Inflation Cents

Inflation And Interest Rates Relationship and Your Finances

Inflation And Interest Rates Relationship

To fight against inflation, interest rates have been increased by .75% by Federal Reserve. That has been the highest increase in the interest percentage since 1994.

But why do you need to worry about the interest rate and how it can affect your finances? Let’s discuss how you need to plan your investment strategies and financial future accordingly.

Banks and moneylenders respond when there is a hike in interest rates by Federal reserves. And here are important parameters where inflation is gonna hit you with all its glory.

1. Credit Cards

We have all noticed that our banks keep changing interest rates. But did you know why this happens? It is because the Fed reserves increase their interest rates and as a result, the banks also change the interest rate for your credit cards. That will only happen if you pay the monthly minimum balance and you have to pay the debt and your interest rate will keep increasing as the inflation rate increases. You can also contact your bank and ask them to lower your interest percentage. Do this for all the credit cards you have debt with.

However, if you pay your credit card bill every month the change in interest rates will not affect you.

Read our guide on: How to prepare for inflation in 2022

2. Saving Accounts and Interest Rate

Your saving account interest rate depends on a lot of external factors in the financial market. During the Covid19 Pandemic the interest rates decreased, and the savings account interest rate also slashed. With the increase in interest rates the savings accounts’ interest also increased and is still increasing.

The increase in the interest rate is very minute and you might not even notice it. However, keep a close eye on your account for the coming months for any changes in the interest rate. The saving account interest rates are scheduled by each bank individually. Sometimes, your bank’s interest rate is very minimal, but another bank might be offering a higher rate. In such cases, you can switch your bank and transfer your balance to that account.

3. Variable Rate Loan

A loan without a fixed interest rate is called a variable rate loan. That means the interest rate will keep changing throughout the whole payment term. These loans include mortgages, car loans, personal and student loans, and others.

In such cases, if the interest rates go up by the Feds, you will have to pay higher interest. If the rates go down you will have to pay less interest. But that does not mean, the changes will be made each month. Loan lenders have their own terms and conditions. Some change their rates yearly and some do that after every six months and sometimes even monthly.

We are 100% sure, some of you dont even know which kind of loan you have applied for. If you have received any loan, contact the customer service of that lender and ask about your loan documents.

If you have received a variable loan, you need to confirm from your lender whether they change their interest rate yearly or on monthly basis. Also, ask them about the new interest rate. That way you will be able to plan your budget for the coming months without messing up anything.

If the interest rate increase is very substantial and you think you won’t be able to pay it easily, you can do two things. Ask your lender to refinance your loan and set a fixed interest and increase the loan term so you have a lower payment each month.

Interest Rate Changes on New Loans

There are a lot of differences in interest rates on loans even 2 to 3 months back. So, if you applied for a loan one month back your inflation rate will be less versus now. So the higher the interest rates by the Fed Reserves, the higher the interest rate on loans and the higher the inflation. Even if you want to refinance a present loan, you will have to pay a higher interest rate in the new loan terms.

Inflation is not going to settle down and the interest rates will also keep on increasing. Even though there is not a very considerable difference in the interest rate. If we consider the last few months, one thing is sure; the interest rates are not coming down any time soon. So, if you are thinking about getting a loan or refinancing your current loan, you should do it now.

Do The Increasing Interest Rates Affect Investments?

Interest rates are not very much related to the stock market or other types of investments. That is because there are so many factors that affect the stock market like current events or economic factors.

However, when there is an increase in interest rates by the Fed, that is a signal for economic improvement. It will indirectly affect the stock market and there might be an increase. The stock market has been negatively effected by the invasion of Russia on Ukraine. Therefore it is difficult to predict how the interest rates will affect the stock market.

Keep in mind that your investment is not affected by changing interest rates and you dont need to worry about it.

Summing Up Inflation And Interest Rates Relationship

Nothing is certain except the fact that everything is uncertain. We are never gonna know what’s gonna happen tomorrow. The only thing that is in our hands is to prepare for the future especially when it comes to our finances.

Interest rates will keep changing, inflation will keep on increasing. You need to set your goals and manage your budget including your investments, debts, and savings accordingly. If you make smart choices, pay your debts on time, choose a saving account with a higher interest rate, and plan for your future the changing interest rates and inflation won’t affect you at all. Or at least, you will be prepared for it 🙂

Disclaimer

Information provided on InflationCents.com is for informational/entertainment purposes only. This information should not be considered as professional advice. Please seek a certified professional financial advisor if you need assistance. Rates and offers provided by advertisers can change frequently and without notice. We attempt to provide up to date information, but it could differ from actual numbers. Inflationcents.com may be compensated by 3rd party companies that are mentioned either through advertising, reviews, affiliate programs, or otherwise. All reviews and articles are based on objective analysis and no compensation will tilt our opinion.

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