Why Interest Rates Matter

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It's a blood bath out there.

Inflation data came in at 8.6% last Friday, the highest since 1981. Following this, the S&P tumbled nearly 4% on Monday marking an official bear market (drop of 20%).

It gets better. Boosted by the news of a few major crypto brokerages pausing transfers and withdrawals, Bitcoin, Ethereum, and a number of other coins have taken a dive. At the time of me writing this, Bitcoin is at $22,478. That is a 67% decline from it's high just 7 months ago.

While you might think it can't get any worse, let me remind you that the Fed has their meeting Wednesday. At this point, it's almost a lock that we see interest rates increase another 50 basis points.

That's why this email is going to cover how interest rates affect your everyday life.

Quote

"I don't mind going back to daylight savings time. With inflation, the hour will be the only thing I've saved all year." - Victor Borge

Interest Rates 101

With all this talk about inflation and the rising prices of goods, you have likely heard a thing or two about the Fed increasing interest rates.

To understand interest rates, let me first introduce you to "The Fed."

At this point you are probably saying "Cade, why should I care?" (Patience grasshopper)

As mentioned previously, the Fed is increasing the federal funds rate to hopefully lower inflation. The main point here is that higher interest rates mean higher borrowing costs. This forces consumers and businesses to spend less which drops demand for goods and services. In a perfect world, inflation then falls.

So What?

There's a few places the average person will probably notice a change in interest rates. Credit cards, loans, and savings accounts.

Though I hope readers of this email aren't carrying any credit card debt, an increase in rates will likely be reflected in an increase in the APR of credit cards. Pay off your credit card debt (please).

Another area this change will be noticed is in traditional loan rates. Whether you are going to take a loan on a car, house, or boat (talking myself out of this), the interest rate you get will have a major impact on your monthly payment.

Housing Example:

You are in the market to buy a house. One day you come across the perfect home. The area is nice, the kitchen is up-to-date, the neighbors don’t suck, it sits on a big lot, and has a hot tub you can sit in and watch your 401k continue to drop.

The asking price is $300,000. You plan on putting 20% down which means you will need a loan for $240,000.

Six months ago you would have been able to get a 30-year fixed mortgage with an APR of 3% which would put your monthly payment around 1,012.

Unfortunately, due to the recent increase in interest rates, the bank offers you a whopping 6%, meaning you now have to pay $1,439 a month.

Over a year that’s a $5,000 difference in the cost to own.

To back up these numbers, here’s the average 30-year fixed mortgage rate over the last five years.

This example is true for almost any type of loan you might be looking to take out.

There's hope?

If you didn’t have all your money stashed away in crypto, you likely have something left over sitting in a savings account.

When banks increase their lending rates, it means that they can pay higher interest rates on savings accounts and CDs.

Don’t get your hopes up too much, as even some of the higher rates for online banks are only around 1%. But hey, it’s better than the national average of 0.07%.

Conclusion:

Rising interest rates will likely influence your daily life the most by determining what rate you pay on borrowed money.

I didn't mention it the main body, but depending on your career field, the drop in demand for goods and services could impact your day job as well. If we hit a serious recession, layoffs will begin to increase rapidly.

So after your read this email get back to work, I don't want to be the reason you get fired.

Seriously, I hope you learned a thing or two.

Until next time, Cade

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