The Federal Reserve has been gradually increasing interest rates since 2015, and in 2023, it has hiked rates seven times already. CNBC reports that the Fed will continue to raise rates throughout 2023. High-interest rates impact your finances in critical ways, and the stress of dealing with more money coming out of your pocket to pay for the things you’ve always paid for has reached a fever pitch for many Americans.
A look at the connection between rising interest rates and inflation
One of the most significant impacts of rising interest rates is inflation — the increase in the prices of goods and services over time. The current inflation rate in the U.S. is 6.04%. When interest rates rise, it’s automatically more expensive to borrow money, which leads to decreased spending. This, in turn, leads to a decrease in the supply of goods and services, which drives up prices and causes inflation. Raising interest rates tends to slow down the economy by making goods and services more expensive, which may ultimately lead to lower costs over time as the market adjusts. Still, in the interim, it’s ridiculously stressful to live through as a consumer.
Inflation also impacts the growth of savings accounts, stocks and bonds, personal loans, and mortgage payments. When interest rates rise, the interest earned on savings accounts and bonds also increases. However, it also means that borrowing money becomes more expensive, which leads to an increase in personal loans and mortgage payments. As a result, it’s essential to find ways to beat the stress of rising interest rates.
Not all of the hacks below will be right for everyone. The path you choose depends on what your current financial situation looks like, but considering implementing some that are right for you can be helpful.
Hack #1: Pay off your existing debt
Paying off debt is one of the top ways to beat the stress of rising interest rates. When interest rates rise, the cost of borrowing money increases, which means you’ll pay more in interest on your outstanding debt. By paying off debt, you can reduce the amount of money you owe, and pay less in interest over time.
Paying off debt can also help you keep more of your money during inflation. As inflation increases, the value of your money decreases, which means it becomes more expensive to pay off debt. By paying off your debt early, you can reduce the interest you pay overtime and keep more of your money during inflation.
There are a variety of debt payoff strategies to consider including the popular snowball and avalanche methods, but the way you pay off your debt has a lot to do with the type of debt you’re in — dealing with credit card debt, mortgage debt, and student loan debt all differ slightly.
Dealing with credit card debt? Try Credello’s credit card debt consolidation tool to compare the best ways to consolidate credit card debt.
Hack #2: Refinance high-interest loans
One way to beat the stress of rising interest rates is to refinance existing loans, taking out a new loan to pay off your existing debt. The new loan will typically have a lower interest rate, so you’ll save money over time. As interest rates continue to rise, this may only sometimes be feasible, but it’s worth looking at what’s available to see if a new loan would be beneficial.
For example, let’s say you have a personal loan with an interest rate of 10%. If you refinance that loan with a new loan with an interest rate of 5%, you’ll save money on interest payments over time. Refinancing is also a good option for mortgage loans, as it can lower your monthly payments and save you money in the long run.
Hack #3: Increase (or start) your emergency fund
It may sound counterintuitive, but another way to beat the stress of rising interest rates is to increase your emergency fund. When you have money set aside for unexpected expenses, such as car repairs, medical bills, or job loss, it can help you avoid taking on additional debt when unexpected expenses arise.
Financial experts recommend having at least three to six months’ worth of expenses saved in an emergency fund. If you don’t have an emergency fund, now is the time to start building one. You can start small by setting aside a portion of your monthly paycheck and gradually increasing the amount over time.
Hack #4: Buy the car you’re leasing
If you’re currently leasing a car, buying it may be a smart financial move during a time of rising interest rates and inflation. When you lease a car, you are essentially paying for the vehicle’s depreciation over the lease term. At the end of the lease term, you can buy the vehicle for a predetermined price, known as the residual value. If you decide to buy the car, you can finance the purchase at a fixed interest rate, which can be lower than the interest rate on a new car loan during times of rising interest rates.
Additionally, buying the car you’re leasing means that you won’t have to worry about finding a new car and financing it during a time when interest rates are high. By keeping the car you’re familiar with, you can save money on the higher interest rates and avoid the hassle of finding a new car.
Of course, buying the car you’re leasing isn’t always the right decision. If you don’t drive many miles and like to switch up your vehicle every few years, leasing may be a better option for you. However, if you’re happy with the car and plan on keeping it for a while, buying it can be a smart financial move.
Hack #5: Evaluate your employment situation
Inflation and rising interest rates can significantly impact your income, making it more critical than ever to ensure that you’re being paid what you’re worth. Here are some ways you can evaluate your employment situation:
- Ask for a raise. If you feel you’re not being paid what you’re worth or your income isn’t keeping up with inflation, it may be time to ask for a raise. Schedule a meeting with your manager and come prepared with examples of your accomplishments and contributions to the company. Be confident but also realistic and considerate of the company’s financial situation.
- Update your resume. Updating your resume is always a good idea, even if you’re not actively looking for a new job. This can help you stay aware of your value in the job market and position yourself for future opportunities if your current employment situation doesn’t improve.
- Stay aware of market trends. Keep up with market trends in your industry and job market. This can help you determine the most valuable skills and experiences and ensure that you stay competitive in the job market.
Hack #6: Consider ways to cut expenses
Reevaluating your lifestyle to cut expenses is another way to beat the stress of rising interest rates. When interest rates rise, the cost of borrowing money increases, which means you’ll pay more for loans and credit card balances. You can free up more money to pay down debt or save for emergencies by cutting your expenses.
