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.
Win-win.
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?
[By the way, are you a super saver? Are you obsessed with saving money? Do you have effective strategies that go way beyond the basics? We'd love to hear from you for an upcoming feature. Email editor Linda Vergon at lvergon@getrichslowly.org.]
I don’t think rising interest rates will affect me personally. I’m not planning on taking on debt just because rates are low, and I doubt a small rise is going to make much difference to my savings accounts. It still doesn’t make sense for me to buy a home now, regardless of low mortgage rates.
But the larger implications? Well, if mortgage rates go up that might cool housing prices in Canada. Not sure how rising interest rates will affect the markets — I guess if they go up, my investments will go up. If they go down, then I’ll get more shares for my monthly allotment.
IMHO, people need to crunch the numbers before making any moves based on the hype.
I try to save as much as I can regardless of the return I’m getting. With that mentality, I am able to get through the lean times of low interest rates and really benefit in the boom times when rates are high. If I think about changing my strategy around too much, I make decisions that are good in the short-term but aren’t necessarily aligned with my long term strategy and goals.
That said, if I was thinking of buying a house, I would DEFINITELY try to do so ASAP. I recently re-financed and got an awesome rate on a 30-year fixed, which will save me big over the life of the loan.
“That said, if I was thinking of buying a house, I would DEFINITELY try to do so ASAP.”
Yeah, see, that’s part of the reason housing is overpriced in a lot of places in Canada. Debt is “cheap” so people are buying who probably shouldn’t, and people are buying more than they need. Does this sound familiar to anyone? We don’t have 30 year fixed rates here, so there’s going to be a lot of hurt coming.
People need to do the math. Low interest rates often mean higher housing prices. Rising interest rates often mean falling housing prices. There are so many variables.
Higher rates won’t make me save more money, but it could affect how I save it. Because the rates are so low I haven’t bothered to put anything in a CD. I’m not willing to lock my money up for 2+ years just to get a rate only slightly higher than my savings account.
Looking at the larger picture higher rates could decrease my estimated net worth by lowering or cooling my condo’s market value. But, since I’m not planning on selling any time soon it’s a moot point.
I just bought a condo with 30-yr fixed at these low rates. Low interest rates, and rumored higher rates at the next FOMC meeting weren’t the only factors in that decision, but they did help. Now that my time horizon is 30 years, it’s no longer a question of saving, it’s a matter of putting as much money as I can (except emergency fund) into the highest probable investment class over a 30 year time frame – and that has historically been index funds…
Interest rates don’t affect my spending and savings habits. I automatically put a set aside away monthly on the first of the month, so it’s not there to spend. I keep a budget and stick to it pretty well. I’ve been aggressively paying off debt for the past three years and have seen my monthly interest expenses drop by 75%. I should be debt free (except mortgage) in less than two years and then I’ll start on the mortgage.
The only thing I might explore if interest rates were to rise would be investing in bonds. However that’s best done when rates are already high and expected to fall. Other than that, I have no variable debt, and I already save as much as I can; rising rates will help but will not change anything I do.
Taking on debt like a mortgage or a car loan is the kind of thing you do when you need to. You may not have the opportunity to chase interest rates when you need a car or when you’re ready to buy a home. Those already planning to buy this year may want to do so soon, but not at the expense of being under-prepared.
I like reading GRS but most advice on here I take with a grain of salt. Most of the writers on here say one thing and do another. “I hate debt” but “I took out a small loan”. You must not of hated it that much to jump back in it. You can rationalize any sub par decision you make and we all do it. I think regardless of interest rates on anything you should stick to a plan whether that be saving, investing, or borrowing. Save regardless of what the bank is paying you, invest regardless of what the economy (ie returns) are, and invest regardless whether or not you get a match or not.
Saving money is a habit. It comes natural to some people, other’s really have to force themselves into it. But over time, if done repeatedly, it sticks for life. I don’t know that interest rates will change that. Savers will continue to save, non-savers will likely not change their habits unfortunately. But at least an attractive interest rate might motivate them to try!
This was a great article! Rising rates are going to affect home owner and investors big time in Canada. When rates rise, I fear that investors will put money out of the market and those who renew their mortgage may not be able to afford their homes. Homes in Toronto and generally across Canada are almost $1,000,000!
A higher profit rate would certainly make me want to save more. I like to think of myself as a saver and with interest rates at record lows I still save substantially. When rates start to rise I will have a greater incentive to save more and enjoy watching my precious savings make more money.
I am already saving as much as I can. The increase in rates won’t change that. However, if i was considering investing in another rental property, then yes, I would buy it as soon as I can and lock in a fixed rate mortgage.
For the general public, people will save what they want to or can save; the interest rates won’t make a difference. However, once money market rates start to exceed 5% or 6%, then investors’ allocation between stocks and money market funds will start to change.
My son has a little over $1000 in a 6-month CD. It made 80 cents this term. We will continue to save the same amount regardless of interest rates :)
It allows me to save more money if “high interest rates” are from investments not on credit card rates ^_^
I drift towards banking on myself. I have not been saving much because interest rates are low so I have been focusing on investments more easily attained with low rates (wiping out mortgage, investing in precious metals, maxing IRA’s. When interest rates rise I put more into savings and then into CD’s. When I want or need to borrow money, I borrow against my CD’s. Since the collateral is my own money the loan rate stays low (about 2%), you gain credit, and when paid off, you still retain the initial capital locked up in your savings. My focus (roughly) is to keep debt interest below 5% and asset interest above.
The best time to put money into bonds is when you have money. You cannot time interest rates.
Bond enable you to create a cash flow that could become a substitute paycheck. You create a ladder so that you always have cash coming back. If you can you reinvest the principal. You don’t lose money and you do incur fees and taxes.
Somehow, higher interest rates (if we mean credit cards) will make you guard your savings but it doesn’t mean that when low interest rates are being offered, we should indulge in making debts. In the first place, everyone’s goal is to be debt-free.