You may have heard a lot of talk about rising interest rates and how that can slow the economy, but do you know what that means for you?
Interest rates, as they relate to the U.S. market, refer to the cost of borrowing money from the central bank of the United States, also referred to as the Federal Reserve (or the Fed for short). When the Federal Reserve increases interest rates, it increases the cost of financing for credit and investment which is a strategy used to slow an overheated economy.
While raising interest rates can be healthy for the economy, the slowing economy can have real impacts on everyday people like you. So, what do higher interest rates mean for you?
What Happens When Interests Rates Rise?
When interest rates rise, it means that the cost of borrowing money has increased. This typically has the effect of slowing down the economy because people and businesses alike will not purchase or finance as many goods as they would with low-interest rates.
A prime example of this can be seen in the housing market. When interest rates on mortgages are low, the cost to finance a home is low so more people will make the decision to purchase. But, as interest rates rise, so does the overall cost of the loan, which results in fewer home purchases.
How Do Higher Interest Rates Affect Inflation?
So why are higher interest rates an important topic? You may have heard the word inflation a lot over the last year or so. Inflation, or a general increase in prices and a fall in the purchasing value of money, occurs at times when the interest rates are low and demand for goods is high enough to drive prices up across the board. As interest rates rise, they slow the demand as financing becomes more expensive and prices then follow.
What Can You Do to Prepare for Higher Interest Rates
As interest rates begin to rise, it’s important that you meet with a professional wealth strategist to discuss your best options for preparing for higher rates. Building and maintaining personal wealth through the ebb and flows of the economy relies on having a well-thought-out strategy for protecting your investments and identifying new ones to expand your portfolio. The experienced wealth and tax strategy team at ProVision Wealth can help you. Contact us today to speak with a member of our team about building your wealth strategy.