What’s Going On?

Times are becoming tougher and we are all starting to feel the effects of inflation. Right now with soaring interest rates, it’s making it really difficult to borrow money. We have to think twice before we make a big purchase or end up paying the price. Credit card interest rates are at an all time high. If you are in a position where you can hold off from making a big purchase, you should. Refinancing any loans you had in the past can hurt drastically as you will get hit with these new higher rates.

Tip:

Interest rates vary by loan type, so credit cards will have the highest averaging at above about 20%, personal loans around 10-20%, and mortgages around 5-8%. Also credit history and credit worthiness are big factors on what rate you will receive.

Be aware of fees when making balance transfers or refinancing loans. Sometimes the fee will not be worth the jump to a new servicer.

The Good

If you want to play the game and take advantage, soaring interest rates can benefit you. Right now saving your cash in a savings account will pay you a hefty interest rate. This also means that CD’s are giving good rates. CD’s are Certificates of Deposit, usually have withdrawal restrictions but can you can lock in an interest rate. This means if interest rates ever go down, you might beat the market average with your locked in high rate. If you have extra money you won’t need in the next year or so, you can try these. Stocks are also at a “discount” since the need for cash is also increasing. You have an advantage to buy in low. Make your money work for you in these tough times!

The Bad

Since interest rates are so high this means that all forms of borrowing are going to be extremely expensive. This includes credit cards, which is the most common way to borrow money. You have to be extra careful during these times since credit cards almost always have variable interest rates. This can be tragic if you have large balances because it can make your minimum monthly payment go up.

This also includes car loans. Car loan interest rate increases mean higher car payments and possibly longer terms. If you check out Experian you can see that the average monthly car payment has increased by more than $400. If you can hold off on getting a new car, you should.

Unfortunately this also includes mortgages. If you were thinking about refinancing your home, right now might not be the time. Although lenders like Rocket Mortgage are offering a 1% down and paying the PMI. This might be a risky move with rising interest rates because although you might be able to make the down payment, it could result in a mortgage you might not be able to afford.

If you are in a position where you can’t take advantage, you need to play defensive. Pay more that you usually pay to your credit cards, try to save a little more money than usual. Treat this as tough times, because they are. If you can’t afford it in cash, don’t buy it!

Strategy

Although this strategy seems like a repeat of what I usually say, it’s because it works. Earn more and spend less (than usual). Cutting discretionary spending in these tough times will help you save more so you can come out ahead when these interest rates go down. Think about it. You take advantage of these high interest rates save a nice amount, get paid a nice amount. Then when things eventually stabilize you can enjoy the extra money you earned.

That’s why interest rates are so high. Inflation gets combated by discouraging borrowing and spending. Once the spending is discouraged and the spending is stabilized they return to “normal”.

When interest rates are low, the desire to hold cash is low. Spending is encouraged to stimulate the economy and people flock to buy other assets that will make them more than interest rates will pay.

Bottom Line:

Once you learn why interest rates work the way they do, you can play the full potential and earn the most money when times get tough. This is why having a cash savings and emergency fund is a good thing. If times get tough for you, you can fight your way out without relying on credit. Whether interest rates are high or low you’ll come out on top because you’ll know exactly where to put your money.

Thank you for reading and I’ll see you next Sunday,
– Pablo