How Interest Rate Hikes Affect Your Finances

Two wooden blocks, the first with a percentage symbol and the second with two arrows, one red down arrow and one green up arrow

And 5 Tips to Combat Them


Unless you live on another planet, you are fully aware of this thing called inflation, whether you’re at the grocery store, a gas station, buying clothes online, hiring a contractor, or doing almost anything that requires spending money for something. At the beginning of last year, the Federal Reserve started raising interest rates to rein in inflation, which reached another 40-year high in June 2022. By raising rates, the Fed hopes to slow the economy and inflation. That’s because as borrowing becomes more expensive, consumers tend to reduce their spending. The drop in demand for goods eventually leads to lower prices. Fast forward to today, core inflation has come down significantly and the Fed may pivot to lowering interest rates by the end of this year. Reassuring us that their plan seems to be working.

Here are five ways interest-rate hikes can affect your finances and five tips to reduce its impact:

1. Credit Cards

Most cards charge a variable rate that’s tied to the bank’s prime rate — the rate banks charge their best customers (many consumers pay an additional rate on top of prime, based on their credit profile). Banks typically raise their prime rate quickly after the Fed boosts its key rate. HIKING TIP: It may take a couple of statements before you notice the impact of a rate increase. Start paying down any balance before rates get much higher, focusing on the card with the highest rate first.

2. Mortgages

If you have a fixed-rate mortgage, your monthly payments will stay the same. If you refinanced over the last few years and locked in a rate in the 2% to 3% range, that was great timing. However, if you have an adjustable-rate mortgage (ARM), you may be faced with having to make larger payments, depending on the terms of your loan. HIKING TIP: If you have an ARM, budget for higher payments. Or, if you anticipate buying a home within the next year or two, take steps to improve your credit score so you can secure a lower interest rate and aim to get a fixed rate mortgage.

3. Home Equity Line of Credit (HELOC)

This allows you to borrow against the equity in your home as needed, usually at a variable interest rate. Borrowers typically pay only interest on the amount borrowed for the first 10 years, and thereafter must repay interest and the principal over the next, say, 15 or 20 years. Your HELOC rate can adjust monthly or quarterly. So, if you have an outstanding balance, your payments will likely go up when the Fed implements a rate hike.

HIKING TIP: If you have a HELOC, budget for higher payments. You can also pay down your HELOC balance to reduce the interest you pay or talk to your lender about other options, such as refinancing.

4. Auto Loans

It’s already more expensive to buy a new or used car, as their prices have increased dramatically over the last two years. This is due to a number of reasons that have resulted in supply not keeping up with demand. Unfortunately, if you’re planning on financing the purchase of a vehicle in the near future, you’ll need to add in the higher cost of borrowing. HIKING TIP: Make a down payment of at least 20% of the purchase price of a new car and no less than 10% for a used car. A sizable down payment will lower your monthly payments and could help secure a lower interest rate.

5. Purchase Power

Higher interest rates and inflation decrease your purchasing power and can negatively impact your spending and savings. As the cost of goods and services rises, it affects your budget and can cause you to spend more and save less if your income stays the same.

So, what can you do? Great question.

Review Your Budget 

You may have had extra room in your budget for “fluff” in the past when rates and inflation were lower. Now that they’ve both gone up, it’s a great time to review your expenses and look for things you can cut out. Shaving just $100-200 off a month can help free up funds to apply to other line items in your budget that may have increased.

Start or Continue Saving

If you do not already have a 3–6-month emergency fund, now’s a good time to start! It’s always a good idea to have a cushion for emergencies, but it’s even more crucial in today’s inflationary environment.

Consider High-Yield Savings Accounts

One of the benefits of increasing rates is higher yields on interest-earning accounts. The higher annual percentage yields allow you to earn a little more on your savings than you could just a few years ago.

Increase Your Income 

Increasing your income by just a small percentage can help ease inflationary pressures and give you breathing room if your budget is tight. Did I hear someone say side hustle?

Decrease your debt.

My personal favorite is getting rid of consumer debt. Debt can be a pain in any situation, especially when your everyday expenses have increased. Prioritizing paying down or paying off debt is a good way to increase your monthly cash flow.

The Fed doesn’t set interest rates on credit cards, mortgages, auto loans, or savings accounts, but its actions do influence those rates. Understanding how to combat increasing interest rates and inflation can help you stay on track with your financial goals and prepare you for a better future.

Benchmark Wealth Management
5855 Ridge Bend Road
Memphis, TN 38120

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPIC.

The opinions voiced in this material are for general information only and are not intended to provide
specific advice or recommendations for any individual. There is no assurance that the views or
strategies discussed are suitable for all investors or will yield positive outcomes.
Investing involves risk including possible loss of principal.

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