“Hey Dad, do interest rates on my savings ever go down?”
They absolutely do, kids:
In 2021, the best interest rate that I could get on my savings account was 0.45%. While it was higher than the 0.01% that some of the larger banks were offering at that time, it was still too low to provide any growth on my money. However, a few interesting things happened during that low interest rate environment.
People were able to get a low interest rate mortgage to buy a house, which made their monthly payment reasonable. When interest rates started to rise, people ran out to buy any house they could find, with those low interest rates, knowing that higher rates could increase their monthly payment to a point where they could no longer afford a house.
Sellers took advantage of these frantic buyers by increasing the price of their house. Houses that were on the market the previous week for $250,000 all of a sudden had a $100,000 price increase going into the next week, raising the price to $350,000. And people still lined up for these houses. Multiple offers, all cash offers, over asking offers, sight unseen offers, no inspection offers, no contingency offers, first born offers. “OMG!”
You need to understand how interest rates have an impact on your life. The Federal Reserve (oddly, they’re not a part of the federal government) controls interest rates. When they raise interest rates, typically the banks raise their interest rates too. And when they lower interest rates, banks follow suit; some more than others.
Also, during this time large companies were able to borrow money cheaply. And their stock price went up, at least until interest rates started to rise. Some stocks got cut in half or worse when the markets reacted to the increase. For those of you who had cash just sitting in the bank, you had the opportunity to buy your favorite company’s stock for potentially half price. “Stocks were on sale! Everybody loves a sale!” Want to understand how the rich get richer? Here it is, right here! The rich love this type of stock buying opportunity.
When some people see a substantial drop in their investment portfolio, they see it as a reason to sell, not a reason to invest more. They bought investments when they were going up and now they are selling them because they’re going down. They just threw their money away. They would have been better off just leaving it alone and riding the wave. If you pick good investments, they’ll bounce back. Plus, when you invest, you don’t lose money or make money until you sell. There are always going to be stock price fluctuations. The key is to sell when the stock is going up, not when it’s going down.
Rising interest rates can potentially mean that your savings account is generating more interest. However, rising interest rates can also mean that you will pay more in interest charges if you carry a balance on your credit card. And you will pay higher monthly payments on car loans and home loans. Some see the rise in interest rates as a problem, while others see it as a great opportunity. “How do you see it?”
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Understanding the impact that interest rates have on your money is important. Whether you are saving or borrowing, you need to know if it means more interest earned or more interest paid. We explain.