a smart choice for investors who are nearing retirement and are more interested in capital preservation than big returns. Younger investors, on the other hand, might choose to not make adjustments because their investing timeline is long enough to weather a downturn.

A financial professional can help navigate these decisions with different models and outcomes to project how your investments might weather different circumstances and can help you decide whether to reallocate or keep your portfolio as is. Learn more about how interest rates affect investments.


Prioritizing 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. To combat this, Falk encourages using 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. “Some of these go up every time the interest rate rises,” Falk says.
  • 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. High-interest debt should be a bigger priority because it will begin to cost you more.
  • Savings: “If you have savings you could use to pay down some types of debt, I would suggest evaluating your options,” Falk says. Any money you have in a savings account is likely earning less than 2 percent in interest, he points out. 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’ve decided you want to be a homeowner, Falk explains, that’s a goal you’re likely to pursue regardless of rates. Stick to your plan: If you want to buy in five years, don’t rush the process because of the Fed.

Shifting saving strategies

Falk suggests the same strategy for saving money that he does for debt: Stick to your game 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, which may offer higher rates than it did a few years ago. 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. “Your biggest asset in your working years is your ability to earn income,” says Falk. “If by chance that changes, you don’t want to liquidate a portfolio to meet your monthly living expenses.”

Nothing is certain

The uncertainty of rate changes is one reason Falk and other experts 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 how in How to balance money.