How Consumers Can Benefit From Rising Interest Rates

Interest rates are rising and will go higher.

To fight the high inflation hurting our wallets, the Federal Reserve hiked its key interest rate five times this year, raising its fed funds rate from near zero at the beginning of 2022 to 3.0%-3.25%.

The Fed plans more hikes in the coming months, potentially 4.5% or higher, resulting in higher consumer borrowing costs. We will need to make some changes, and there are ways to benefit financially from a higher interest rate environment.

Why Are Interest Rates Rising?

Some fear that the Fed’s actions may drive us into a recession again. The Fed reversed its monetary policy earlier this year, hoping to tame high inflation by discouraging spending and slowing economic growth. In early 2020, the Fed responded to the pandemic-related recession, causing high unemployment, driving its interest rates to near zero, and adding substantial liquidity to expand the money supply to grow the economy.

What Do Rising Interest Rates Mean For The Average Household?

Households tend to be the most interest-rate-sensitive sector. They already see higher mortgage, car, and credit card borrowing costs. As borrowing costs rise, they will postpone large purchases, become more significant savers, and earn income. We may not be able to control the economy, but we can anticipate the changing environment to better our financial health.

We’ll review the impact of rising interest rates on consumer borrowing and how to benefit.

How Consumers Can Benefit From Rising Interest Rates 


Save More Money

The US personal savings rates in August 2022 are now at a low level of 3.5% after registering unusually high savings rates during the pandemic when we weren’t going out and spending as much. However, we are well below the pre-Covid savings rate of 8.3% at the end of 2019. Undoubtedly, higher inflation is taking a toll on our wallets and depleting our savings.

With challenging days potentially ahead, saving money remains essential. Paying yourself first is a good strategy, as is automating your finances.

Boost Your Emergency Savings Fund

Now is an excellent time to boost your emergency fund or establish an account if you don’t have one.  Many believe that the Fed’s rate hikes may result in higher unemployment and a recession. Your emergency savings can help in uncertain times and weather job loss, reduced hours, or lower bonuses, and you can save your money and earn more interest.

Myra Alport, Financial Coach, Founder of Money Coach, says, “After several years of short-term interest rates paying zilch, savers are finally being rewarded in the current rising interest rate environment. So while you may be paying higher interest on credit card balances, new car payments, and mortgages, you can now reap the rewards of online savings accounts and Certificates of Deposit. Traditional brick-and-mortar bank savings accounts are still yielding paltry rates of less than .05% at best, nothing to brag about. Online banks have grown in popularity over the last ten years. They are safe, FDIC-insured, and have minimum balance requirements. You can link your primary bank elsewhere with your online savings account to transfer funds back and forth if you allow 2-3 days (excluding weekends) for processing. I suggest keeping small savings account at your primary bank for emergencies and an online bank for long-term goals, the best of both worlds.”

You can boost your emergency cushion by realizing extra savings, especially if you work for an industry or business prone to recessions.  As interest rates rise, banks will likely offer higher-yielding FDIC-insured saving accounts or a money market account for your emergency fund. High-yield savings accounts may offer higher rates from online banks.

Keep Investing In Your Retirement Accounts

It is essential to persistently contribute to your retirement accounts. In the long term, stocks go up more than down, and market volatility is normal. If your employer matches your contribution, you’ll want to earn that benefit.  Seeing the 20%-30% decline in your account balances is undoubtedly painful, but these are unrealized losses, and your retirement may be years away.  

Prioritize Paying Off Debt, Especially Credit Card Balances

With higher borrowing rates still to come, you should consider paying off your debt, especially credit cards, if you carry substantial card balances, which will only get more costly. Credit cards move swiftly with fed funds rates. With those rates rising 75 basis points, credit card issuers moved in tandem, moving to the highest rates since mid-2007.

According to Credit Cards, the national average APR  credit card rate for new users was 18.44% in late September, rising from 16.25% six months ago.

Use your emergency savings to pay off your credit cards entirely. If your balances are too cumbersome, apply for a balance transfer credit card with 0% APR and a generous timeframe to reduce your card balances.

Balance transfer credit cards can range from 12 to 21 months, enabling you to tackle your principal amount during the intro period without compounding your interest. The longer the period, the better your ability to get your balance to zero. You need to reduce your spending significantly during this time and live more frugally.

