8 Ways Rising Interest Rates Can Help Your Wallet

By Tim Lemke on 3 December 2014 0 comments

There has been a lot of recent rumbling that interest rates could be on the rise. And that rumbling also comes with debate over what it means for the economy and the average person's finances.

Rising interest rates can be a bit of a mixed bag, but there are some definite positives for people who are looking to save money and secure their retirement.

Consider these ways that higher interest rates could help you financially.

1. You Get More Income From the Bank

This is the most basic benefit of higher rates. If you have money in a bank account, that money will start working for you. Imagine getting 5% or more off your money instead of less than 1%, as we've seen in recent years.

2. You Might Spend Less

Sometimes when interest rates are super-low, people feel inclined to spend whatever extra money they have. Some might argue there's little point in keeping large sums of money in the bank if that cash isn't going to generate a high return. If interest rates are higher, you might see the benefit of saving more. And there's nothing wrong with getting in the habit of saving.

3. Your Retirement Account Becomes More Secure

When interest rates are low, it's not too helpful for older Americans who are nearing retirement age. Older people may have rebalanced their retirement accounts to include more cash, but haven't seen much growth in recent years. Higher interest rates allow older Americans to keep their retirement in safer investments while also boosting income.

Higher interest rates could also be a boon to defined benefit plans, or pensions. In recent years, pension funds have come under fire for placing money in riskier investments in order to fulfill obligations to retirees. Higher interest rates may allow those funds to remain secure with less risk.

4. Housing Prices May Drop

When mortgage interest rates were historically low, you had lots of potential buyers entering the market, and this caused home prices to skyrocket. Now, it's true that higher interest rates increase the cost of borrowing, thus making buying a less attractive option for people. But prices themselves may fall if there is less demand. So if you're capable of putting a lot of money down, you may end up with a better deal when interest rates are higher.

5. The Dollar Becomes More Valuable

A rising dollar isn't always a great thing, but there are some definite ways it can improve your financial situation. For one thing, a stronger dollar often means lower prices for many commodities, which could translate into lower costs for fueling up your car or heating your home. Higher interest rates also mean it's cheaper to buy foreign products, and your money will go farther when traveling overseas. So maybe it's time to plan that European vacation!

6. Lending Is More Lucrative

If you lend someone money, (perhaps through a firm like Lending Club) your returns are based on the interest rate. So if the borrowers are paying higher rates, your returns increase. In theory, a higher rate may also mean a higher rate of default, but you're probably coming out better as a lender when rates go up.

7. Some Stocks Will Rise in Value

Because higher interest rates are often viewed as a sign of stronger economy, shares of some companies will be viewed as good investments. This is especially true for banks and home improvement stores, such as Lowe's or Home Depot. But be careful — some sectors, including real estate, could be crushed by rising rates.

8. It Might Make Your Job More Secure

In recent years, many companies have replaced human workers with automated systems and other technologies. They could afford to do this, because low interest rates made it easy for them to invest in the necessary systems. But if interest rates are higher, companies may find it's cheaper to keep a human workforce for a little while longer.

Are you positioned to take advantage of rising interest rates, should they arrive as expected?

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