When you hear “Federal Reserve raises rates again,” your first question might be how this national news may affect you. Even though your credit card or home equity loan rate could go up, a high-interest rate environment could also be good for you if you know how to take advantage of it. That's because checking and savings accounts, bonds, and other investments can earn more when interest rates are high.
Why Interest Rates Change and How It Impacts Your Money
Since the 1990s, the Federal Reserve has set a target interest rate to influence economic activity and inflation. Officially called the Effective Federal Funds Rate (EFFR), though most people refer to it simply as “the Fed Rate,” this percentage range is the interest rate banks charge each other to borrow money overnight. While there isn’t a rule or law requiring it, financial institutions often follow suit when the Fed changes its rate, making it easier or harder to borrow and spend money.
Since the COVID-19 pandemic started in March 2020, we’ve seen how changes to the Fed Rate affect the economy in real-time. Early on, the Fed dropped rates to nearly 0% to encourage businesses to invest and hire more workers and increase consumer spending to heat a cooling economy. When left unchecked, these positive changes can also lead to inflation. In March 2022, the Fed started to fight inflation by raising its rate and making it more expensive to borrow money. But it's not all bad news.
3 Reasons Higher Interest Rates Can Actually Be Good for You
When you deposit money in a bank or credit union, it's almost as if you're lending it to them so they can lend it to others. In return for letting them use your money, the financial institution pays you interest, which means you can benefit when the Fed raises interest rates.
Many financial institutions will raise their return rates to stay competitive. With more options, you can get the most out of your balance.
There are more ways to stay flexible and work toward your financial goals. You can use a savings account to take advantage of rising rates or lock in a high rate for a longer term with share certificates, offered by credit unions, or certificates of deposit (CDs), offered by for-profit banks.
Compounding interest makes your money work harder for you. (And after all, don’t you work hard enough for it?) The higher your interest rate, the more your interest can earn interest. For example, at the end of five years, a $10,000 deposit earning 1% would be worth $10,510 — the original $10,000 plus $510 in interest. But, if you earned 4% per year over that same period, you'd have more than simply four times the interest you get at 1%. You'd now have $12,167 — all due to the power of compound interest.
How To Take Advantage of Higher Interest Rates
Strong money management skills like budgeting, debt management, and learning to save consistently will help you take advantage of high rates rather than being taken advantage of when rates are high. Start by saving for an emergency with a high-yield savings account and avoid unnecessary borrowing — don’t forget, compounding interest works both ways!
If you have enough savings to cover several months’ worth of expenses and additional cash you don’t need immediately, a smart investment might be a low-risk share certificate account; but don’t forget-certificates are usually subject to penalties if you withdraw before the maturity date.
Where to save: Banks v. Credit Unions
Trying to navigate tough times can feel overwhelming, especially when making financial decisions. But you don't have to go through it alone when you have a partner that has your back — like a credit union. As a member of a credit union, you’re also an owner, which means you get all the benefits of lower fees, higher savings rates, and attractive loans. Rather than paying off shareholders, credit unions reinvest revenue into their members and communities, which means your money can do more good while helping you do well.
Tom Wambaugh, is the vice president of member services at Greater Nevada Credit Union. At GNCU, we're all in for you and ready to help however we can. To learn more about our current rates, call 855-LIV-GR8R (548-4787) or visit gncu.org.