Reduce Discretionary Spending

Reduce your spending significantly during this time, especially if you are paying off expensive debt.  Look for more bargains for things you need. Some companies (e.g., Target, Walmart, and Nike) have bloated inventories and will discount their merchandise. It is time to be living stingy and tighten our budget.

Look for easy ways to ease your budget by taking these measures:

Postpone Large Purchases

As interest rates rise, consumers typically reduce spending, particularly for large ticket items like cars, appliances, and homes, rather than take on costly loans.

Unless you find the home of your dreams, you are better off postponing purchases, with mortgage costs going higher. 

Buying Your Home Will Cost More, Can You Afford It?

After historically low mortgage rates of 2.67% at the end of 2020, the 30-year fixed rates hit a recent high of 7% and are likely to go higher.  The proxy for mortgage rates is the 10-year Treasury yields which move with prevailing interest rates.

Buying a home will cost you more. For example, if you’re buying a $500,000 home with a 20% down payment, your 30-year fixed-rate mortgage loan of $400,000 will cost $2,661 a month at current rates, up from $1,622 just a few months ago, adding over $12,000 to your annually. Over the life of the loan, you’ll be paying $375,489 more in interest costs before refinancing your loan in the future. 

Nathan Mueller, MBA, financial advisor, and Founder of BlackBird Finance, says, “If you are at the point you need to buy a home, make sure you still can afford the mortgage payment. The upside is that as demand cools, you may have more leverage in negotiating the home’s purchase price.”

If you are already locked in a fixed mortgage rate, your monthly mortgage payment won’t change. You may not want a variable mortgage, as you may be subject to more rising rates.

Consider Paying Cash For Your Car or Delay Your Purchase

Car loan rates move with the bank prime loan rate, which rose from 3.25% in March 2022 to 6.25% recently. Statista said the interest rate for 60-month new car loans was 3.85% at the end of 2021.

Not surprisingly, new car loans are creeping up. In a recent Edmunds report, auto loans climbed to 5.7%, the highest level since 2019. The average amount financed for new vehicles hit a record high in 3Q22, rising to $41,347, up from $38,315 a year earlier. Car buyers have recently extended loans to 72 months and beyond. That’s risky, adding significantly to their purchase price.

It may be better to buy your car with cash or delay purchases.

Review Investment Strategies For Market Volatility

Panic selling in any market is the worse thing you can do. It is hard not to be emotional when the market is making new lows. Unless you need the money you invested in the market, try to weather this volatility. You can’t time the market for its bottom, but if you have a long-term timeframe, you may find some bargains in better companies. Consider these investment strategies:

Don’t time the market.

Take a longer-term perspective.

Stay diversified with low-cost indexing funds.

Use dollar-cost averaging.

Proactive Moves For Investors

Besides using investment strategies to lessen the risk, investors can make proactive moves to adjust to the market.

David Edmisten, CFP, Founder of Next Phase Financial Planning, says, “Investors can look at the potential to harvest tax losses in their brokerage accounts by selling stocks at a capital loss. Investors can harvest these losses to offset realized gains in other areas of their taxable portfolio. With the stock market down for the year, it can be worth considering adding quality dividend stocks and high-quality, stable companies with consistent cash flows to one’s portfolio.”

Review Asset Allocation And Some Bonds

The market remains volatile, reacting to higher interest rates and the potential for a recession.  When the market changes, reviewing your asset allocation is an excellent strategy.

Investors avoided bonds in their portfolios for a long because of the minuscule returns generated in a low-interest rate environment. The Fed provided low-interest rates and high liquidity that benefited the stock market. As interest rates rise, stocks go through correction, making Treasury securities more attractive for portfolio protection. The two-year Treasury yields have shot up to 4.22% end of September 2022, up from 0.73% at the end of 2021.

There are no better places to go for safety and high returns with high inflation than investing in Series I Government Savings Bonds, which currently pay 9.62% in interest and an AAA rating. There is a cap of $10,000 per person on the purchase amount, but you can buy a bond for your children. Alternatively, TIPS or Treasury Inflation-Protected bonds provide similar benefits without the cap.

Final Thoughts

We are experiencing high inflation and rising interest rates to slow the economy, creating uncertainty and volatility in the still bearish stock market. We can take measures to offset higher costs while benefiting from higher interest rates, like saving more money and proactive investing.

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