Everything You Need To Know About Interest Rates
Everything You Need To Know About Interest Rates
Contents
DISCLOSURE: THIS POST MAY CONTAIN AFFILIATELINKS, MEANING I GET A COMMISSION IF YOU DECIDE TO MAKE A PURCHASE THROUGH MYLINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FORMORE INFO.
INTRO
Although I studied Economics at an advanced level, I never really liked macroeconomics so much. Academics have woven in a lot of calculus so that it's largely a bunch of numbers that few understand.
Nevertheless, people seem to be throwing the “interest rate” word around often these days. And since they have a massive effect on your assets and net worth, I think we should dive deeply into it.
Before you think of skipping this article, here is what ignorance may bring:
· You take out a massive loan you can’t afford
· Your job security dwindles
· Your assets suddenly take a hit
So, you see, I’d be lying if I said you don’t have to learn about interest rates.
But let’s keep it simple...
What are interest rates?
Any time you make use of someone else's money, such as money attained from a bank, you have to pay interest for that use — whether you're buying a house, a car, or some other big-ticket item you want.
The interest rate is the cost to leverage the money upfront for payment of the purchase. But who sets that interest percentage rate then?
The central bank does. In the United States, that’s the Federal Reserve (FED).
How do interest rates affect my life?
When interest rates go up, it affects your life in a couple of ways that you should know about.
First off, borrowing money becomes more expensive. Imagine you're looking to buy a new house or a shiny new car. Well, when interest rates are high, the cost of borrowing money goes up too. And guess what? That means you might have to put those plans on hold or settle for a smaller loan in such instances. It's a bummer, I know, but that's how it goes.
Now, here's the interesting part. When people like you and me cut back on spending because borrowing gets pricey, it slows down the whole economy. It's like a domino effect. When we don't spend as much, businesses start feeling the pinch too. With fewer customers, their profits start declining, and you know what happens next?
They may have to tighten their belts and cut costs. And, unfortunately, that often means letting go of employees. It's not a fun situation in which to find yourself, and it can make job security a bit shaky.
Conclusion
So, to sum it up, higher interest rates mean that borrowing money becomes expensive, making it harder for you to make big purchases. And on top of that, businesses can struggle because it also costs businesses more to make their big purchases, which also puts your job security at risk. Not the most uplifting news, I know, but it's important to be aware of these things.
But that’s not all. There's more to consider—let's take a look at what happens to asset prices when interest rates change.
What happens to stocks when interest rates rise?
I’m a visual learner. So here is an image that I think will help you understand.
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When interest rates rise, it becomes more expensive for businesses to borrow money for expansion or investment. This can lead to lower profits and slower growth, which can cause stock prices to decrease. Investors may become more hesitant to buy stocks, leading to a decline in demand and further downward pressure on prices.
And it seems like we might see more interest rate hikes in the near future. Why? Well, one of the main goals behind the recent hikes is to keep inflation under control. And we’re still not at the finish line.
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Disclosure/Disclaimer
information provided on this site is based on myown personal experience, research, and analysis, and it is not to be construedas professional advice. Please conduct your own research before making anyinvestment decisions. I am not a professional financial advisor,stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site andthe resources provided are for informational and entertainment purposes onlyand do not constitute financial, accounting, or legal advice. The author is notliable for any losses or damages related to actions or failure to act relatedto the content on this website.
