Let’s be honest, most of us are trying to figure out how to cope with the current economic climate. The price of food is up. There’s a baby food shortage. Russia is still invading Ukraine. Gas is over $9.00 in California and plane tickets prices are up…I can go on and on. During these times, it’s important for us to learn the effects of rising interest rates and inflation.
I don’t want to be the bearer of bad news, but we were warned that if we don’t act this won’t be the last pandemic we experience. The pandemic is a part of why we have a supply chain issue, but there are other factors as well like, policy, and addressing inflation too late. When the Federal Reserve printed money to help boost the economy we were warned about inflation and the effects it could have. It’s important for us to use this time as a lesson for the future and to plan accordingly.
What is inflation? Also, what are interest rates?
Inflation is a rise in the prices of goods and services. It is usually measured as an annual percentage change. Inflation can have different effects on different people. For example, inflation may cause wage earners to lose purchasing power (the amount of goods or services they can buy with their wages). Interest rates are the percentage of interest charged on a loan, typically expressed as an annual rate. The interest rate determines how much interest will be charged over the course of a year. Now that we know what inflation and interest rates are, let’s discuss a few reasons why we should learn about the effects.
1. Rising interest rates can make it more difficult to afford a home.
Rising interest rates can make it more difficult to afford a home for several reasons. First, rising interest rates can lead to inflation, which in turn can lead to higher prices for homes. Second, rising interest rates can lead to higher mortgage payments, making it more difficult to afford a home. Finally, rising interest rates can lead to a decrease in the value of homes, making them more difficult to sell. All these factors can make it more difficult to afford a home, especially for those who are already struggling to make ends meet.
Currently, home prices are extremely high across the United States. The demand for homes is there but the supply isn’t. There are concerns that the housing market could crash. However, some experts believe that there won’t be a housing market crash and the market will stay hot. In a recently published article on Forbes, “Will The Housing Market Crash? Experts Give 5-Year Predictions, one of the predictions was “The supply-demand imbalance is the primary reason home prices have escalated so rapidly,” says Rick Sharga, executive vice president at RealtyTrac. The article also states, “after not building nearly enough houses for the last decade, homebuilders will take several years at least to add enough new supply to balance the market.” If the housing market remains hot and interest rates continue to go up to combat inflation many can be paying a lot more for homes.
2. Inflation can reduce the purchasing power of your salary.
Inflation is one of the most common causes of reduced purchasing power of salaries. When inflation rates are high, each unit of currency buys fewer goods and services. This means that, in real terms, wages fail to keep up with inflation and the buying power of salaries decreases.
There are several ways in which inflation can reduce the purchasing power of salaries. One is by eroding the value of savings. As inflation goes up, the prices of goods and services also rise. This means that the same amount of money will buy less over time. Savings lose their value as a result, which reduces the purchasing power of people’s incomes.
Another way inflation reduces purchasing power is through what is known as “Bracket Creep.” Bracket Creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions.
3. Rising interest rates can make it more expensive to borrow money for things like a car or a student loan.
If you’re planning on taking out a student loan, it’s important to be aware of how interest rates can affect your monthly payments. It’s important to shop around and compare interest rates from different lenders. This way, you can make sure you’re getting the best deal possible. When interest rates rise, the amount you have to pay back each month on your student loan will also increase. This is because the total amount you owe will increase as interest accrues on your outstanding balance.
If you’re planning to finance a car purchase, you may want to consider the impact of rising interest rates. When interest rates go up, it can make it more expensive to borrow money for a car. This is because the interest rate will be applied to your loan balance, and over time this can add up to a significant amount of money. It’s important to compare interest rates from different lenders. Make sure you understand how the interest rate will affect your monthly payments, and factor this into your budgeting. Rising interest rates may not necessarily mean that you can’t afford a car, but it’s important to be aware of the potential impact on your finances.
4. Inflation can make it more difficult to save for retirement.
Inflation can make it more difficult to save for retirement in several ways. First, inflation can erode the value of savings over time. This means that the purchasing power of savings will decline as inflation rises. This can make it more difficult to maintain one’s standard of living in retirement, as inflation eats away at the value of retirement savings. Second, inflation can also increase the cost of living, making it more difficult to save money each month. Finally, inflation can create uncertainty about the future, which can make it harder to plan for retirement.
In a recent article in CBS News “How to Strategize for Retirement as Inflation Hits 40-year high,” some tips were given on how we can strategize for retirement. One tip provided was “People on the proverbial glide path to retirement might consider moving some of their money into Treasury Inflation-Protected Security (TIPS), U.S. government bonds that can help mitigate the inflation impact at least for the short-term.”
As young professionals most of us might not be knocking on the door of retirement just yet, but it’s good to learn how inflation affects us and our families so that we can be better prepared in the future. Many of us are just learning about inflation this year and don’t remember that we learned about this in economics class our junior year of high school 😊.
5. Rising interest rates can cause the stock market to decline, which can impact your 401k or other investments.
Interest rates and the stock market are two important factors that can impact your investments. When interest rates rise, it can cause the stock market to decline, which can then have an impact on your 401k or other investments. There are a few reasons why this may happen.
First, when interest rates rise, it becomes more expensive for companies to borrow money. This can lead to lower profits and share prices, which can then cause the stock market to decline.
Second, rising interest rates can also lead to a stronger dollar value. This is because when interest rates rise, investors tend to move their money into assets that will offer them a higher return. This often means investing in US dollars, which leads to a stronger dollar and a weaker stock market.
