Good morning Dinks. Interest rates are very important to consumers who want to borrow money, save money and invest their money. Interest rates are also very important for everyone else as people who contribute to society, pay taxes and buy groceries. In basic layman terms…interest rates make the world go round.
Have you ever thought about how interest rates affect your life? Everything that we do and everything that we buy is affected either directly or indirectly by interest rates. Even our salary is determined, in part, based on interest rates. You know that 3% salary increase that you get each year? Well that is based on the rate of inflation and inflation is based on interest rates (among other economic factors).
Borrowing money and saving money
Think about the last time that you wanted to borrow money or invest money – what made you choose one bank over the other to fund your personal loan? The last time you wanted to save money what made you invest in one high interest savings account over the other? The odds are that the interest rate had a direct impact on your decision.
Banks entice people to come in and buy their products or borrow their money with flashy advertisements and appealing interest rates. If banks don’t advertise their low interest rates then no one will come in to invest or borrow money. In reality, it’s all about the numbers.
Just a numbers game
Are you thinking about buying or leasing a car? If so, what made you choose one option over the other? Is your decision based on the interest rate, yes it probably is. As personal finance enthusiasts we most likely shop around, compare interest rates and calculate our total interest costs over the life of our car loan or lease, I know that I did when I bought my Honda a few years ago.
If you have a mortgage, what made you choose one bank over the other and what made you refinance? Are you getting my point? Even though we may not know it, interest rates set the base for everything in our lives; and not only the money aspects…absolutely everything.
Investing wisely
I love investing, mostly because I love watching my money grow and a little bit because it’s a personal victory when I choose a winning investment strategy. Many of us invest our money for the long term because we don’t want our $25,000 to still be worth $25,000 in 10 years.
Investing wisely doesn’t mean that we try to time the market and pick the perfect investments at the right moment. Investing wisely means that we understand market cycles and how interest rates affect our investments, and then we choose the correct asset mix to protect our money throughout any market cycle – ups or downs.
I know that I am not a high risk investor, my long term investments include a 60% equity and 40% fixed income mix that includes both domestic and foreign investments. This ensures that during interest rate highs and lows my investments are well balanced and should not fluctuate as much as someone who has all of their investment eggs in one basket.
Photo by kevinmarsh
“You know that 3% salary increase that you get each year? Well that is based on the rate of inflation and inflation is based on interest rates (among other economic factors).”
It’s always depressing when your yearly increase is less than inflation, but I think it’s fairly commonplace in today’s economy.
I don’t think many people realize how much of an affect interest rates have on our society. As you covered here, they impact so many things. I agree with DC when he says that it’s depressing when your yearly increase is less than inflation, but that should just push you harder to get an actual raise or promotion in order to cover off on this. So many people are just sticking with where they are (probably because they are afraid of change) when they should be striving to move up.
For the most part we really do watch the interest rates and calculate how much they affect us especially on big ticket items and like pointed out our salary and how the rate of inflation factors in. The mortgage was the biggest shock and likely why we would rather get rid of it as soon as we can. Living in Canada vs the USA there are pros and cons to both paying down the mortgage and investing. In our case, paying down the mortgage while investing was our best option. Cheers
Interest rates are very competitive these days especially in financing, leasing and loans. In finance specifically, I see rates fluctuate all the time, as well as consumers’ decision making.