Interest rates are mentioned and discussed almost every day in the media, including television, radio, newspapers, and Internet websites. Rarely, however, are these discussions detailed and explained enough that the majority of the public actually understands what it means and represents, and the possible ramifications, etc. Why should the average person care if they are going up, down, or stable? How do they impact us in our daily lives? Although there are numerous aspects of our lives where these matter, this article will briefly attempt to consider, review, examine and discuss 5 areas, which can be truly meaningful to most people.
1. Stock Exchange: How often, have you heard, someone, let’s say, the stock market, they really didn’t care that much, because they don’t invest in stocks? In reality, however, if you have retirement accounts, mutual funds, etc., they matter considerably! Also, when interest rates are low, as they are currently (many believe, historically low), there are fewer ways and places to invest and/or put one’s funds. When/if banks and bonds pay interest/dividend rates that are so low (below the inflation rate) that it leaves much less choice and in most cases creates a rising stock market (in price conditions, etc.).
2. Real-estate market: In general, when the cost of borrowing is low, mortgage rates are extremely attractive, and therefore home prices increase and the real estate market in general increases in price. Of course, this depends on other factors, such as: Supply and Demand; inventory; and the economy in general, and working/employment conditions. We are currently seeing a rate of price increase that we have rarely (if ever) seen, but part of it is related to changing perceptions and priorities, after this horrible pandemic! The lower the rates, the less it costs, for a hundred-thousand dollars, to pay one’s mortgage, monthly!
3. Use of credit card: Credit card issuers often, especially when interest rates (cost of borrowing) are low, offer attractive rates for using their cards. When people experience greater optimism about the future, they tend to borrow and use credit cards—more!
4. Personal loans: Because it costs less to borrow, when rates are lower, many are more willing to take out personal loans. Obviously, when these rates eventually go up, or at least normalize, these things become less attractive.
5. Bonds and bank interest rates: For many decades, the typical bank account paid a fixed interest rate. I remember this rate being between 4-5% for decades and then over a shorter period, rates went up much higher due to inflation and other economic conditions! Today’s rates are historically lower, and actually quite a bit, lower than cost-of-living increases. Obviously, these will change over time, but it is dangerous, speculative and ill-advised to try to commercialize time!
The more you know and understand why rates are important and how they relate to many components of your lives, the better your chance to be prepared and act wisely! Will you commit to trying to become a more educated and engaged/prepared consumer?