If you’re feeling the pinch of rising interest rates, downsizing your expenses is an effective way to reduce your overall spending and save money. Here’s a look at the top ways to reduce spending:
- Create a budget. Track your monthly income and expenses to see where your money goes. Then, create a budget that prioritizes your necessary expenses, such as housing, utilities, and food, and reduces or eliminates non-essential expenses, such as dining out, entertainment, and subscriptions. Budgeting isn’t always easy, but it’s worth it.
- Cut back on dining out. Dining out can be a significant expense for many people. Consider cooking at home more often and packing your lunch instead of eating out at restaurants or getting takeout.
- Shop smarter. Keep an eye out for deals and discounts when shopping for groceries or other necessities. Use coupons, buy in bulk, shop secondhand, and compare prices to save money on your purchases.
- Reduce your transportation costs. If you’re spending a lot of money on gas or public transportation, consider carpooling, biking, or walking to work or other activities. You can also look into getting a more fuel-efficient car or taking advantage of public transportation discounts or commuter benefits.
- Cut the cord. Cable TV and streaming services can add up quickly. Instead of cable, use free or low-cost streaming services or invest in an HD antenna to access local channels.
- Reduce your energy costs. Make your home more energy-efficient by turning off lights and appliances when not in use, upgrading to energy-efficient light bulbs, and installing a programmable thermostat to regulate your heating and cooling costs.
- Sell or donate items you no longer need. Clearing your clutter can help you save money and create a more minimalist lifestyle. Consider selling or donating items you no longer need, such as clothes, furniture, and electronics.
Hack #7: Protect your retirement savings
Inflation and rising interest rates can impact your retirement savings, so taking steps to protect your nest egg is essential. Below, you’ll find some of the top ways to hold onto your retirement savings.
- Hold onto your stocks and investments. While stocks and other investments may be volatile in the short term, they have historically outperformed other asset classes over time. Don’t panic-sell during market downturns. Instead, stay invested for the long term.
- Get a high-yield savings account. A high-yield savings account can help you earn more interest on your savings and keep your money safe.
- Add a rider to your annuity. An annuity with a rider that includes inflation protection can help you protect your retirement income from the impact of inflation.
- Don’t cash out your pension. If you have a pension plan, wait to cash it out if you change jobs or retire. Instead, keep the plan in place and continue to receive the benefits.
- Delay drawing on social security. If you can afford to delay drawing on your social security benefits, you can increase your monthly benefit amount by up to 8% each year you wait after your full retirement age, per the Social Security Administration.
Hack #8: Lower your mortgage rate
For most people, their mortgage is the most significant expense they have each month. As interest rates rise, the cost of borrowing money to buy a home also increases, but there are ways to lower your mortgage rate and save money over the life of your loan going forward.
- Talk to your seller. One way to lower your mortgage rate is to ask the seller or builder for help. Some sellers or builders may be willing to pay a portion of your closing costs or offer a lower interest rate to close the deal. This can help you save money upfront and over the life of your loan.
- Negotiate with lenders. It’s smart to shop around and compare rates from multiple lenders. You can also ask your current lender if they can offer you a lower rate or refinance your existing mortgage at a lower rate. Refinancing can help you save money throughout the life of your loan, but be sure to consider the closing costs and fees associated with refinancing.
- Consider an assumable mortgage. Taking over the seller’s old mortgage through an assumable mortgage can also be an option if they have a lower interest rate than what is currently available. This can be a good option if you buy a home in a high-interest-rate environment.
- Making a larger down payment. This can also help you lower your mortgage rate. The more you can put down upfront, the less you’ll have to borrow, and the lower your interest rate may be.
- Consider shorter terms, government-backed loans, or adjustable-rate mortgages. Shorter terms, like 15-year mortgages, typically have lower interest rates but higher monthly payments. Government-backed loans, like FHA or VA loans, can offer lower interest rates and more flexible qualifying requirements. Adjustable-rate mortgages have an interest rate that fluctuates over time but can offer lower initial rates than fixed-rate mortgages.
Hack #9: Stay inflation-aware
One of the top ways to prepare for inflation and rising interest rates is to stay aware of them. Knowledge is power — educate yourself by studying historical inflation periods to help understand what inflation looks like, what caused it, and how it affected the economy and your finances.
Understanding shrinkflation can help you not overspend. This phenomenon happens when companies reduce the size of their products while keeping the price the same, effectively increasing the price per unit. Be aware of this tactic and adjust your spending accordingly.
Keep up with financial news and trends, including inflation rates, interest rates, and other economic indicators. This can help you make informed decisions about your finances and stay prepared for any financial changes.
By staying inflation-aware, you can help protect your finances amidst rising interest rates and inflationary periods, making all the difference in your financial future.
Without a doubt, rising interest rates during inflation are stressful for consumers, and the financial impact on everyday people can be an intense situation to navigate. But, by implementing these hacks, you can beat the stress and stay on top of your finances. Refinancing your loans, increasing your emergency fund, cutting your expenses, investing in high-yield savings accounts, and paying off debt can all help you save money and keep more of your hard-earned cash during times of inflation and rising interest rates.