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