Interest Rate Hikes | How it Affects Your Bank Account

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I’m not talking about a hike that you take out in the wilderness with your friends, I’m Talking about Interest Rate Hikes!

Currently, we are in a rising interest rate environment, but what does that mean for you?

The Cost of Money is Increasing!

Why is this important? The economy is like going to the gym, sometimes you are growing, other times you are maintaining, and at times we can slow down.

Rising interest rates means that the cost of money is getting more expensive, which is an attempt to manage two things:

 

  • Make Sure the Economy is Not Growing Too Fast

  • Make sure the Economy is Not Slowing Down Too much

How does this Affect Banks?

By increasing interest rates, this lowers the amount a bank can make when they loan out money to their customers. This is called a “spread” or simply, this is how banks make money.

They give you a loan, you are able to buy something, and you pay the bank interest (additional money). So, as interest rates get higher, the amount of money banks can make, slowly goes down.

As the “spread” shrinks, so does the bank’s incentive to loan out dollars, which may lead to a slow-down in the number of loans they are giving out to people.

When things slow-down for 6 months or 2 consecutive quarters, this is the definition of a “Recession.”

Does this affect you? Most likely! Especially if you are thinking about purchasing a big-ticket item like a house, car, or investing your money.

Let’s say that you go to your local bank and talk to the Top-Hat wearing, suit sporting, money bag carrying, mortgage officer.  You tell them you are looking to borrow $1 to start the business of your dreams!

Unfortunately, after your first meeting, you procrastinated, and never followed up. Interest rates initially were 1%, but now they have risen to 2%!

This now causes a few things to happen:

  • For you to borrow that $1, it is going to cost you more (interest paid to the bank)

  • The amount of the “spread” (how banks make money) has decreased

That’s enough learning for today!  Feel free to reach out to me if you would like to discuss more

Happy Slacking,

Joshua Krafchick CRPC©, EA