Nearly every day, interest rates are discussed and mentioned by media outlets, such as television, radio and newspapers. These discussions are rarely sufficiently detailed and explained so that most people understand what they mean and how it could impact their lives. What is the point of worrying about whether these are increasing, decreasing, or staying steady? What impact do these have on our daily lives? While there are many areas of our lives where they matter, this article will briefly review, analyze, and discuss five areas that may be really important to most people.
1. Stock market How often have you heard someone say that the stock market doesn’t matter to them because they don’t invest much in stocks? However, retirement accounts and mutual funds are important if you have them. Also, when interest rates are low (which they are currently in a historic low manner), there are less places and ways to invest and/or put your funds in. If banks or bonds pay low interest rates (below inflation rate), this leaves you with fewer options and in most cases, a rising stock market (in terms price, etc).
2. The real estate market: Generally, when borrowing costs are low, mortgage rates can be very, attractive. Home prices rise and the overall market for real estate goes up in price. This depends on many other factors such as supply and demand, inventory, job/employment conditions, and overall economy. We are currently witnessing a rate of price increases that we have never (if ever) seen. However, part of this is due to shifting perceptions and priorities after the terrible pandemic. The monthly mortgage payment costs per hundred-to-thousand dollars are lower if the rates are lower.
3. Use of credit cards:Often, especially when interest rates are low, issuers of credit cards offer attractive rates for using their cards. People who have greater optimism about the future tend to borrow more and use credit cards more.
4. Personal loans Because borrowing is cheaper, people are more likely to get personal loans when the rates are lower. These things will become less appealing if the rates go up or normalize.
5. Bank interest rates and bonds: For many decades, a typical bank account paid a fixed rate of interest. This rate was between 4 and 5 percent for many decades. Then, over a shorter period of time, the rates went much higher due to inflation and other economic conditions. Rates today are historically lower and in fact quite a bit lower than the increase in cost of living. These will change over time but it is risky, speculative and dangerous to try to market them – time!
Knowing and understanding rates and how they relate to other components of your life will help you be more prepared and wise. Are you willing to make an effort to be a better educated and more prepared consumer?