Finally, rising interest rates can also impact investor confidence. When interest rates rise, it can signal that the economy is doing well and that inflation may be on the horizon. This often leads to a sell-off in the stock market as investors become worried about their investments losing value.
If you are concerned about how rising interest rates may impact your investments, it is important to speak with a financial advisor. They can help you understand how interest rates may affect your specific situation and make recommendations accordingly.
6. Inflation can erode the value of your savings.
Inflation can erode the value of your savings over time. For example, let’s say you have $100 in savings and inflation is 3%. After one year, your $100 would be worth $97 in purchasing power because inflation has risen by 3%. In other words, inflation has eaten into the value of your savings.
According to an article by CNBC “Here’s a Simple Way to See How Inflation Erodes Your Long-term Savings,” if we used the “Rule of 72 we can see the long-term impacts of inflation eating away our savings.” Inflation is at a 40-year high. That means consumers are losing buying power at a faster-than-usual pace. Just how quickly is inflation eating away at your savings? The so-called “rule of 72” can help gauge its long-term impact.
This rule of thumb is generally applied to investment returns. It’s a back-of-the-envelope calculation that approximates how many years it will take investors to double their money at a certain interest rate.
Here’s how it works: Divide 72 by the annual interest rate to determine the amount of time it takes for an investment to double. For example, a mutual fund that yields 2% a year will double in 36 years. One with a 6% annual return will do so in 12 years. With inflation, the rule works in reverse: Consumers can approximate how quickly higher prices (for food, energy, rent and other household budget items) will half the value of their savings. The Consumer Price Index, a key inflation gauge, jumped 8.5% in March 2022 from a year earlier, the fastest 12-month increase since December 1981. Applied against the “Rule of 72” formula, an 8.5% inflation rate halves the value of consumers’ money in roughly 8½ years. (Seventy-two divided by 8.5 equals just over 8.47.)
To combat the effects of inflation, you need to ensure that your savings are growing at a rate that is greater than inflation. This can be done through investment or by choosing a savings account with a high interest rate. Otherwise, inflation will slowly eat away at the value of your hard-earned savings.
7. Rising interest rates can lead to higher credit card payments and other debts become more expensive to repay.
Rising interest rates can have several impacts on our finances, one of which is higher credit card payments. When interest rates rise, the minimum payment on your credit card balance also rises. This means that it will take you longer to pay off your debt, and you will end up paying more in interest over time. In addition, rising interest rates can make it more difficult to refinance your debt at a lower rate, meaning that you could be stuck paying high interest payments for some time.
As a result, it can become more expensive to repay your debts, which can put a strain on your finances. If you’re struggling to keep up with higher payments, it’s important to speak to your lender about your options. They may be able to offer you some relief, such as a payment holiday or reduced interest rate.
8. Inflation may cause prices of everyday items to increase, making it difficult to stick to a budget
When inflation goes up, the prices of everyday items also increase. This can make it difficult to stick to a budget, as your costs are constantly rising. Inflation can also cause wages to stagnate, as employers may not be able to keep up with the rising prices. This can make it difficult to make ends meet and can put a strain on our finances.
The purchasing power for those who are on a fixed income, such as Social Security or disability benefits, can decrease substantially during periods of high inflation. This is because your benefits don’t increase at the same rate as prices. For example, if inflation is 3%, but your benefits only increase by 2%, then you’re effectively losing buying power each year. This can make it difficult to maintain your standard of living and cover your basic expenses.
Inflation can have a big impact on the cost of food, which can in turn make it difficult to stick to a budget. When inflation goes up, the cost of food usually goes up as well. This is because farmers and food producers need to charge more for their goods to make a profit. This means that consumers must spend more money on food, which can be difficult if they are on a tight budget. Inflation can also cause prices of other everyday items to increase, such as gas and clothing. This can make it difficult to keep up with the cost of living and can put a strain on household budgets.
To help offset the effects of inflation, you can try to invest in assets that tend to go up in value when prices rise. This includes things like stocks, real estate, and precious metals. You can also try to boost your income by increasing your hours at work or finding a better-paying job. Finally, you can cut back on your spending and save money so that you have a cushion to fall back on during tough economic times.
9. Rising interest rates can make it more difficult to get a loan for a small business.
Interest rates have a direct impact on the cost of borrowing for small businesses. When interest rates rise, the cost of borrowing also rises. This can make it more difficult for small businesses to get loans, as they may not be able to afford the higher payments. Rising interest rates can also make it difficult to refinance existing loans, as the higher payments can make it difficult to make the required loan payments. This can put small businesses in a difficult financial position, as they may not be able to access the capital they need to grow and expand their businesses.
In addition to making it more difficult to get loans, rising interest rates can also impact small businesses in other ways. For example, higher interest rates can make it more expensive to rent or buy commercial property. This can make it difficult for small businesses to afford the space they need to operate their businesses. Rising interest rates can also impact the stock market, which can have a direct impact on small businesses that are publicly traded.
Conclusion:
All of these factors can have a significant impact on young professionals who are just starting out in their careers. Rising interest rates and inflation can make it more difficult to afford a home, save for retirement, or even stick to a budget. If you’re concerned about how rising interest rates and inflation may impact your financial future, be sure to speak with a financial advisor. Interest rates and inflation can have a profound impact on our lives as young professionals. By understanding the effects of rising interest rates and inflation, we can make informed decisions about our careers, investments, and overall financial well-being. Please share any strategies you’ve used to protect yourself from the negative effects of increasing interest rates and inflation in the comment section below. We would love to hear from you! Be sure to check out my other blog Financial Strategies for Young Professionals.