Interest rates are expected to rise later in 2015. What will you do with this information?
You could make the case that you haven't missed much if you didn't keep your money in a savings account over the last few years. But still, we all need liquid funds to one degree or another — and the sooner the interest rate goes up on those balances, the better.
So will higher interest rates make you save more money?
Well, they could, but not if you don't have the money to begin with. A strange dichotomy seems to exist right now. “Total indebtedness is now almost $12 trillion in America,” as William Cowie pointed out in his recent article “What is your position on debt? Read this first.” But the Federal Reserve Board's latest monetary policy statement read in part, “Although growth in household spending declined, households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remained high.”
Or will higher interest rates make you take on more debt?
I wonder if some Americans wouldn't take on more debt if interest rates began to rise. I happen to agree very strongly with William when it comes to debt. I want to avoid it like the plague. But last year, when our eight-year-old Smart car was about to give up the ghost, Terry and I started looking for another car to replace our little Munchkin. He knew that, with 140,000-plus miles on her, she could give up suddenly. Then we'd be left with towing charges and the choice to buy another car under pressure or to spend the money to fix her and keep her for a little while longer.
Since we would ultimately have to replace her anyway, we decided to accept a small loan on a good used car. For us, taking on this debt was a way to limit our expenses at a fixed amount that we could live with. We were hedging our bets and protecting ourselves by setting a known price on our transportation expense. We plan to pay off the five-year loan this year in December.
Getting out of debt could make you save more money
Going back to the idea of saving, though, I think getting out of debt (if you have debt) is the best thing to do when interest rates are expected to rise. To the extent the interest rate on your debt can also rise, you would save money by reducing your debt.
And to the extent you eliminate your debt, you could also free up capital at a time when you could actually earn more interest in a savings account than you would have in prior years.
What do you think is happening if Americans have more disposable income? Will you save more if and when interest rates rise or will you take on more debt to fix your housing or transportation costs?